Sunday, 27 July 2014

What is Finance? Its objectives and scope

What is meant by Finance
Finance as a subject deals with money matters. It deals with the creation and circulation of money and its efficient management. It studies and researches the financial conditions of a country, region, business entity or even individuals. It studies how people and countries behave in financial matters. How do they collect and create funds and make financial decisions. On the basis of such studies conducted scientifically, it formulates principles and  gives guidelines in solving  the financial problems and helps in creating and maximising funds through efficient management. It includes management of money, funds and capital.

Objectives of Finance

So here are the two important objectives of finance: profit maximization and wealth maximization

1) How to manage money efficiently
This is aimed at profit maximization. Any financier who invests in business aims at some returns on the money invested. So efficient management of money is necessary to earn profits. This goal is achieved through proper planning and streamlining of available resources and eliminating wastage and unnecessary expenditure.

2) How to create and arrange funds for the various needs and projects of a country or business entity/ individuals

This is concerned with wealth creation and wealth maximization. If it is public finance, you are concerned with accumulating money and providing funds for the various projects and activities of the country. If business entity, the finance personnel are concerned with creating funds through profit maximization as well as efficient control of money by locating wastages. They are further concerned with various options available for creating funds like debt management, loan financing, share dealings, etc.

We shall discuss these functions in detail later on.

Scope of Finance

Finance plays much important role in almost every field of public and private activities. So its scope is much broader than initially purported to be. We can identify the scope of finance in two distinct ways.

One is based on the nature of organisations or institutions it deals with like public or government, corporate/ private, institutional, personal and international types.

The other is based on nature of functions.Modern financial activities are directly linked with many functional departments like public administration, personnel, marketing, accounting, production, etc.

Let us have a look at these horizons of finance.

1. Public Finance
Public finance is associated with the study of government spending- the way they raise large amount of funds and spend it through planned budgets for different schemes. Public spending is different from corporate and institutional spending as it is not profit oriented. It concentrates only on raising of funds and spending them prudently for public welfare works through efficient management. The finance departments of central and state governments with their Finance ministers and staff fall under this scope.

2. Corporate/ Business Finance

Corporate Finance and Business Finance deals with the capital structure and activities of various business establishments and corporate bodies. Here, all activities are profit oriented. So financial decisions and activities are aimed at profit maximization. It is involved with how to invest, save money and increase profits through efficient management of finances. All business firms and corporations appoint Finance Managers for this function.

3. Institutional Finance
Institutional finance deals with some public service oriented institutions which also work for profit like Banks, Insurance Companies, educational institutions, etc. They deal in savings and capital formation by way of serving public.

4. Personal Finance
In personal finance, the individual financial activities of a person are dealt with. Preparation of personal budgets, providing guidelines for saving and spending, financing of loans, etc are studied here.

5. International Finance
International finance deals with international activities of finance. Financial transactions between nations, matters related to compliance of international financial laws and regulations are covered in this area. It also deals with the transactions between individuals and corporate bodies that have multinational and international activities with regard to flow of money and financial problems across international markets.

Further, based on the activities of functional departments, the purview of finance includes following branches of study.

1. Finance and Accounts

2. Finance and Costs
3. Finance and Economics
4. Production Finance
5. Marketing Finance
6. Personnel Finance

We may discuss these things in later chapters.