Finance is a broad term encompassing many things about the management, manufacture, and evaluation of financial resources and investments. It deals with how money is made to be invested for growing wealth. In simple terms, the term Finance simply means the method of creating, planning, and determining how money will be used in a manner that will ultimately increase a person’s net worth or wealth. This includes looking at how savings can be applied to investments or repaid when interest is paid.
Basically, every aspect of a person’s financial life is involved in the process of financing. The management of cash flow and investments is one of the most important aspects of finance. Cash flow is the ability of a firm or individual to easily and quickly distribute funds between purchases and needs. The investments that finance covers the methods of creating a financial value and the methods of repaying that value when it is earned.
The first step in the process of financing is banking or the process of borrowing money and investing in an endeavor. Banking is a system of issuing and managing loans through banks or other financial institutions. A number of different types of banking exist including savings, commercial banking, the traditional form of paper currency, government insured deposit banking, and much more. In today’s society, banking uses the Internet as part of its lending and investment processes. Therefore, it is possible to find online banking services that can offer a wide variety of financial products and services.
When finance is broken down into the various components that make up the business finance model, there are two main areas of focus. These are accounts receivable and accounts payable. Accounts receivable refers to any current assets a firm owes others based on their credit card purchases, merchant account sales, and any obligations that have been agreed upon with a client in which payments have not been received. Accounts payable generally refers to any current liabilities of a firm owes customers in the form of accounts payable. Most firms begin their finance processes by borrowing money to invest in short-term assets that are expected to earn a high return.
There are many different aspects of finance that impact both accounts receivable and accounts payable. The balance sheet, which is a summary of all financial transactions, includes a balance on the receivable and payable balances. All investments in finance are recorded in this balance sheet. The accountant who prepared the balance sheet uses the information on the balance sheet as well as other financial data available to them to create a final financial statement that presents the income statement, balance sheet, and statement of cash flow, among other items.
The second area of finance is that of interest income. Interest income is earned by lending money to another firm. The money is used to finance investments by either the lending firm or the recipient. Interest income is included in the gross debt of the borrower and can be accessed when the borrower needs cash. Most banks require a minimum amount of cash to be kept in the bank and will provide advances to their customers only after they have verified the source of the funds.
Investment decisions are the most important aspect of the financial system. This includes both stocks and bonds that are issued by publicly traded companies. The purpose of issuing stock is for the company to issue equity and capital to increase its ability to earn profits. By purchasing shares from the company, investors are trading part of their future income on an asset that is not easily liquidated.
Another area of finance that impacts all areas of the financial system is investment securities. These include equities in the stock market and government bonds. Bonds are a form of debt security and are issued by governmental institutions, such as the Federal National Mortgage Association and the Federal Reserve. Stocks are a common form of investment in the United States and throughout the world. Financial management includes the process of collecting payments from stock holders for a company’s stock holdings. Other forms of financial management include derivatives, bond markets, the borrowing market, insurance, financial stability, and other aspects of the financial management of the economy.