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What does Finance mean – Definition, Branches, Characteristics, and Uses

What does Finance mean?

  • You want to know, What does Finance mean, Finance is a broad concept that describes two closely related activities.
  • The study of how we manage money and the actual process of acquiring the necessary funds.
  • It covers the supervision, creation, and analysis of cash, banking, credit, investments, assets, and liabilities that make up the origin of Finance.

Two Main Branches of Finance

The formal study of Finance is divided into two main branches, according to their particular focus:

Corporate Finance

  • We assume the perspective of who requires funds or assets to invest, who needs to generate resources.

The valuation of assets

  • On the contrary, it assumes the perspective of someone who has the capital to invest and wishes to do so in the most profitable way possible.
  • These branches, in turn, are divided into a diverse set of application areas of financial knowledge.

Finance Characteristics

Finances are characterized by the following:

  • They deal with the management of money and capital goods: banking and savings, investments (bonds, stocks, etc.), loans, etc.
  • As an area of knowledge, Finance locates between economics, administration, and accounting.
  • They handle vital concepts such as risk, profit, interest rate, investment costs, etc., which describe how the world of money works.
  • It allows the improvement of money management for both public and private entities, both individuals or families, and large corporations.
  • They rely on other auxiliary disciplines, such as economics, accounting, statistics, and mathematics.

Types of Finance

Private Finance

  • We seek resource management optimization in private or individual entities: SMEs, large corporations, families, or individuals. They cover the following areas:

1. Personal finances

  • Those that have to do with personal money management: income, fixed expenses, decision-making regarding how to spend the money and on what, etc.

2. Family finances

  • Understand as the sum of the finances of individuals who share a home and jointly face the expenses that this entails.
  • And also, make joint plans for the future.

3. Corporate Finance

  • We have to do with the management of private companies or organizations’ assets.
  • And also, their financing decisions, their investment methods, and their managerial decisions.

Public finances

  • They involve the state or the public companies that the state manages and therefore contain different terms from the private ones.
  • They cover the following areas:

1. Fiscal policy

  • That is how a State collects and administers the taxes it obtains from its citizens.

2. Public spending

  • It is how the state invests, the money it manages, and how much money it injects back into society in jobs, purchases, etc.

3. Public debt

  • Suppose a State cannot cover its expenses and debt with private sectors to keep the State apparatus running.

4. Public budget

  • That has to do with the projections of future expenses that a State makes, taking into account its financial moment.

Importance of Finance

  • Given the fundamental principle of every economy, the resources available in the world are finite.
  • It is important while the needs that we must cover with them are infinite.
  • Or, in other words: that the money is not enough to do it or have it all at once, the importance of a field of study such as Finance is evident.
  • Finance allows individuals and organizations to play the game of capitalism in the best possible way.
  • To obtain the necessary resources at the right time, we should be able to keep the economic machinery running.

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