What is Finance? Meaning Definition Features of Finance

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 18^th 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.

Image Credits © Simon Blackley.

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."

Features of Finance

The main characteristics or features of finance are depicted below.

Article and Image Credits © Moon Rodriguez.

1. Investment Opportunities

In Finance, Investment can be explained as a utilisation of money for profit or returns.

Investment can be done by:-

1. Creating physical assets with the money (such as development of land, acquiring commercial assets, etc.),
2. Carrying on business activities (like manufacturing, trading, etc.), and
3. Acquiring financial securities (such as shares, bonds, units of mutual funds, etc.).

Investment opportunities are commitments of monetary resources at different times with an expectation of economic returns in the future.

2. Profitable Opportunities

In Finance, Profitable opportunities are considered as an important aspiration (goal).

Profitable opportunities signify that the firm must utilize its available resources most efficiently under the conditions of cut-throat competitive markets.

Profitable opportunities shall be a vision. It shall not result in short-term profits at the expense of long-term gains.

For example, business carried on with non-compliance of law, unethical ways of acquiring the business, etc., usually may result in huge short-term profits but may also hinder the smooth possibility of long-term gains and survival of business in the future.

3. Optimal Mix of Funds

Finance is concerned with the best optimal mix of funds in order to obtain the desired and determined results respectively.

Primarily, funds are of two types, namely,

1. Owned funds (Promoter Contribution, Equity shares, etc.), and
2. Borrowed funds (Bank Loan, Bank overdraft, Debentures, etc).

The composition of funds should be such that it shall not result in loss of profits to the Entrepreneurs (Promoters) and must recover the cost of business units effectively and efficiently.

4. System of Internal Controls

Finance is concerned with internal controls maintained in the organisation or workplace.

Internal controls are set of rules and regulations framed at the inception stage of the organisation, and they are altered as per the requirement of its business.

However, these rules and regulations are monitored at various intervals to accomplish the same which have been consistently followed.

5. Future Decision Making

Finance is concerned with the future decision of the organisation.

A "Good Finance” is an indicator of growth and good returns. This is possible only with the good analytical decision of the organisation. However, the decision shall be framed by giving more emphasis on the present and future perspective (economic conditions) respectively.

Conclusion on Finance

Finance to be more precise is concerned with the management of,

1. Owned funds (promoter contribution),
2. Raised funds (equity share, preference share, etc.), and
3. Borrowed funds (loans, debentures, overdrafts, etc.).

At the same time, Finance also encompasses wider perspective of managing the business generated assets and other valuables more efficiently.