Finance is the method of channeling funds from borrowers and investors to financial entities that need it immediately. Borrowers and investors usually have money in hand that can make interest or dividend payments when placed to effective use. Banks make loans to businesses and individuals for the purpose of making interest or dividend payments. Individuals and businesses take out loans from banks for the purpose of buying property or equipment and then make interest or dividend payments on them. Finance is basically the method used by all financial entities to raise funds. It is a very broad concept and finance has many types such as:
The major uses of finance are to buy and sell financial assets and create economic wealth. Finance can be used to leverage financial resources, expand current assets, generate surplus, reduce costs, and make future investments. In corporate finance, there are three main methods for creating financial wealth: creating cash flow, investing in fixed assets such as plant and equipment, and borrowing money. Creating cash flow means earning profits from the sale of financial assets. Investing refers to using financial resources to acquire fixed assets such as equipment, land, and machinery for the purpose of producing goods and services which are then sold for making profits. Borrowing refers to using cash to finance projects and other large-scale activities.
Finance is an important subject in economics. The scope of finance is so vast that it actually fills several branches of study. There are different perspectives on finance. For instance, some believe that the purpose of finance is to make financial wealth through investment, while others think that the purpose of finance is to earn a profit by providing a financial service. Many in the economics profession subscribe to the second view, believing that finance is an important part of the economy and must be addressed on a regular basis.
Finance in the United States is generally divided into two main areas: commercial banking and money management. Commercial banking refers to the activities that take place between the lending and the borrower’s transactions with banks. Money management deals with money management strategies used by banks to facilitate their depositors’ access to financial instruments such as credit cards and loans. Money market funds and other short-term investments are also included in the definition of commercial banking.
Businesses that generate their own revenue usually conduct their business in the money markets. Money management involves the determination of risks and the appropriate timing of purchases and sales. Capital markets, on the other hand, deal with the issue of long-term debt and asset management. Companies in the capital markets are referred to as borrowers and sellers. Banks are commercial banks and savings and loan associations are traditional lenders.
Finance plays an important role in all economic activities of modern society. Without finance, businesses would not be able to satisfy their customers and remain in business. Without capital markets, businesses would not be able to acquire the amount of money they need to start up or expand. Without financial institutions, businesses would have no way to finance growth and expansion, and the economy would face many difficulties.