Finance is the study of money and how it is used. It is the soul and blood of any business and no firm can survive without finance.
It concerns itself with the management of monetary affairs of the firm—how money can be raised on the best terms available and how the procured money can be devoted to the best uses. Hence the nature of finance relates to the process of arrangement and application of funds.
Finance is needed to establish a business, to run it to modernize it to expand or diversify it. It is required for buying a variety of assets, which may be tangible like machinery, furniture, factories, buildings, and offices or intangible such as trademarks, patents, technical expertise etc.
Also, finance is central to run day to day operations of business like buying materials, paying bills, salaries, collecting cash from customers etc needed at every stage in the life of a business entity. Availability of adequate finance is very crucial for survival and growth of a business.
A business organization seek to achieve their objectives by obtaining funds from various sources and then investing them in different types of assets, such as plant, buildings, machin¬ery, vehicles etc. Thus for this, management of the finances through scientific decision – making is necessary.
Finance is often split into three areas: personal finance, corporate finance and public finance. At the same time, finance is about the overall “system”– i.e. the financial markets that allow the flow of money, via investments and other financial instruments, between and within these areas; this“flow” is facilitated by the financial services sector.
A major focus within finance is thus investment management — called money management for individuals, and asset management for institutions — and finance then includes the associated securities trading, investment banking, financial engineering, and risk management.
More abstractly, finance is concerned with the investment and deployment of assets and liabilities over“space and time” : i.e. it is about performing valuation and asset allocation today, based on risk and uncertainty re future outcomes, incorporating the time value of money (determining the present value of these future values, “discounting”, requires a risk-appropriate discount rate).
As an academic field, finance theory is studied and developed within the disciplines of management, (financial) economics, accountancy and applied mathematics. Correspondingly, given its wide application, there are several related professional qualifications, that can lead to the field. As the debate to whether finance is an art or a science is still open, there have been recent efforts to organize a list of unsolved problems in finance.
The nature of finance is discussed below:
Utilization of finance requires payment of fees, rent or any such cost to the provider of finance. Business raises funds and in exchange it has to pay a cost to suppliers of the funds. If the finance is arranged by issuing shares the firm pays dividend in return or capital payment in the form of bonus shares.
2. Value Based:
Economic application of finance helps to earn profit which ultimately creates value for the firm. Finance administers economic activities, enhances efficiency of the business operation, and thus ensures creation of surplus. So it deals with the broad spectrum of business activities that are directed to increase the value of the firm. How the fund can be arranged with least cost consideration and how that can be applied with best uses determines the extent of value generated by a firm. Hence finance is value-oriented.
It has a deep impact on the organization, society as well as the economy. The financing decision of a firm creates impact on investors, employees, debtors, creditors, government and all the members of an economy. Business activities are not mutually exclusive and so their dependence on each other is measured in terms of finance. Decisions relating to any activity influence others and in this way finance builds an interrelationship among business, society and economy.
Finance is all-pervasive. It is necessary for all types of organizations whether profit seeking or non-profit seeking. For profit seeking firm’s value maximization is the main goal while for non-profit seeking firms cost minimization and survival get prime importance. Both these goals are evaluated in financial terms. Firms, whether profit seeking or non-profit seeking, require financial support, because financial viability is the central theme of every firm.