Finance is a broad term encompassing many things about the management, generation, and allocation of funds and assets. In particular, it addresses the issues of why an individual, business or government can obtain the funds required for their activities and how those funds are used. In simple terms, finance is the art of making money. There are many techniques and systems used to accomplish this goal. Some techniques include interest, dividends, premiums, inflation, taxes, and others. The methods used to create and allocate funds are generally categorized into three basic categories: financial instruments, strategies, and institutions.
Financial instruments refer to any one of a wide array of financial instruments such as stocks, bonds, insurance companies, property, accounts receivable, depository receipts, original issue discount rates, interest rate swap agreements, forward contracts, swaps, and derivatives. A company can use any one of these instruments to finance its activities. Many different financial instruments are used by companies and other organizations in their operations today. Examples of some of the more common financial instruments are cash, marketable securities, foreign exchange, mortgage banking, derivatives, corporate bonds, insurance companies, corporate stock, marketable securities, and money market.
The primary objective of any organization is to achieve maximum utilization of its capital and to optimize its performance. This is typically achieved through the use of financial systems. One way to achieve financial systems results in better financial management of resources and better allocation of those resources to the best uses. A variety of financial instruments and strategies are applied to achieve this goal through the application of different models and the use of various software programs.
One area that research efforts in finance have begun to address is that of better financing for businesses and the financing of specific commercial ventures. Businesses rely on long-term contracts to guarantee their capacity to do business. Through proper financial management of these long-term investments, a business owner ensures that his or her investment is not depleted before it has delivered its full profit and satisfaction. As new businesses are developed, more capital is needed in order to start up and expand. Through proper utilization of the banking and non-banking capital markets, better financing for these ventures is possible.
The world of finance continues to develop and evolve with changing environments. The study of economics continues to influence decisions made in business. Economists have long studied the process by which value is acquired and the costs related to that acquisition. In the social sciences, social science research on finance issues has produced important findings regarding the process by which value is created and the costs associated with that creation.
The study of economics in general and the study of banking in particular have shown to have a strong impact on the decision-making process and the allocation of funds. The allocation of funds in business organizations occurs because of the probability of returns being greater than the expenses incurred. Economics has shown to be of significant assistance to managers as they attempt to maximize revenue and minimize costs in order to attain a goal of making a profit. Therefore, economics plays an important role in making sound financial decisions.