Meaning of Finance
The science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.
The financial systems include the public, private and government spaces, and the study of finance and financial instruments, which can relate to countless assets and liabilities.
Finance is divided into three distinct categories: public finance, corporate finance and personal finance, all three consisting of many sub-categories.
The one word which can easily substitute finance is “exchange.” Finance is nothing but an exchange of available resources. Finance is not restricted only to the exchange and/or management of money.
A barter trading system is also a type of finance. Thus, we can say, Finance is an art of managing various available resources like money, assets, investments, securities, etc.
Some Definitions of Finance
The concept of finance includes capital, funds, money, and amount. But each word has its unique meaning. Studying and understanding the concept of finance becomes an important part of the business concern.
Definition of Business Finance
According to the Wheeler, “Business finance is that business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”.
According to the Guthumann and Dougall, “Business finance can broadly be defined as the activity concerned with planning, raising, controlling, administering of the funds used in the business”.
In the words of Parhter and Wert, “Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in non-financial fields of industry”.
The term finance comes from the Latin “finis” which means end or finish . It is a term whose implications affect both individuals and businesses, organizations and states it has to do with obtaining and using or money management – Ivan Thompson
According to Bodie and Merton, finance is the “study how scarce resources are allocated over time”.
Corporate Finance
According to the Encyclopedia of Social Sciences, “Corporation finance deals with the financial problems of corporate enterprises. These problems include the financial aspects of the promotion of new enterprises and their administration during early development, the accounting problems connected with the distinction between capital and income, the administrative questions created by growth and expansion, and finally, the financial adjustments required for the bolstering up or rehabilitation of a corporation which has come into financial difficulties”.
The core corporate finance principles can be stated as follows:
The Investment Principle: It is better to invest in assets and projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for riskier projects and should reflect the financing mix used—owners funds (equity) or borrowed money (debt). Returns on projects should be evaluated based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects.
The Financing Principle: Choose a financing mix (debt and equity) that maximizes the value of the investments made and match the financing to nature of the assets being financed.
The Dividend Principle: If there are not enough investments that earn the hurdle rate, return the cash to the owners of the business. In the case of a publicly traded firm, the form of the return—dividends or stock buybacks—will depend on what stockholders prefer.
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