What is Finance? An overview

As fascinating as the word sounds, finance refers to the art and science of money management. Looking for the origin of the word, it is a French term, adapted by the English speaking communities in the 18th century. If we want to broaden our scope of study, we can also say that finance is the exchange of resources. We know about the barter system, where one can get the desired goods and services directly against the goods and services he/she can provide the party dealing with, and that too without the use of money. This is also a type of financing, where one person acquires the commodities of his/her requirements. Hence this study lands us to the following definition: The science of managing resources like money, investments, securities and other assets to satiate one’s demands is known as finance.

There are three questions to be kept in mind while financing:

1. How to raise money for investing in long term projects?

2. In what assets should one invest?

3. How to raise money for day to day activities? or How to manage cash flows?

The answers to the above questions need to be found out after much thinking and contemplation, keeping in mind the risks associated with each one of them, advantages, disadvantages and other unique traits of each step. This involves obtaining low cost funds and credit, investing in assets that give a high return with a low risk and managing cash flows in a way that would give an individual/firm enough liquidity to smoothly function on a daily basis.

An appropriate example for the above three decisions can be of a man who will be retiring from his job in future. The man would be required to obtain funds in his life time at a reasonable cost so that he can invest it in profitable projects, that would give him adequate returns so as to live peacefully after retirement. Also he needs to manage the cash flows so that he has enough cash in hand to fulfil his daily needs.

Hence, finance studies and addresses the ways in which organisations and individuals can raise funds and obtain adequate returns keeping in mind its day to day monetary requirements.

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