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finance
Definitions (2)
1. A branch of economics concerned with resource allocation as well as resource
management, acquisition and investment. Simply, finance deals with matters related to
money and the markets.
2. To raise money through the issuance and sale of debt and/or equity.
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]
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• 14 External links
An entity whose income exceeds its 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 earns the difference for arranging the
loan.
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.
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 an individual and for an
organization.
In corporate finance, a company's capital structure is the mix of financing methods it uses
to raise funds. One method is debt financing, which includes bank loans and bond sales.
Another method is equity financing - the sale of stock by a company to investors.
Possession of the stock gives the investor part ownership in that company, in proportion
to the number of shares the investor owns. In return for the stock, the company receives
cash, which it may use to expand its business or to reduce its debt.[5]
The investors, in both bonds and stock, may be institutional investors - financial
institutions such as investment banks and pension funds - or private individuals, called
private investors or retail investors.
• 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.
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.
[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.
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.
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.
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.
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:
• 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
• 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
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:
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
• 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
• 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.
• 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] 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
Uninsured risks
• Bad debt
• Changes in fashion
• Time lapses between ordering and delivery
• New machinery or technology
• Different prices at different places
• 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.
o The insured must have a legal claim to that which he is insuring.
• Good faith
o Uberrimae fidei refers to absolute honesty and must characterise the
dealings of both the insurer and the insured.
It studies:
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.
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.
Intangible asset finance is the area of finance that deals with intangible assets such as
patents, trademarks, goodwill, reputation, etc.
• 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] 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
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