Finance is a broad term encompassing all aspects of the management, development, and the monitoring of financial resources and assets. Finance is used to describe the process by which monetary value is determined over time in order to provide economic advantage through appropriate allocation of financial instruments. The discipline also includes other areas such as financial markets, asset pricing, risk management, and payments. All these areas are related to the study of the market economy and how monetary instruments are created, allocated, traded, and eventually disbursed. Finance also studies the effects of economic shocks on society as a whole, and the procedures that may be utilized in the event of monetary disturbances or events that render currency useless.
When it comes to understanding the nuances of the foreign exchange market, one must first understand the different perspectives that are taken in by Finance. Some people study the economics of countries and the decisions they make regarding their foreign trade and alliances. Some study the politics of countries and evaluate national economic policies. While others delve into the field of derivatives, stock exchanges, private equities, and the role of finance in modern society.
When we study the effects of economic shocks on society, it is important to remember that Finance is not just about the distribution of economic wealth. Economics affects everything in our world, including business finance. For example, when a nation’s finance is strained due to a war, oil prices go up, and international terrorism takes a toll on tourism, businesses will suffer. A strain in finance results in lower business investment, a decline in business banking and credit, lower retail sales, and decreased consumer confidence. A strain in business finance can have an adverse effect on the economy and the businesses that rely on it. Therefore, business finance is just as much about managing the economic consequences of events as it is about providing economic advantage through proper allocation and use of financial instruments.
Another point of view that falls under the broader area of economics is that of business banking. Business banking, as opposed to normal banking, deals with short-term liabilities arising from day-to-day operations. Business banking in the United States and other countries often involves financing through credit lines from other companies (usually financial institutions) and provides funding flexibility that allows businesses to take advantage of a falling economy or credit crunch. Other types of finance include asset management, investing, venture capital, and mortgage banking.
The field of finance also includes money management and investment strategies. Money management is the process of saving, building, and liquidating capital so that it can be used to create long-term income and wealth. Money management also encompasses the discipline of being a good steward of finance investments by avoiding bad debt and excessive borrowing. Investments in the money market come in several forms, including Treasury bonds, municipal, business, and corporate bonds, commercial paper, mortgage-backed securities, and federal funds. While some people are skeptical about investments in the money markets, it should be noted that during a money market crash, even ordinary bonds will rise in value, while ordinary stocks will lose value.
Another branch of finance that most people would never think of as a part of finance is financial planning. Financial planning is all about setting and achieving a long-term financial goal. This may involve building retirement funds for today, securing healthcare for the future, buying a home, or purchasing a vehicle. Most people only think about the short-term here. Financial planning can also involve setting goals for the current year and projecting forward into the future. This part of the process takes into account both the immediate and future financial situation of the organization.
All these three main areas of finance are intertwined, but they are not composed of the same four elements. In fact, there are actually six elements that constitute the structure of finance, and they are savings, capital budgeting, financial planning, income and assets management, and cash flow management. Within each of these topics, there are subtopics like leasing, inventories, investment, property market, and external financing. The entire process is therefore made up of six distinct elements.
The entire process, then, consists of financial decisions being made about capital assets, liabilities, revenues, and surplus funds. It also involves the formulation and implementation of plans to raise capital and to manage resources for future purposes. Finance is therefore not merely about creating a financial plan or managing money, but also has much more to do with making sound investment decisions. Finance has a crucial role in business and it is vital that businesses have effective finance plans in place, because without them, their ability to survive and thrive is severely limited.