Finance is a broad term for things about the management, generation, allocation, and utilization of financial resources. In particular, it concerns the questions of who, what, when and where an individual, institution or government obtain the funds required for its activities and how those funds are used or misused. At the most fundamental level, finance can be thought of as the language used to describe a process by which goods and services are produced or made and to which customers pay for them.
This broader sense makes finance a more interesting science than business management, which at its most basic level is merely the application of the knowledge and skills of the manufacturing and marketing aspects of any business. While some aspects of finance are easily taught in business school, the concepts involved and the range of choices open to a business manager studying finance in any capacity are much more diverse. This diversity results from a number of factors. One of the major factors is the different ways in which money is raised and used. Another factor is the very nature of the business to which finance refers.
There are three fundamental areas in which business managers will usually turn to when they consider issues of business finance, although there are some other concepts that fall under this broader umbrella. Business managers will generally turn to principles of public finance when they need to understand and implement the methods of managing money for their own firm. They will also turn to principles of internal finance when they need to understand and execute the methods of managing money within an institution (such as a business bank). And finally, they will turn to principles of external finance, when they need to understand and implement the practices of companies that do not maintain direct control over their money supply.
Public finance is the science of public finances. Public finance experts to study how the decisions made by individuals and institutions that contribute to the public finances affect the efficiency and effectiveness of the financial markets. Public finance theory focuses on the distribution of wealth rather than the source of wealth. This area of finance deals primarily with how public institutions like local, state, and national governments to allocate resources. Public finance theory is the basis for nearly all of the current understandings of the subject matter, including modern approaches such as microeconomics and macroeconomics.
The science of business finance is intimately connected with money management and risk management. The concepts of business finance and money management have evolved in parallel with developments in the financial markets over time. As a result of the interconnectivity of money within the business, there are multiple theories and concepts that are related to the subject matter of business finance. For instance, there are differences between savings, lending, and capital markets that shed light on various aspects of business finance.
Another area of study in the world of finance is the theories and practices that deal with derivatives, financial engineering, and credit risk. Derivative, or financial, engineering refers to the ability of an institution to create financial securities that allow future cash payments to be shifted from current assets to current liabilities. Credit risk refers to the potential loss of cash flows from any loans that have been issued by an institution.
A number of other areas of finance are involved in the study of financial management. One such field of study is that of insurance financing. Many insurance companies engage in the practice of long-term financing. Long-term financing is used to avoid excessive exposure of the organization’s assets to interest rate fluctuations. Insurance companies make use of financial services firms in order to obtain appropriate financing for their businesses.
There are many different modern financial theories that deal with the complex world of today’s global economy. The study of modern financial theories is necessary in order for modern managers and investors to make sound financial decisions. One of the most influential areas of modern financial theory is behavioral finance economics. Behavioral finance theories to explain why people respond in certain ways to economic situations. By studying these areas of behavioral finance, managers can learn how to improve the way they manage their businesses.