Finance is a very broad term that encompasses many things about the financial management, the development, management, and evaluation of assets and finances. The word “investment” is often used in association with finance. In business, finance often gets squeezed in with the areas of business management such as finance, banking, and accounting. The investment of finance involves creating new resources (capital), using existing resources (asset finance) or saving for an eventual retirement. All of these activities are part of the process of creating wealth.
Today’s focus on finance has become very complex. While changes in technology and dramatic technological changes are always being made, human behavior is not static. Therefore, finance and its role in modern financial markets is never going to change. Behavior driven decisions are what create economic activity. Thus, it is expected that over time, finance will have a increasing role in the marketplace.
There are three main subcategories of finance: public finance, corporate finance, and private finance. Public finance is the action or process of managing and investing the national budget. Governmental agencies such as the Federal Reserve, Department of the Treasury, and the Federal Deposit Insurance Corporation are examples of public finance. Corporate finance is the process of managing private company finances.
Accounting is an accounting subcategory of finance. Accounting provides information about the financial position of a firm and helps managers and other decision makers make decisions. For example, a business’s financial statements provide information about the income and assets of a business, its debts and retained earnings, and all related aspects of day-to-day financial activities. Mastering the skills required for accounting, and then communicating that knowledge effectively to decision makers, is essential to building and maintaining a successful company.
While understanding the broad perspective of the discipline of finance is helpful, the specific details are less important. To illustrate, when a firm is experiencing financial difficulties it is not necessarily in its managerial accounting that will be most important. Instead, a firm that is experiencing a significant decline in revenue is going to need to focus on the details of its sales and marketing activities to determine what is going wrong.
Another crucial element of effective corporate finance is the management of debt. Debt is the means by which a firm uses capital to finance its long-term commitments, such as loans, mortgages, and leases. The balance between cash and capital is determined by an analysis of the credit risk inherent in the underlying financial transactions. In addition to cash flow problems, debt affects corporate finance through the use of securities, such as common stock and preferred stocks, debt instruments, such as promissory notes and mortgage notes, and the strategies that relate to the purchase, sale, or exchange of these securities.
Broad term perspectives are necessary for those who are planning to have a long-term impact on finance. For example, in the United States the Department of the Treasury ( Treasury ) creates and implements programs to provide emergency financial assistance when requested. This agency also oversees the use of the national reserve banks, the clearinghouses (such as the Federal Reserve Banks) through which bank operations (such as making commercial loans and repositions of treasury bills) are processed. The broader term in this case is finance, which involves the use of the financial system to address both short-term and long-term needs. As a result, all of these pieces are necessary for sound decision-making regarding both financial markets (such as the credit markets) and the nation (such as the banking systems).
While accounting provides a basic framework for financial planning, one can expand the perspective beyond the traditional accountancy. It is important, however, to recognize that the accountancy only describes the “paper” part of the financial process. To understand how decisions are made within the banking system, and to learn about the different aspects of finance, it is necessary to have a more holistic approach to accounting and financial planning.