Finance

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For the Slovenian newspaper, see Finance (newspaper).
Finance

Financial markets[show]
Financial instruments[show]
Corporate finance[show]
Personal finance[show]
Public finance[show]
Banks and banking[show]
Financial regulation[show]
Standards[show]
Economic history[show]

v•d•e

Finance is the science of funds management.[1] The general areas of finance are business
finance, personal finance, and public finance.[2] Finance includes saving money and often
includes lending money. The field of finance deals with the concepts of time, money, and risk
and how they are interrelated. It also deals with how money is spent and budgeted.

One aspect of finance is through individuals and business organizations, which deposit money in
a bank. The bank then lends the money out to other individuals or corporations for consumption
or investment, and charges interest on the loans.

Loans have become increasingly packaged for resale, meaning that an investor buys the loan
(debt) from a bank or directly from a corporation. Bonds are debt instruments sold to investors
for organizations such as companies, governments or charities.[3] The investor can then hold the
debt and collect the interest or sell the debt on a secondary market. Banks are the main
facilitators of funding through the provision of credit, although private equity, mutual funds,
hedge funds, and other organizations have become important as they invest in various forms of
debt. Financial assets, known as investments, are financially managed with careful attention to
financial risk management to control financial risk. Financial instruments allow many forms of
securitized assets to be traded on securities exchanges such as stock exchanges, including debt
such as bonds as well as equity in publicly traded corporations.[dubious – discuss]

Central banks, such as the Federal Reserve System banks in the United States and Bank of
England in the United Kingdom, are strong players in public finance, acting as lenders of last
resort as well as strong influences on monetary and credit conditions in the economy.[4]

Contents
[hide]

• 1 The main techniques and sectors of the financial industry

• 2 Personal finance
• 3 Corporate finance
o 3.1 Capital
o 3.2 The desirability of budgeting
 3.2.1 Capital budget
 3.2.2 Cash budget
o 3.3 Management of current assets
 3.3.1 Credit policy
 3.3.1.1 Advantages of credit trade
 3.3.1.2 Disadvantages of credit trade
 3.3.1.3 Forms of credit
 3.3.1.4 Factors which influence credit conditions
 3.3.1.5 Credit collection
 3.3.1.5.1 Overdue accounts
 3.3.1.5.2 Effective credit control
 3.3.1.5.3 Sources of information on creditworthiness
 3.3.1.5.4 Duties of the credit department
 3.3.2 Stock
 3.3.3 Cash
 3.3.3.1 Reasons for keeping cash
 3.3.3.2 Advantages of sufficient cash
o 3.4 Management of fixed assets
 3.4.1 Depreciation
 3.4.2 Insurance
• 4 Shared Services
• 5 Finance of states
• 6 Financial economics
• 7 Financial mathematics
 • 8 Experimental finance
• 9 Behavioral finance
• 10 Intangible Asset Finance
• 11 Related professional qualifications
• 12 See also
• 13 References

• 14 External links

[edit] The main techniques and sectors of the financial

industry
Main article: Financial services

An entity whose income exceeds their expenditure can lend or invest the excess income. On the
other hand, an entity whose income is less than its expenditure can raise capital by borrowing or
selling equity claims, decreasing its expenses, or increasing its income. The lender can find a
borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The
lender receives interest, the borrower pays a higher interest than the lender receives, and the
financial intermediary pockets the difference.

A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from
lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow
borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus
compensators of money flows in space.

A specific example of corporate finance is the sale of stock by a company to institutional

investors like investment banks, who may sell it on to private investors, or other financial
institutions such as pension funds. The stock give part ownership in that company in proportion
to shares owned.

In return for the stock, the company receives cash, which it may use to expand its business;
("equity financing"), to reduce its debt.[5] Equity financing mixed with the sale of bonds (or any
other debt financing) is called the company's capital structure.

Finance is used by individuals (personal finance), by governments (public finance), by

businesses (corporate finance), as well as by a wide variety of organizations including schools
and non-profit organizations. In general, the goals of each of the above activities are achieved
through the use of appropriate financial instruments and methodologies, with consideration to
their institutional setting.

Finance is one of the most important aspects of business management. Without proper financial
planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is
essential to ensure a secure future, both for the individual and an organization.
[edit] Personal finance
Main article: Personal finance

Questions in personal finance revolve around

• How much money will be needed by an individual (or by a family), and when?
• Where will this money come from, and how?
• How can people protect themselves against unforeseen personal events, as well as those
in the external economy?
• How can family assets best be transferred across generations (bequests and inheritance)?
• How does tax policy (tax subsidies or penalties) affect personal financial decisions?
• How does credit affect an individual's financial standing?
• How can one plan for a secure financial future in an environment of economic instability?

Personal financial decisions may involve paying for education, financing durable goods such as
real estate and cars, buying insurance, e.g. health and property insurance, investing and saving
for retirement.

Personal financial decisions may also involve paying for a loan, or debt obligations.

[edit] Corporate finance

Main article: Corporate finance

Managerial or corporate finance is the task of providing the funds for a corporation's activities.
For small business, this is referred to as SME finance (Small and Medium Enterprises). It
generally involves balancing risk and profitability, while attempting to maximize an entity's
wealth and the value of its stock.

Long term funds are provided by ownership equity and long-term credit, often in the form of
bonds. The balance between these elements forms the company's capital structure. Short-term
funding or working capital is mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. An

investment is an acquisition of an asset in the hope that it will maintain or increase its value. In
investment management – in choosing a portfolio – one has to decide what, how much and when
to invest. To do this, a company must:

• Identify relevant objectives and constraints: institution or individual goals, time horizon,
risk aversion and tax considerations;
• Identify the appropriate strategy: active v. passive – hedging strategy
• Measure the portfolio performance
Financial management is duplicate with the financial function of the Accounting profession.
However, financial accounting is more concerned with the reporting of historical financial
information, while the financial decision is directed toward the future of the firm.

[edit] Capital

Main article: Financial capital

Capital, in the financial sense, is the money that gives the business the power to buy goods to be
used in the production of other goods or the offering of a service.

[edit] The desirability of budgeting

Budget is a document which documents the plan of the business. This may include the objective
of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost,
growth, required investment to achieve the planned sales, and financing source for the
investment. Also budget may be long term or short term. Long term budgets have a time horizon
of 5–10 years giving a vision to the company; short term is an annual budget which is drawn to
control and operate in that particular year.

[edit] Capital budget

This concerns proposed fixed asset requirements and how these expenditures will be financed.
Capital budgets are often adjusted annually and should be part of a longer-term Capital
Improvements Plan.

[edit] Cash budget

Working capital requirements of a business should be monitored at all times to ensure that there
are sufficient funds available to meet short-term expenses.

The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The
cash budget has the following six main sections:

1. Beginning Cash Balance - contains the last period's closing cash balance.
2. Cash collections - includes all expected cash receipts (all sources of cash for the period
considered, mainly sales)
3. Cash disbursements - lists all planned cash outflows for the period, excluding interest
payments on short-term loans, which appear in the financing section. All expenses that do
not affect cash flow are excluded from this list (e.g. depreciation, amortization, etc.)
4. Cash excess or deficiency - a function of the cash needs and cash available. Cash needs
are determined by the total cash disbursements plus the minimum cash balance required
by company policy. If total cash available is less than cash needs, a deficiency exists.
5. Financing - discloses the planned borrowings and repayments, including interest.
6. Ending Cash balance - simply reveals the planned ending cash balance.
[edit] Management of current assets

[edit] Credit policy

Credit gives the consumer the opportunity to buy, purchase or acquire goods and services, and
pay for them at a later date. This has its advantages and disadvantages as follows:

[edit] Advantages of credit trade

• Usually results in more customers than cash trade.

• Can charge more for goods to cover the risk of bad debt.
• Gain goodwill and loyalty of customers.
• People can buy goods and pay for them at a later date.
• Farmers can buy seeds and implements, and pay for them only after the harvest.
• Stimulates agricultural and industrial production and commerce.
• Can be used as a promotional tool.
• Increase the sales.
• Modest rates to be filled.
• can be a marketing tool

[edit] Disadvantages of credit trade

• Risk of bad debt.

• High administration expenses.
• People can buy more than they can afford.
• More working capital needed.
• Risk of Bankruptcy.
• May lose peace of mind.

[edit] Forms of credit

• Suppliers credit:
• Credit on ordinary open account
• Installment sales
• Bills of exchange
• Credit cards
• Contractor's credit
• Factoring of debtors
• Cash credit
• Cpf credits
• Exchange of product

[edit] Factors which influence credit conditions

• Nature of the business's activities

• Financial position
• Product durability
 • Length of production process
• Competition and competitors' credit conditions
• Country's economic position
• Conditions at financial institutions
• Discount for early payment
• Debtor's type of business and financial position

[edit] Credit collection

[edit] Overdue accounts

• Attach a notice of overdue account to statement.

• Send a letter asking for settlement of debt.
• Send a second or third letter it first is ineffectual.
• Threaten legal actions.
[edit] Effective credit control

• Increases sales
• Reduces bad debts
• Increases profits
• Builds customer loyalty
• Builds confidence of financial industry
• Increase company capitalisation
• Increase the customer relationship
[edit] Sources of information on creditworthiness

• Business references
• Bank references
• Credit agencies
• Chambers of commerce
• Employers
• Credit application forms
[edit] Duties of the credit department

• Legal action
• Taking necessary steps to ensure settlement of account
• Knowing the credit policy and procedures for credit control
• Setting credit limits
• Ensuring that statements of account are sent out
• Ensuring that thorough checks are carried out on credit customers
• Keeping records of all amounts owing
• Ensuring that debts are settled promptly
• Timely reporting to the upper level of management for better management.

[edit] Stock
Purpose of stock control

• Ensures that enough stock is on hand to satisfy demand.

• Protects and monitors theft.
• Safeguards against having to stockpile.
• Allows for control over selling and cost price.

Stockpiling
Main article: Cornering the market

This refers to the purchase of stock at the right time, at the right price and in the right quantities.

There are several advantages to the stockpiling, the following are some of the examples:

• Losses due to price fluctuations and stock loss kept to a minimum

• Ensures that goods reach customers timeously; better service
• Saves space and storage cost
• Investment of working capital kept to minimum
• No loss in production due to delays

There are several disadvantages to the stockpiling, the following are some of the examples:

• Obsolescence
• Danger of fire and theft
• Initial working capital investment is very large
• Losses due to price fluctuation

Rate of stock turnover

This refers to the number of times per year that the average level of stock is sold. It may be
worked out by dividing the cost price of goods sold by the cost price of the average stock level.

Determining optimum stock levels

• Maximum stock level refers to the maximum stock level that may be maintained to
ensure cost effectiveness.
• Minimum stock level refers to the point below which the stock level may not go.
• Standard order refers to the amount of stock generally ordered.
• Order level refers to the stock level which calls for an order to be made.

[edit] Cash

[edit] Reasons for keeping cash

• Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
• The transaction motive refers to the money kept available to pay expenses.
 • The precautionary motive refers to the money kept aside for unforeseen expenses.
• The speculative motive refers to the money kept aside to take advantage of suddenly
arising opportunities.

[edit] Advantages of sufficient cash

• Current liabilities may be catered for meeting the current obligations of the company
• Cash discounts are given for cash payments.
• Production is kept moving
• Surplus cash may be invested on a short-term basis.
• The business is able to pay its accounts in a timely manner, allowing for easily obtained
credit.
• Liquidity
• Quick upfront pay.

[edit] Management of fixed assets

[edit] Depreciation

Depreciation is the allocation of the cost of an asset over its useful life as determined at the time
of purchase. It is calculated yearly to enforce the matching principle.

[edit] Insurance

Main article: Insurance

Insurance is the undertaking of one party to indemnify another, in exchange for a premium,
against a certain eventuality.

Uninsured risks

• Bad debt
• Changes in fashion
• Time lapses between ordering and delivery
• New machinery or technology
• Different prices at different places

Requirements of an insurance contract

• Insurable interest
o The insured must derive a real financial gain from that which he is insuring, or
stand to lose if it is destroyed or lost.
o The item must belong to the insured.
o One person may take out insurance on the life of another if the second party owes
the first money.
o Must be some person or item which can, legally, be insured.
 The insured must have a legal claim to that which he is insuring.
o
• Good faith
o Uberrimae fidei refers to absolute honesty and must characterise the dealings of
both the insurer and the insured.

[edit] Shared Services

There is currently a move towards converging and consolidating Finance provisions into shared
services within an organization. Rather than an organization having a number of separate
Finance departments performing the same tasks from different locations a more centralized
version can be created.

[edit] Finance of states

Main article: Public finance

Country, state, county, city or municipality finance is called public finance. It is concerned with

• Identification of required expenditure of a public sector entity

• Source(s) of that entity's revenue
• The budgeting process
• Debt issuance (municipal bonds) for public works projects

[edit] Financial economics

Main article: Financial economics

Financial economics is the branch of economics studying the interrelation of financial variables,
such as prices, interest rates and shares, as opposed to those concerning the real economy.
Financial economics concentrates on influences of real economic variables on financial ones, in
contrast to pure finance.

It studies:

• Valuation - Determination of the fair value of an asset

o How risky is the asset? (identification of the asset-appropriate discount rate)
o What cash flows will it produce? (discounting of relevant cash flows)
o How does the market price compare to similar assets? (relative valuation)
o Are the cash flows dependent on some other asset or event? (derivatives,
contingent claim valuation)

• Financial markets and instruments

o Commodities - topics
o Stocks - topics
o Bonds - topics
 o Money market instruments- topics
o Derivatives - topics

• Financial institutions and regulation

Financial Econometrics is the branch of Financial Economics that uses econometric techniques
to parameterise the relationships.

[edit] Financial mathematics

Main article: Financial mathematics

Financial mathematics is a main branch of applied mathematics concerned with the financial
markets. Financial mathematics is the study of financial data with the tools of mathematics,
mainly statistics. Such data can be movements of securities—stocks and bonds etc.—and their
relations. Another large subfield is insurance mathematics. This is also known as quantitative
finance, practitioners as Quantitative analysts.

[edit] Experimental finance

Main article: Experimental finance

Experimental finance aims to establish different market settings and environments to observe
experimentally and provide a lens through which science can analyze agents' behavior and the
resulting characteristics of trading flows, information diffusion and aggregation, price setting
mechanisms, and returns processes. Researchers in experimental finance can study to what extent
existing financial economics theory makes valid predictions, and attempt to discover new
principles on which such theory can be extended. Research may proceed by conducting trading
simulations or by establishing and studying the behaviour of people in artificial competitive
market-like settings.

[edit] Behavioral finance

Main article: Behavioral finance

Behavioral Finance studies how the psychology of investors or managers affects financial
decisions and markets. Behavioral finance has grown over the last few decades to become central
to finance.

Behavioral finance includes such topics as:

1. Empirical studies that demonstrate significant deviations from classical theories.

2. Models of how psychology affects trading and prices
3. Forecasting based on these methods.
4. Studies of experimental asset markets and use of models to forecast experiments.
A strand of behavioral finance has been dubbed Quantitative Behavioral Finance, which uses
mathematical and statistical methodology to understand behavioral biases in conjunction with
valuation. Some of this endeavor has been led by Gunduz Caginalp (Professor of Mathematics
and Editor of Journal of Behavioral Finance during 2001-2004) and collaborators including
Vernon Smith (2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira
Ilieva, Ahmet Duran). Studies by Jeff Madura, Ray Sturm and others have demonstrated
significant behavioral effects in stocks and exchange traded funds. Among other topics,
quantitative behavioral finance studies behavioral effects together with the non-classical
assumption of the finiteness of assets.

[edit] Intangible Asset Finance

Main article: Intangible asset finance

Intangible asset finance is the area of finance that deals with intangible assets such as patents,
trademarks, goodwill, reputation, etc.

[edit] Related professional qualifications

There are several related professional qualifications in finance, that can lead to the field:

• Accountancy:
o Qualified accountant: Chartered Accountant (ACA - UK certification / CA -
certification in Commonwealth countries), Chartered Certified Accountant
(ACCA, UK certification), Certified Public Accountant (CPA, US certification)
o Non-statutory qualifications: Chartered Cost Accountant CCA Designation from
AAFM
• Business qualifications: Master of Business Administration (MBA), Bachelor of
Business Management (BBM), Master of Commerce (M.Comm), Master of Science in
Management (MSM), Doctor of Business Administration (DBA)
• Generalist Finance qualifications:
o Degrees: Masters degree in Finance (MSF), Master of Financial Economics,
Master of Finance & Control (MFC), Master Financial Manager (MFM), Master
of Financial Administration (MFA)
o Certifications: Chartered Financial Analyst (CFA), Certified International
Investment Analyst (CIIA), Association of Corporate Treasurers (ACT), Certified
Market Analyst (CMA/FAD) Dual Designation, Corporate Finance Qualification
(CF)
• Quantitative Finance qualifications: Master of Science in Financial Engineering
(MSFE), Master of Quantitative Finance (MQF), Master of Computational Finance
(MCF), Master of Financial Mathematics (MFM), Certificate in Quantitative Finance
(CQF).

[edit] See also

Main article: Outline of finance
Book:Finance
Books are collections of articles that can be downloaded or ordered in print.

• Financial crisis of 2007–2010

• Local Government Finance in Kerala

[edit] References
1. ^ Gove, P. et al. 1961. Finance. Webster's Third New International Dictionary of the
English Language Unabridged. Springfield, Massachusetts: G. & C. Merriam Company.
2. ^ finance. (2009). In Encyclopædia Britannica. Retrieved June 23, 2009, from
Encyclopædia Britannica Online: Finance
3. ^ Charitytimes.com
4. ^ Board of Governors of Federal Reserve System of the United States. Mission of the
Federal Reserve System. Federalreserve.gov Accessed: 2010-01-16. (Archived by
WebCite at Webcitation.org)
5. ^ Business.timesonline.co.uk