Finance is a broad term encompassing all matters regarding the science, invention, development, and strategy of money and financial investments. In particular, it concerns the questions of why and how an individual, firm or government obtain the funds necessary to finance their projects or programs of work; known as capital within the firm context. Finance is also concerned with how money is made available to individuals and firms for the purpose of sustaining business activities and other activities. The process of financing involves borrowing money from banks or other financial institutions and using it to engage in different projects and activities. A company then uses the funds to buy raw materials, equipment, plants, inventory, and facilities required in its operation.
Finance is also involved in asset management. This involves the careful monitoring, evaluation and control of various forms of financial assets such as equities, derivatives, debt instruments, fixed assets, and non-financial assets such as rights, options, futures, currencies, and financial investments. In simple terms, financial managers make use of banks, governments, and other financial institutions to borrow funds and manage them. It is an essential part of the overall soundness of the financial markets.
The major components of the discipline of finance include economic theory, practice, measurement, and economic policies. It is also a relatively comprehensive field, which covers many areas of the business and economics field. Some of the main areas of finance include: financial markets, money markets, asset management, banking, insurance, financial planning, risk management, economic growth, international trade, consumption, monetary policy, and industrial structure.
Within the broader field of finance, there are three main approaches to the discipline. First, there is the traditional view of managing money or wealth. Second, there are the mixed approaches, which mix management of both personal finances and financial activities. Finally, there is financial planning, which regards all the three approaches in practice.
Let us take a closer look at each of these approaches in detail. First, traditional personal finance is the study of the entire financial situation, with an emphasis on the future. This includes the present as well as past periods, and analyzes the inter-linkages between investment strategies, income and balance sheets, credit history, cash flow, investment choices, etc. It is basically a study of long term viability for the business or individual’s personal finance position. This is typically what is known as “day-to-day” financial planning.
On the other hand, mixed approaches to personal finance involve analyzing the present in relation to financing the same expenditures over time, for the purpose of evaluating the financial return on investment. Also called “short-term finance”, it involves evaluating the inter-linkages between current cash flow, earnings, utilization, and liabilities. The third main approach to personal finance is corporate finance, which regards all the aspects of the business (or individual’s) financial portfolio as part of its portfolio. In general, corporate finance refers to all the aspects of business that are influenced by finance, including: venture capital, private equity, and mortgages. With this in mind, you can see that your choice of a finance career will be influenced by the three main finance approaches.