The Different Areas of Finance
Finance is a wide term which covers many issues regarding the study, development, management, and allocation of funds. This includes financial decision-making, allocation of capital, risk management, market evaluation, protection of funds, and other aspects of financial activities. Some of the subtopics in finance include asset valuation, corporate finance, venture capital, mortgage banking, non-traditional finance, personal banking, merchant banking, credit card financing, financial markets, insurance, public finance, real estate financing, and derivatives. In addition, finance also includes other aspects such as work purchasing, technology transfer, infrastructure, and education.
Finance is an integral part of all economic activity. It helps to organize the whole system of the enterprise. This includes the process by which value is created, how it is distributed, and how payments are made. One of the most important principles of finance is the time value of money, which states that an amount of money is worth something according to the time spent to create it.
The process of creating value is called production. Finance then comes into play once the company has determined how to best produce that value. The key element in creating financial systems is cash flow, or the flow of funds through an organization. Cash flow is necessary in all organizations, large or small, because without it, there cannot be commerce, finance, investment, or any of the other aspects discussed. Cash flow is necessary because it ties together the various elements of the financial industry.
There are two types of financial systems: productive and unproductive. Producers finance in order to acquire raw materials, employ workers, and make sales. Unproductive finance are basically long-term investments like long-term loans, stock portfolios, bonds, and insurance. All banks create money in this manner in order to keep their financial systems running smoothly. Banking is one of the largest users of finance throughout the world. Therefore, many people consider banking and finance to be a part of the same system.
Every financial system needs a regulating body or a governing institution to set rules and guidelines. Examples of these institutions are central banks and government agencies. Regulations are necessary in order to keep markets from excessively rising or falling and to maintain the stability of the value of currency. Without regulation, investors would be able to engage in highly speculative investments and financial systems would be prone to sudden and drastic changes. In addition, banks use this form of finance to secure their own interests and to avoid losses by making investments with funds they cannot afford to lose.
As mentioned earlier, finance is broken down into three distinct areas: capital budgeting, financial reporting, and investment management. Capital budgeting is the process of setting aside funds in advance of an investment decision. Financial reporting involves preparing financial reports for investors and other stakeholders, and this includes valuing assets, analyzing accounts receivable, analyzing inventories, and estimating future cash flows. Lastly, financial management refers to the overall oversight of these disciplines in order to ensure the long-term viability of the finance system.
Money management refers to the process of predicting how money will move. Traders, investors, and banks make decisions about funding over time based on their projections of the economy, interest rates, inflation, unemployment, and other factors. This requires a lot of foresight, which some people find to be difficult to achieve. Finance that falls under the heading of money management is a relatively narrow field of study that includes bank supervision, financial statements analysis, asset allocation, portfolio optimization, financial markets, management of pension funds, and monetary policy. While most of these techniques were developed within the banking industry, many have been adopted by businesses large and small.
Accounting is an area of finance that has its roots in accounting. Accountants determine the value of a company’s assets, liabilities, owner’s equity, and retained earnings by recording daily financial transactions in books. While accounting is not as broad in scope as finance, it is essential to the survival of any business large or small. Some techniques used in accounting include: internal control, external control, financial reporting, internal fraud control, and financial burden management. Although most companies rely heavily on accounting in order to operate, management should remember that the accounting process is just one part of the whole financial picture and should not be looked at as a means of justifying all financial activity.