Finance is a broad term that includes many things regarding the study, creation, management, and investment of financial resources. It includes taxes, which are a form of indirect finance. It also usually includes the administrative and managerial aspects of finance such as setting up banks and lending. There are two schools of thought in regard to the definition of finance. The first school of thought regards it as a subset of management accounting, with a distinct set of problems and methodology.
In this view, there is a separate analysis for financial position, funds flow, investment, capital budgeting, and operations management. The second school of thought, which is also popular but not accurate, maintains that there are three distinct components of corporate finance. They are corporate finance, working capital management, and financial analysis.
Corporate finance refers to the activities that deal primarily with purchasing businesses and the financing of those purchases. These activities include creating new businesses, finding venture capital, merging with other companies, orchestrating acquisitions, and repaying debt. Working capital management handles working capital needs of businesses. This includes short-term borrowing and restructuring loans for a company’s earnings. Financial systems on the other hand describe the policies and procedures of financial systems, such as managing banks, developing credit, financial institutions, and the issuance of securities in the stock market.
Financial analysis is used to identify, measure, manage, and improve the finance industry. It deals mainly with the evaluation and identification of financial risks. This can be done through financial systems, corporate finance, economic or social structure, national and international organizations, and externalities such as price, quality, availability, timing, and value of a financial product or service. In addition, this subcategory of finance also encompasses other related subjects like banking, insurance, pensions, consumer and retail financing, government finance, commodity markets, and non-financial finance.
The main goal of financial management is to make things happen. It is an essential part of business activities. It is needed by large corporations, mutual funds, hedge funds, and others. Its purpose is to ensure that the resources invested by the owner(s) or the manager(s) go to the right use and at the right time. Its objective is to produce positive cash flow by ensuring that total resource investment is balanced; increasing cash available for use; reducing the interest rate associated with outstanding loans; providing financial services to customers; and promoting financial opportunities.
Another major area of finance is risk management. The purpose of this subcategory is to mitigate the effect of financial instruments on other financial activities. These include pricing of securities, pricing of derivative products, pricing of financial instruments such as bonds, bills, and mutual funds, and valuation of financial instruments such as corporate bonds, bank deposits, and mortgage notes. The objective of risk management is to minimize financial losses by ensuring appropriate pricing of financial instruments, and by ensuring that risks are transferred to appropriate parties in the process of their transfer.
One other major area of finance is international finance. International finance deals with the financing of various financial activities of a country other than that of the issuing country. Some of these areas are first-time capital appreciation, debt finance, sovereign finance, and cross-currency borrowings. It is imperative that the various activities of international finance are managed prudently. Finance specialists can help in providing guidance on various aspects of international finance. They can assist with mergers and acquisitions, issues related to exchange rates, and can provide advice on various taxation issues.
Personal finance involves managing money for an individual or family. It includes saving for retirement, paying for children’s education, buying a home, paying off debts, and buying entertainment items. There are various financial decisions that a person must make on a regular basis. All of these areas are included under personal finance.