Finance – Meaning and Definition

The definition of finance is the management of money matters. The term finance should be understood in two perspectives – finance as a resource and finance as a discipline. It is money or other liquid resources of a government, business, group, or individual. Finance, as a resource, refers to monetary means of financing assets of an entity. Finance as a discipline or subject of study describes how individuals, governments and corporate organizations manage the flows of money through an organization. In other words, finance tells how people make decisions about the collection and allocation of resources in organizations like corporation, school, bank or government agency.

In General sense, “Finance is the management of money and other valuables, which can be easily converted into cash.”

Therefore, it is important for all individuals, businesses, governments, and non-government organizations to appreciate the significance of finance in their day-to-day businesses. There are three main types of finance: (1) personal, (2) corporate, and (3) public/government.

  • Public Finance: The federal government helps prevent market failure by overseeing the allocation of resources, distribution of income, and stabilization of the economy.
  • Corporate Finance: Businesses obtain financing through a variety of means, ranging from equity investments to credit arrangements.
  • Personal Finance: Personal finance is a very personal activity that depends largely on one’s earnings, living requirements, and individual goals and desires.

Finance was a branch of economics till the closure of the nineteenth century. Finance as a separate academic discipline is still evolving. Practicing managers and academicians have been contributing to its expansion and enrichment.

There is a wide range of topics that people in the financial industry are concerned with.

  • Yield (coupon payments, dividends)
  • Financial statements (balance sheet, income statement, cash flow statement)
  • Cash flow (free cash flow, other types of cash flow)
  • Profit (net income)
  • Cost of capital (WACC)
  • Rates of the return (IRR, ROI, ROA)
  • Risk and return etc.

 

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