Written by Finance can be broadly defined as the discipline that deals with the management, creation, and study of money and other financial assets.
It is the field of study that deals with the management of money and investments. It is essentially the art and science of money management.
Finance studies money affairs, money matters and other things related to money.
It involves understanding how individuals, businesses, and public institutions raise, allocate, and use financial resources to achieve their financial goals.
At the personal level, finance is concerned with how individuals make decisions such as how much money should be spent, how much should be saved, and how much should be invested.
At the business level, finance is concerned with businesses decisions such as how companies raise money from investors and how companies invest money in an attempt to get more money.
Types of Finance
Finance can be divided into three sub-categories, namely: Personal finance, corporate finance and public finance.
1. Personal finance: This is primarily concerned with how individuals use and manage their funds to achieve their personal goals and objectives.
It deals with the personal financial planning, budgeting, and investment decisions of individuals.
Personal finance focuses on managing the financial resources of individuals. It is concerned with managing your own money, rather than managing money for a business or organization.
Some of the areas of focus in personal finance include creating a budget to manage income and expenses, deciding how much money to save for emergencies, planning for retirement, and making smart decisions about personal investments.
2. Corporate finance: This is concerned with how companies raise funds and manage their financial resources.
It involves making financial decisions and strategies to achieve the goals and objectives of the company.
One of the primary areas of focus in corporate finance is the funding sources and capital structure of the company.
This involve deciding how much money the company needs to raise and where to get the funds from.
That is, whether to get fund from debt financing (borrowing money) or equity financing (selling shares of the company).
Another area of corporate finance is evaluating the investment opportunities of a company.
This involves evaluating the risks and potential returns of various investments options, and deciding on which one to invest the company funds on.
3. Public finance: Public finance involves the study of financial activities and decisions of governments and public institutions.
It is the concerned with the finance of a state or government institutions.
Public finance deals with the financial management of government entities. It involves managing government revenues, expenditures, and debt.
Public finance is usually long term, lasting for five or more years.
Reasons why finance is Important
1. Helps in resource allocation: Finance facilitates the efficient allocation of financial resources since it helps individuals, businesses, and governments determine how to allocate their limited resources among various alternatives to maximize their utility, profitability, or societal welfare.
2. Necessary for everyone: We all have to make financial decisions about our money and investments daily.
As a result, we have to be well-versed in finance. Finance enables us to better understand and manage our money.
It assists us in keeping track of our finances and reducing unnecessary expenditures.
3. Important for Financial planning: Finance enables individuals and organization to set financial goals and develop plans to achieve them.
Finance helps individuals, businesses, and government institutions assess current financial situations, forecast future cash flows, and create budgets to manage future income and expenses effectively.
4. Assists in making investment decision: The study of finance assists us in making investment decisions.
A person who wishes to invest in the stock market, for example, needs to be well-versed in finance.
5. Understands how money work: Money is a common commodity in today’s world.
It’s an irony that so many people don’t understand how money works.
For example, many people do not know about the time value of money concept, which states that an amount of money given to you today is worth more than the same amount of money given to you five years from now.
A good understanding of finance is very crucial to understanding every aspect of money management.
Finance helps us make decisions such as should I hold money? should I invest my money? Which credit policy should u choose? etc.
