What is Finance?
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"What is finance?"- This is a very common question for many of us who have their degree in finance. specially, in the Viva-voce it is the most common question. if you answer the first question correctly, your confidence level will grow up. and you will have the right to control the board.
or you will face negetive impressions. or simplilly,
"You are dead."
So, be cautious and let's have a look the topics discussed below.
What is Finance?
Finance is the art of managing money. it is a systematic way to manage money.
At the personal level, finance is concerned with individuals’ decisions about how much of their earnings they spend, how much they save, and how they invest their savings. In a business context, finance involves the same types of decisions: how firms raise money from investors, how firms invest money in an attempt to earn a profit, and how they decide whether to reinvest profits in the business or distribute them back to investors.
Sources of Financing
The keys to good financial decisions are much the same for businesses and individuals, which is why most students will benefit from an understanding of finance regardless of the career path they plan to follow.
Learning the techniques of good financial analysis will not only help you make better financial decisions as a consumer, but it will also help you understand the financial consequences of the important business decisions you will face no matter what career path you follow.
Finance includes financial service and financial instruments. Finance also is referred to as the provision of money at the time when it is needed. The finance function is the procurement of funds and their effective utilization in business concerns.
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The concept of finance includes capital, funds, money, and amount. But each word is having a unique meaning.
Studying and understanding the concept of finance become an important part of the business concern.
Definition of finance:
According to Khan and Jain, “Finance is the art and science of managing money”.
According to the Oxford dictionary, the word ‘Finance’ connotes ‘management of money’.
Webster’s Ninth New Collegiate Dictionary defines finance as “the Science on the study of the management of funds’ and the management of the fund as the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities.
Definition of Business Finance:
According to Wheeler, “Business finance is that business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”.
According to Guthumann and Dougall, “Business finance can broadly be defined as the activity concerned with planning, raising, controlling, administering of the funds used in the business”.
In the words of Parhter and Wert, “Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in non-financial fields of industry”.
Corporate finance is concerned with budgeting, financial forecasting, cash management, credit administration, investment analysis and fund procurement of the business concern and the business concern needs to adopt modern technology and application suitable to the global environment.
According to the Encyclopedia of Social Sciences, “Corporation finance deals with the financial problems of corporate enterprises. These problems include the financial aspects of the promotion of new enterprises and their administration during early development, the accounting problems connected with the distinction between capital and income, the administrative questions created by growth and expansion, and finally, the financial adjustments required for the bolstering up or rehabilitation of a corporation which has come into financial difficulties”
Financial Management:
Financial management is concerned with the acquisition, financing, and management of assets with some overall goal in mind. Thus the decision function of financial management can be broken down into three major areas:
1. The Investment Decision
2. The Financing Decision
3. The Asset Management Decision
Let's have a look at those three decisions.
1. The Investment Decision:
The investment decision is the most important of the firm’s three major decisions when it comes to value creation. It begins with a determination of the total amount of assets needed to be held by the firm. Picture the firm’s balance sheet in your mind for a moment. Imagine liabilities and owners’ equity being listed on the right side of the balance sheet and its assets on the left. The financial manager needs to determine the dollar amount that appears above the double lines on the left-hand side of the balance sheet – that is, the size of the firm. Even when this number is known, the composition of the assets must still be decided. For example, how much of the firm’s total assets should be devoted to cash or to inventory? Also, the flip side of investment – disinvestment – must not be ignored. Assets that can no longer be economically justified may need to be reduced, eliminated, or replaced.
2. The Financing Decision:
The second major decision of the firm is the financing decision. Here the financial manager is concerned with the makeup of the right-hand side of the balance sheet. If you look at the mix of financing for firms across industries, you will see marked differences. Some firms have relatively large amounts of debt, whereas others are almost debt-free. Does the type of financing employed make a difference? If so, why? And, in some sense, can a certain mix of financing be thought of as best?In addition, dividend policy must be viewed as an integral part of the firm’s financing decision. The dividend-payout ratio determines the number of earnings that can be retained in the firm. Retaining a greater amount of current earnings in the firm means that fewer dollars will be available for current dividend payments. The value of the dividends paid to stockholders must, therefore, be balanced against the opportunity cost of retained earnings lost as a means of equity financing.
Once the mix of financing has been decided, the financial manager must still determine how best to physically acquire the needed funds. The mechanics of getting a short-term loan, entering into a long-term lease arrangement, or negotiating a sale of bonds or stock must be understood.
3. The Asset Management Decision:
The third important decision of the firm is the asset management decision. Once assets have been acquired and appropriate financing provided, these assets must still be managed efficiently. The financial manager is charged with varying degrees of operating responsibility for existing assets. These responsibilities require that the financial manager be more concerned with the management of current assets than with that of fixed assets. A large share of the responsibility for the management of fixed assets would reside with the operating managers who employ these assets.
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