Professional Documents
Culture Documents
Finance is a field that deals with the study of investments. It includes the dynamics
of assets and liabilities over time under conditions of different degrees of
uncertainty and risk. Finance can also be defined as the science of money
management. Finance aims to price assets based on their risk level and their
expected rate of return. Finance can be broken into three different sub-categories:
public finance, corporate finance and personal finance.
Definition of Finance:
1. In General sense,
"Finance is the management of money and other valuables, which can be easily
converted into cash."
2. According to Experts,
3. According to Entrepreneurs,
4. According to Academicians,
"Finance is the procurement (to get, obtain) of funds and effective (properly
planned) utilisation of funds. It also deals with profits that adequately compensate
for the cost and risks borne by the business."
Features of Finance:
The main characteristics or features of finance are depicted below.
1. Investment Opportunities
Creating physical assets with the money (such as development of land, acquiring
commercial assets, etc.),
Carrying on business activities (like manufacturing, trading, etc.), and
Acquiring financial securities (such as shares, bonds, units of mutual funds, etc.).
2. Profitable Opportunities
Profitable opportunities signify that the firm must utilize its available resources most
efficiently under the conditions of cut-throat competitive markets.
Finance is concerned with the best optimal mix of funds in order to obtain the
desired and determined results respectively.
The composition of funds should be such that it shall not result in loss of profits to
the Entrepreneurs (Promoters) and must recover the cost of business units
effectively and efficiently.
Internal controls are set of rules and regulations framed at the inception stage of
the organisation, and they are altered as per the requirement of its business.
A "Good Finance is an indicator of growth and good returns. This is possible only
with the good analytical decision of the organisation. However, the decision shall be
framed by giving more emphasis on the present and future perspective (economic
conditions) respectively.
Objectives of Finance:
Categories of Finance:
Finance can be broken into three different sub categories: public finance, corporate
finance and personal finance. All three of which would contain many sub-categories.
Corporate Finance: Corporate finance is the task of providing the funds for a
corporation's activities by raising and administering funds. Corporate finance aims
at studying the funding of assets from various sources like market, general public,
or various financial institutions. In this process corporate finance aims to balance
risk and profitability, while attempting to maximize an entity's wealth and the value
of its stock. The importance of corporate finance is underlined by economic and
social significance in terms of increase in public responsibility as the organization
grows and wide distribution of the corporate ownership in the process separating
ownership from management.
Direct Finance: In this case the borrower directly borrow funds from the lender in the
financial markets by selling them securities (also called financial instruments),
which are claim on the borrowers future income/assets or reserves and entitle the
borrower with partial ownership if the funds have be raised using equity.
Indirect Finance: In this case the role of channelizing the funds from the savers to
borrowers is done through financial intermediaries (example commercial banks).
2. Short Term & Long Term Finance:
Money is needed to setup any kind of business. A business owner can look for the
investors to invest money in the business and this money can be borrowed for short
term or long term.
Long Term Finance: Long term finance is generally used for investment in fixed
assets such as land and building, plant and machinery etc. and is not repayable with
in short period of time.
Short Term Finance: Short term finance is used for investment in working capital. It
is used to meet the short term needs of the business. It may be repayable in short
term or on demand as in case of a cash credit account. Short term loans are usually
repayable within a period of one to three years.
3. Sources of Finance:
The sources of funds can be broadly divided into owned capital and borrowed funds.
Owned Capital: Owned capital is the money brought in by the businessman himself
and sometimes referred to as capital or equity capital.
Borrowed Capital: Borrowed capital is the money advanced by outside agencies like
banks, financial institutions etc. generally in the form of loan.