Finance is a broad term encompassing concepts regarding the study, development, management, manufacture, and accumulation of money. The field of finance is an academic study aiming to understand how the financial system of a nation works. For most individuals, the word finance means managing one’s finances. There are various fields that deal specifically with finance and these include accounting, economics, taxation, and business administration.
Accounting is an accounting discipline that focuses on the recording of financial transactions and information. Accountants create financial statements, which allow a company to track the history and progress of its finances. Auditors then analyze these records to determine whether the financial statements recorded within the accounting documents are accurate and if any errors have been made. The audits conducted by accountants and auditors determine the reliability of the company’s finances and the extent to which they are able to meet their obligations in regards to fulfilling their financial responsibilities. The auditing process is also used as a means of detecting fraudulent activities carried out by an organization’s financial officers or management in relation to its finances.
Finance is important to all businesses. In order for any company to grow and produce enough revenue to secure its operations and provide a solid base for its assets, finance is required. Without adequate finance, a company risks running short of funds that could hamper its capacity to meet its goals and objectives. This is why it is essential to develop and maintain effective finance policies to ensure that the company has the financial means to carry out its goals and missions. As part of finance planning, a company should first establish its financial goals and objectives. These aims and objectives should include the type of products or services that the company will specialize in, the market or category of products that it will cater to, the level of capital funds available, and the target sales or revenue that the company expects to achieve in a given year.
Banking, on the other hand, is an area reserved for banks that handle the loan and investment process of other individuals. The main objective of banking is to lend money to individuals, groups, or companies in need of finance. Borrowers who come to a bank seek to borrow money for a particular purpose such as purchasing a vehicle, buying equipment such as machinery, investing in assets, or even paying off debts. A bank gives a credit or money to borrowers based on their repayment capabilities. The amount of credit granted, interest rates, and terms of the credit are determined by the bank manager based on the individual financial needs of each borrower.
As a part of finance planning, organizations must also decide how they intend to lend money. This includes determining what form of finance is to be used-secured or unsecured-and whether they will opt to take interest on lending funds through credit cards or directly. Different forms of lending include retail finance, corporate finance, commercial lending, industrial finance, mortgage finance, private lending, and municipal lending. It is important to determine which form of lending will yield the highest return in terms of the risk and reward of the initial investment.
Organizations must also apply sound behavioral finance principles in order to effectively manage finance and make sound investments. Behavioral finance recognizes that some decisions made are not only better than others but also more effective. For example, it is not always best to take a risk on small, unknown businesses rather than invest in a large, well known corporation that has a proven track record of success. Another example of a decision made better than another is to purchase a car rather than renting one. Behavioral finance recognizes the trade offs and rewards associated with making decisions and then applying those decisions to funding choices.