An overview of the term ‘finance’:
The word ‘finance’ exists from as long as the human civilization through vivid forms e.g. the barter system etc. Finance is generally referred to as the process of providing funds to the borrower (individual or entity) for fulfilling their economic goals. On a broader note, finance is the science that explains the allocation, creation, study as well as management of funds, assets, credits, investments, cash in terms of money and all other liabilities. Precisely, finance is referred to areas of business and study as it has the application of statistics and mathematical calculations.
Keynote of finance:
Finance is there theory of allocation of individuals as well as firm’s assets in due course of time. The basic note in finance that affects the decision making criteria is the ‘time value of money’, which states that the value of the money changes with the changing time. As per this principle, certain sum of money in the present time has different capacity of buying than the same sum of money in future. This is a result of the changing value of money as a result of changing interest rates and the future worth of the current sum of money can be numerically calculated.
Categories of finance:
For better understanding of finance it is categorized as under three main divisions, namely:
- Public finance: it describes the finance associated with the entities that form a nation such as counties, states, provinces etc. It lays emphasis on the efficient working of the public sector entities and is managed by central banks etc.
- Private finance: can also be referred as personal finance involves the financial decisions involving investment in real estates, buying goods like vehicles, paying for the educational expeditions etc. It may also include investment in health insurance, savings for retirement etc. Basically it refers to the expenses and investment made by individuals for personal heath and benefits.
- Managerial finance: it is the process of providing assets and resources for a firm’s activity (firm may be referred to as small and medium scale enterprises). The criteria under these involve risk management and are carried out in step by step manner.
Although it is scrutinized in to the above three divisions, yet each of the sub-divisions have other broader classifications.
How a financial institution works:
Any financial institution be it a bank or credit card company, it works on the simple principle of deposits and credits. Deposits imply the investments made by the individuals or entity to which the financial institution pays interest and credits refer to the capital that is provided to the borrowers and to which they pay a negligibly greater rate of interest as compared to the investors. The difference in the rate and the amounts is handled and retained by the financial institutions for its internal working.
Basic steps behind the financial set-up of an SME:
SME are termed as the building blocks of societies as well as economy of any nation. The procedure for financially powering up any corporation involves three basic steps:
- The preliminary decision termed as investment decision implying the decisions as to which projects to take up. This involves the estimation of budget by evaluation techniques employed by the economists’.
- The second step is termed as the financial decision making. This suggests the resources from which the funds are turned up in the form of equity e.g. cash from the shareholders of the organization or firm. For the short term capital requirements, banks provide a helping hand.
- The final step can be summoned as the dividend rule. In this, the management staffs of the firm determine/calculate the presence of any inappropriate profit and plans for either using it for future investment or distributing to the shareholders.
An idea to the financial theory:
Financial theory is the combination of different elements such as financial economics, intangible asset finance, experimental finance, mathematics, and behavioral-finance. Each of the elements refers to particular subject of consideration.
Sherry Rosen is an investment banker who has worked with a variety of financial firms. Recently, she has become quite interested in the trading of annuities, similar to those that are handled by the financial firm JG Wentworth. Follow her on Twitter @SherryRRosen.