What is Finance?
The very foundation of the economic world is Finance. The study of managing money and procurement of the needed fund is known as Finance. Its components are financial service and financial instruments. Basically, finance is about acquiring funds and their optimal maneuvering with respect to business concerns.
Capital, funds, money, and amount are a few abstraction of finances however they all have their separate entity. In order to enhance business development one must study and understand the concepts of finance thoroughly. The definition of Finance has always been subjected to improvisations.
According to the Oxford dictionary, the word ‘finance’ signifies ‘management of money’. Jain, define finance as the art and science of managing money. Webster’s Ninth New Collegiate Dictionary has two definitions of finance. The first one says, “Finance is the money resources, income, etc. of a nation, organization, or person.” The latter one is “Managing or science of managing money matters, credit, etc.”
Guthumann and Dougall give their definition as following, “The activity concerned with planning, developing, managing, administering and increasing of the capital used for business purposes is known as finance”. According to Ivan Thompson, “the term finance comes from the Latin “finis” which means end or finish. Its implications affect both individuals and businesses, organizations and states it has to do with obtaining and using or money management.”
In the words of Wheeler, “The overall assessment, acquisition, and conversation of capital funds to accomplish important objectives of a business enterprise including the financial requirement is called business finance”. Investopedia defines finance as the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.
The role of finance is very crucial. It is the backbone of every activity. For instance if you’ve to purchase a car, you’ll start your planning only if your finances allow you. But there’s a huge difference between amount of capital required for purchasing a car and sanctioning a national level public scheme.
Finance can be classified into two major categories: The first type of finances is Private Finance or Personal Finance. It includes the management and allocation of Individual, Firms, Business or Corporate capitals to meet their financial requirements. Second one is Public Finance. It deals with revenue and expenditure of Government including Central Government, State Government, Gram Panchayat and Semi-Government’s financial matters.
Importance of Finance:
Wealth is very much important in person’s life. Importance of finance is different for different people. For example: someone it is important for starting a business or entrepreneurship. May be for someone role of finance is important for investment or good life style or wealth creation or helping people or many other reasons which you may think of.
Source of Finance:
To fulfill your financial need there are different sources of finance through which you can either borrow money to fulfill your short term or long term goals. For example: savings, bank loan, government grants, business loan, business grants, loan from financial institutions, investors, crowdfunding or fundraising, etc. It is highly recommended to borrow money only when you have proper money management plan or when you think you can earn money more than the interest you will be paying for the loan.
Features of Finance:
Once you know your financial goals, importance of finance to meet your goals and sources of finance then next step is to take the knowledge on features of financial planning. What are the ways you can fulfill your financial goals. Here we will present some of the important features of finance.
1. Investment Opportunities: Important reason to look forward for investment opportunities is to invest your money to earn profits or to create wealth from it. There are many investment opportunities available in the market like buying a home, purchasing a land, investing in your business idea, buying stocks, shares or financial instruments. Through this investment opportunities you can generate wealth. Also keep in mind that expected return on investment may keep on changing depending upon economic factors.
2. Diversify your Investment: Best way to maximize your earnings and reducing the risk of investment is to diversify your investment. Many experts have suggested that allocating all your sources of funds into one area increases your risk on investment. You should diversify your investment for example: 20% allocation in equity funds, 20% allocation in mutual funds and 60% allocation in property or assets.
3. Financial Decision Making: Decision making is one the primary features of financial planning. If you are a good financial planner but you are unable to take decision makes no sense. Firstly you should prepare your financial plans, secondly your money management plans and then at the right time frame you should take decision. Gradually you will keep on improving your decision making skills which will benefit you in getting good returns on investment.
Financial knowledge is one of the important education which everyone has to learn. In whatever field you are working you need to gradually improve your knowledge on finance. This will benefit you towards financial stability and peace of mind from the future prospective.
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» e-Learning Chapter 5: What is Managerial Accounting? Definition, Role, Job and Objectives
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» e-Learning Chapter 7: Investment Valuation and Project Valuation Methods and Techniques
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