What is Finance? Part 1

 

Finance can be defined as the science and art of managing money in order to achieve the appropriate objective you can see that there are two components two important components in the definition one is managing money therefore finance involved with managing money and the other component is appropriate objective that means finance involve managing money with an appropriate objective in mind.

Finance is a wide area and it can be it can be thought in different contexts like from personal context government, context or business context from personal context if you think about finance it is the management of money for personal objective for example if you are thinking about personal finance perhaps you will think about how to earn adequate amount of money how much money to spend and save how much to borrow if necessary how much money to invest if you have extra and if you want to increase your consumption in future where the in where to invest the money when to invest the money so these are the these are some examples of questions that you answer if you are dealing with personal finance.

 

Government context in government context the finance will be dealing with a generating government revenue for example by deciding how much to tax public spending the amount of public spending budgeting government depth production distribution of public goods and if we think about business context of finance then it will be dealing with for example in what fixed assets should we invest our money how to raise money for the investment of the business how to manage the short-term cash flows how much to reinvest in the business if you want to expand the business so these are the different context of finance but now we are going to focus on business finance and learning about business finance can also help you to understand the finance in other context so what are the areas of business finance.

One is capital budgeting capital budgeting answers in what fixed asset and when a forum should invest the other relative related area is dividend policy when a firm makes profit the firm will normally distribute the profit to the owners but if the firm decides to reinvest how much of the profit should be reinvested so if the firm reinvest the dividend will be lower so these kind of decisions are the area of dividend policy then again the area of capital structure which deals with raising money how to raise money for the investment and it also involved deciding when to raise the money from which sources the firm should raise money should it should the firm raise money more from the owners or more from the creditors and the other area of finance is working capital management which is related to the management of short-term assets more particularly short-term cash flows so it involved for example cash budgeting, managing of current assets, managing up current liabilities etc so these are the areas of Finance which can be related with the balance sheet of a business organization you know that the balance sheet of a business organization has two sides the left-hand side contains the assets and the right-hand side contains the liabilities and owner's equity.

In other words we can say that liabilities and owner's equity x' are the sources of fun because when you are liable to someone that means you are supposed to pay that means you have other people's money borrowed from them and equity is also other people's money but it is the owners money that you have in your business.  so we can say that the right-hand side of the balance sheet actually indicate the sources of money the business organization has and the left-hand side of the balance sheet contains the assets which are essentially the uses of money because how do you use the money normally you buy different types of assets so this type of assets are contained in the left hand side so a business organization can have assets only if the business organization has money in the first place then the organization then the firm can use the money to buy assets. This is why the sources of money and the users of money should be equal and this is why the left hand side and the right hand side of the balance sheets balance sheet are equal if we focus on the left hand side of the balance sheet we have assets.