What is Finance ?
Definition of Finance
Finance can be defined in two related definitions
It is the study in which management of money is learnt for either an organization or Government.
And then it is defined as one of the functional area in any organization in which all the knowledge learnt i.e. management of finance and funding is applied. The main objective of this field is to inject cheapest way of capital in any organization and managing or investing profits in revenue generating projects.
Brief Explanation of Finance
Types of finance include short and long term loans, credit card loans, overdrafts, capital from angel investors.
It is normally divided into three categories
- Personal Finance
- Public Finance
- Corporate Finance
Personal Finance: This includes all the decision related to finance i.e. budget, investment, savings and retirement plans which would effect a person or a family.
Public Finance: It means role of Government in the economy of a country. It includes collection of taxes, revenues, expenses and debt activities and measure it’s impact on the economy. Government budget and tax decisions impact the economy in a very important way.
Corporate Finance: It is a branch of Financial Management in which decisions related to funding sources and capital structure of an organization. The main purpose of financial management is to increase wealth of the shareholders. This can be done by making appropriate and balanced funding decisions which cost cheap to the organization and investment of retained earnings to high revenue generating projects. Company has to keep the liquidity under control as well as a good contract term with banks on case of any hardships.
The main sources of finance in Corporate sectors are
Equity: Money lent from shareholders and in return dividends need to be paid to them annually. Payment of dividend is not mandatory. It is on company’s decision whether to pay the dividend or re-invest the profit earned.
Debt: Loan from banks or financial institutions in the form of bonds and debentures and in return decided rate of interest is to be paid periodically. Payment of interest is mandatory