Finance is a broad term encompassing many things about the financial management, creating, management, and allocation of resources. In particular, it concerns the questions of why and how an individual, firm or state to obtain the funds required for its day-to-day operation, especially for its economic growth and welfare. It also goes hand-in-hand with accounting and the measurement of financial transactions and their outcomes, particularly those involving money. The study of finance is often interdisciplinary and draws on many different disciplines, including economics, accountancy, business, economics, taxation, and the law. Thus, there is a wide scope of research and different areas of expertise within finance.
Finance has become an important and integral part of everyday life for most people, since the advent of modern technology. One of its crucial roles is to provide financial services, i.e. purchasing power based on current cash inflows or outflows, to facilitate economic activity. Finance is one of the oldest fields of study, but it has experienced significant transformations over time. Finance has been developed and organized according to the principle that the distribution of risk among potential investors, institutions or governments should be balanced to yield optimal value at risk. It thus includes many different kinds of transactions, such as: buying and selling of securities, creating money, lending money, issues of debt and equity, and other financial activities.
There are two basic categories of assets and liabilities. Assets include items such as fixed assets, such as plant and property, accounts receivable and inventory, goodwill, and financial investments. Liabilities consist of accounts payable, accrued expenses, and net worth. All of these categories influence the availability and price of the various forms of financial assets and liabilities.
The objective of financial management is to ensure adequate allocation of funds to meet economic demands, both long-term and short-term. It involves the determination of risk-adjusted returns. Thus, it aims at optimizing the economic value of the capital invested, both for short-term usage and for long-term return. It also involves the measurement and interpretation of financial data, the preparation of comprehensive reports regarding risk and investment effectiveness, identification of sources of variation in financial performance, and the provision of recommendations regarding the protection of the assets and liabilities of investors.
One of the main purposes of the discipline is to provide a guide in the selection of appropriate investment strategies. Since it deals mainly with the funds available and the decisions to be made in using them, it can be said to be a rather abstract science. Some areas of Finance that are directly related to the use of funds are: asset pricing, cash flow analysis, credit risk, financial markets, portfolio management, monetary policy, portfolio optimization, real estate finance, venture capital, insurance, public finance, risk management. In addition, there are many more areas of specialized finance such as derivatives, foreign exchange, bond market, commodity markets, bond investing, bond trading, venture capital, derivatives, precious metals, bond trading, money market, mortgage, financial analysis, bond issuance, mergers and acquisitions, real estate and other distressed deals, municipal, private, and structured settlements.
Finance has been called the science of capital investment because it focuses on the method by which value is created and distribution is made over time. One of the concepts that Finance uses is that the present value of money is equal to the discounted value of the future cash flows produced by the assets and the liabilities. Thus, when a manager makes a choice of investment he/she must consider the present value of the funds used to make the investment. Thus, the importance of financial management extends far beyond the simple provision of cash to cover unexpected expenses. It is important to understand and appreciate the role of Finance in modern-day business.