The field of Finance definition has undergone a remarkable change in recent years. Prior to the twentieth century, the meaning of Finance was quite unclear. Finance basically refers to an allocation of financial resources. This includes, among other things, savings, lending and investment. Throughout the history of Finance, there have been several attempts at providing a clear picture of what Finance actually is. Today, most people would most likely think of finance in terms of money management, however let us take it a step back.
To be able to define finance, we need to first take a look at its history and how it relates to all other aspects of our lives. The history of Finance can be traced back to the origins of the Western and Old world financial systems. All of these financial systems had a common element that was that they involved some sort of private capital. While these systems were common, the meaning of the term Finance has evolved notably over the centuries, encompassing a much larger range of ideas.
One of the most common definitions of Finance is as the process by which money is raised and used to make investments. The purpose of raising finance is to either purchase a new property or to fund existing businesses. Defining Finance therefore requires looking at both the reasons for borrowing and the uses of that borrowing. There are a number of different ways that funds can be raised and this includes: borrowing money from banks, borrowing it from investors, borrowing from your own savings, borrowing from the central bank and making purchases with your credit card.
The second most common concept of Finance is budgeting. In short, budgeting is the process of determining how funds will be used over a long term investment plan. This involves the collection of information about future investment plans. The budget is then used to allocate available funds for specific purposes. Some examples include: long term investment decisions, sourcing short-term equipment, sourcing inventory, and determining the working capital requirements of an organization.
A third common definition of Finance is that of the utility of funds. What is Finance then? In this framework, the meaning of Finance includes the use of funds to accomplish goals and objectives in a broader term. Goals and objectives could include the purchase of a particular material, the procurement of a resource, the improvement of a system, or the expansion of an existing enterprise.
A fourth definition of Finance is risk management. In simple terms, risk management means ensuring that funds are invested in appropriate ventures that carry a lower risk of loss than the funds are invested in. Some examples include: determining whether an existing asset will produce a profit, determining whether new technology will reduce the cost of production or increasing the efficiency with which goods and services are purchased and marketed. What is Finance therefore?
The fifth most common definition of Finance is that of financial services. In laymen’s terms, financial services refer to professional money management practices. These practices include: interest rate management, portfolio management, debt management, and asset management. What is Finance then?
The bottom line is that finance includes many different concepts that are relevant to business and personal finance. The five major areas of focus that define the scope of finance are: money management, risk management, elasticity of money markets, and non-financial instruments such as derivatives. Finance is thus not only about making loans, it also includes financial instruments that do not require collateral to secure the loan. The important point to note is that the five perspectives on finance represent complementary approaches to the study of finance.