What is Finance?

Meaning

Before we begin, first let’s understand the origin of word “FINANCE.”

If we trace the origin of finance, there is evidence to prove that it is as old as human life on earth. The
word finance was originally a French word. In the 18th century, it was adapted by English speaking
communities to mean “the management of money.” Since then, it has found a permanent place in the
English dictionary. Today, finance is not merely a word else has emerged into an academic discipline of
greater significance. Finance is now organized as a branch of Economics.

Furthermore, the one word which can easily replace finance is “EXCHANGE." Finance is nothing but an
exchange of available resources. Finance is not restricted only to the exchange
and/or management of money. A barter trading system is also a type of finance. Thus, we can say,
Finance is an art of managing various available resources like money, assets, investments, securities, etc.

At present, we cannot imagine a world without Finance. In other words, Finance is the soul of our
economic activities. To perform any economic activity, we need certain resources, which are to be
pooled in terms of money (i.e. in the form of currency notes, other valuables, etc.). Finance is a
prerequisite for obtaining physical resources, which are needed to perform productive activities and
carrying business operations such as sales, pay compensations, reserve for contingencies (unascertained
liabilities) and so on.

Hence, Finance has now become an organic function and inseparable part of our day-to-day lives. Today,
it has become a word which we often encounter on our daily basis.

Definition of Finance

Finance is defined in numerous ways by different groups of people. Though it is difficult to give a perfect
definition of Finance following selected statements will help you deduce its broad meaning.

1. In General sense,

"Finance is the management of money and other valuables, which can be easily converted into cash."

2. According to Experts,
"Finance is a simple task of providing the necessary funds (money) required by the business of entities
like companies, firms, individuals and others on the terms that are most favourable to achieve their
economic objectives."

3. According to Entrepreneurs,

"Finance is concerned with cash. It is so, since, every business transaction involves cash directly or
indirectly."

4. According to Academicians,

"Finance is the procurement (to get, obtain) of funds and effective (properly planned) utilisation of
funds. It also deals with profits that adequately compensate for the cost and risks borne by the
business."
 Financing is the process of providing funds for business activities, making purchases or
investing. Financial institutions such as banks are in the business of providing capital to businesses,
consumers, and investors to help them achieve their goals. The use of financing is vital in any economic
system, as it allows companies to purchase products out of their immediate reach. Financing is key
to Fundera's business model, for instance. It is difficult to gain financing while in financial distress.

Put differently, financing is a way to leverage the time value of money (TVM) to put future expected
money flows to use for projects started today. Financing also takes advantage of the fact that some will
have a surplus of money that they wish to put to work to generate returns, while others demand money
to undertake investment (also with the hope of generating returns), creating a market for money.

KEY TAKEAWAYS

 Financing is the process of funding business activities, make purchases or investments.

 The main advantage of equity financing is that there is no obligation to repay the money
acquired through it.

 Equity financing places no additional financial burden on the company, though the downside is
quite large.

 Debt financing tends to be cheaper and comes with tax breaks. However, large debt burdens
can lead to default and credit risk.

 The weighted average cost of capital (WACC) gives a clear picture of a firm's total cost of
financing.

Understanding Financing

There are two main types of financing available for companies: debt and equity. Debt is a loan that must
be paid back often with interest, but it is typically cheaper than raising capital because of tax deduction
considerations. Equity does not need to be paid back, but it relinquishes ownership stakes to the
shareholder. Both debt and equity have their advantages and disadvantages. Most companies use a
combination of both to finance operations.