Finance is the method of channeling funds from borrowers and lenders to entities that require it most. Lenders and other financial institutions provide credit for a limited period to businesses and individuals as a method of financing required for growth and expansion. Interest earned on the credit is returned to the lender in the form of dividends. When placed to effective use, borrowers and lenders have surplus cash available that can make the interest or dividends when put to effective use. In today’s economic downturn, financial experts recommend more flexible borrowing practices to increase liquidity in the market as well as to increase access to finance for small businesses.
Finance is an important part of the business world. It influences all aspects of production and business transactions. Production, sales, inventory, cost of goods sold, operation and growth of firms are all affected by how efficiently finance is applied. The study of financial economics provides information needed by businesses, consumers and governments to take advantage of the opportunities afforded by sound finance practices.
Basic function of finance is to provide a platform by which monetary systems can be developed to meet the needs of the borrowers. Finance in monetary systems is influenced by three factors – risk, flexibility and purpose. Risk refers to the expected losses that would occur as a result of investment decisions. Flexibility refers to the ability to alter operations as needed without the loss of capital. Purpose determines the financial systems purpose and includes taxation, regulation and policy.
The financing of enterprises ranges from loans to proprietary instruments issued by banks and other financial institutions. The types of finance available include: borrowing money by the borrower, borrowing money by businesses or individuals and selling securities in the secondary market. Loans are primarily used to purchase plant, equipment, fixtures and materials needed to produce goods and services. Borrowing from banks and other financial institutions is usually the primary method for creating business credit.
Financial analysts use a variety of methods to study the supply side and demand side of the business economy. Data are collected to determine where the market breakdowns are occurring. Analysis of supply-side finance is performed using economic concepts such as production, consumption, saving and lending. Demand side finance is analyzed using the theory of demand price management. Analysis of financial markets is necessary for the understanding of the role of finance in the economy.
The modern financial services sector also encompasses insurance, banking, pensions, savings and securities and mortgage finance. All these sectors have become intertwined through the development of finance. Banks, for example, serve as intermediaries between financial goods and services. They secure loans by offering credit facilities on home loans, consumer credit cards, business loans and business mortgages. They may also provide cash advances for a short period of time when an emergency arises.
The main functions of financial activities are to provide loans and make interest payments. Other functions of finance include creating policies that will influence people’s spending habits. Finance is involved in creating policies that will affect economic growth and development. This includes macroeconomic and political activities. Finance also determines the objectives and methods by which monetary and fiscal policy decisions are made. Public spending, investment, deficits and balance of payments all fall under the realm of finance.
Private organizations conduct most of the finance activities. They include banks, investment banks, corporate funds, venture capitalists and registered investment brokers. Corporate finance refers to the financial activities of running a company from its inception to exit. All corporate finance transactions usually require bank guarantees or financing from some kind of financial institution.