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What is finance and how is it helpful in business?

finance
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What is finance and how is it helpful in business?

Finance, explained!

Pineapples, books, electronic devices, insurance, and houses! When we look at these products and services we recognize how different they are from each other. Now imagine how can we get them if there was no money? Well, thousands of years ago there was bartering, which involved exchanging a particular good or service that we had with a product or service that someone else had. But that was not a proper way of exchanging goods, because it lacked a standard valuation, the ability to be preserved, or being generally accepted. This was the reason that money was invented (first in the form of coins) along with the term called finance, which involves money and the activities related to it! As we know money and the activities related to it, is one of the important parts of everyone’s lives; either in personal aspect or business-wise! If you like to learn more about finance, financial systems and the use of finance in business follow up this blog!

Table of content


What is finance?
  • Money
  • Finance definition
Different types of finance
The financial system
  • The parties
  • Financial market
  • Financial services
  • Financial instruments
  • Finance in business
Blog at a glance

What is finance?

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To simply answer what finance is, I can say that everything involved with money, from the study of money to acquiring money and managing money is under the finance umbrella! From this, we can learn that the term “finance” is so broad that holds many big concepts! But there is one significant constant in this field that has the most important role and that is MONEY! Well, before diving deep into a more detailed definition of finance, we should understand what money is!

Money

Money is any piece of object that can be used for buying goods or services or used to pay debts! The first use of money tracks back to the time when “commodity money” was established. Commodity money was any item that had an actual value itself because of the material it was made from (like golds or silvers) and was used for making payments in exchange for products or services. However, the money we are familiar with today is “fiat money”, which is a piece of note that has no value itself but they are valued based on the governments’ proclaims to be used within a country for buying things and paying for debts. Fiat money is in fact a successor to commodity money! From these two different types of money, we can see that an item that is used for paying debts and buying goods should have specific features, which are:
  • It should be generally accepted by everyone as payment for things like debts and commodities.
  • It should store the value it has.
  • And it should be a standardized unit of measurement to let everyone measure the value of other things!
Note: From these characteristics, we can learn that not every item can be referred to as money!
Did you know?

As of the end of summer 2021, the total amount of money in the world (including every type of money) exceeds 1.3 quadrillion US Dollars!

Finance definition

So after learning about what is actually referred to as “money”, it is time to take a deep dive into the finance definition. We have learned that any activity that involves money is under the finance term! Therefore, we can understand that the term “finance” stands for the way individuals or organizations manage to use their money in the economy. Through this, the money can be used for buying the things needed for living, saving for future use, investing for increasing its value and so on. In other words, I can say the flow of money through the economy is known to be the definition of finance.

Different types of finance

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As it was mentioned, finance itself is so broad that comprises the way money is used in a country, the study field of everything that involves money, and the whole system called “financial system” that will be explained in minutes. If we want to break down this enormous term, we will reach three different types of finance:
  • Personal Finance: personal finance is all about individuals in society. We all have needs and wants that we would want to fulfill by using certain goods, therefore we would need to have money to pay for them. We would also need to have savings for future risks. These activities show the way individuals plan to use their money by managing how much they should spend on the goods and services they need and desire, how much they have to pay for debt (if they have), how much they can save and how much they can invest. Things like saving money in the bank, mortgaging a house to receive money in exchange, buying stocks of a particular company are all that personal finance is about! Simply put, the way individuals earn, save, invest, secure and spend their money is known to be personal finance!
  • Corporate Finance: running a business also needs money. Managers and business owners need to plan and manage the way they use their resources in order to make the highest profit possible with the lowest amounts of money used! In fact, the financial activities related to companies or corporations, such as opening a business account for the company, obtaining money from banks or investors to run the business, managing the cash flow for the activities of the firm, managing debts, are considered as the corporate finance!
  • Public Finance: this section is all about the government. The governments provide certain services to the public, which requires spending money. On the other hand, the governments need money to set budgets for different areas of running the country based on that. Therefore, it would need to collect taxes, make money through different government-owned companies, or borrow money from other countries or the World Bank. The cash flow in the central banks plus all of the financial activities of the government is known to be public finance!
A note: the three types of finance have one main thing in common, and that is to manage the money their monetary funds through different financial activities. Even though the concept of their financial activities could be the same in some situations but the level of their activities differs. As for the individuals and private-sector corporations the activities are in micro-levels and for the governments and public entities in macro-levels!
Did you know?

The U.S Federal Reserve System, the central bank of the United States of America, is the biggest central bank in the world with more than 8 trillion US Dollars as its total asset!

The financial system

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Besides planning how to manage money, finance also refers to the financial system. A financial system is a system in which all of the financial activities between the three different parties (individuals, corporates, and governments) takes place. This portrays the cash flow in the economy of a country. Simply put, the network of institutions, markets, and contracts that brings the different parties together is called the financial system. For example, a person wants to open up a business for himself and he needs 100 thousand US Dollars to run the business. He has $25k himself and he needs to borrow the rest. He would obtain the money from a private investor. The private investor himself has a bank account that saves some of his money there. The bank that contains his money, as well as other people’s money, would provide loans to the public sector of the country. This cycle is a small example of what a financial system is! There are different sections that together make up the financial system. Here we will learn about some of them.

The parties

The parties that make up a part of the financial system are the three different types of finance; individuals, companies, and the government. These parties are the three main factors of cash flow in the economy. Some of the individuals and companies that have an excess amount of money can act as lenders and others who have a deficiency in their monetary funds act as borrowers. The lenders lend their money either directly or indirectly (like through a bank) to the borrowers. Governments are involved in this system too. There are sometimes that they need to increase their monetary funds in order to have sufficient amounts for budgeting! Therefore, all of the financial activities that take place in the financial markets are because of these parties.

Financial market

A section in the financial system that is under the finance umbrella is the financial market. The financial market is a market for exchanging financial instruments through financial services. These markets are the physical or non-physical places for individuals and companies to lend and borrow money through as well as trading financial instruments. This market is the place where financial services such as exchanges take place that would make it possible for individuals and companies to trade financial instruments. For example, the exchange of stocks and shares between individuals through the New York Stock Exchange (NYSE).

Financial services

Financial services are the services in which lenders and borrowers receive in the financial markets. In other words, when the parties trade a particular asset over the financial market, the money in exchange for the asset is transferred via a financial service such as a payment system. In fact, the finance companies that manage the lending and borrowing activities in a financial system are known to be the financial services, such as banks, insurance businesses, stock brokerage, etc.

Financial instruments

In the finance industry, the term financial instruments are used for the assets traded between the parties. These assets include derivatives, securities, and cash. Each of these instrument types includes different categories such as stocks (e.g a company’s share), bonds (e.g corporate bonds), commodities (e.g raw materials), and valuable metals (e.g gold), and loans. In other words, an asset that has a value and it can be traded, settled, modified is known to be a financial instrument.

Finance in business

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When we want to start a business for ourselves, one of the most important things to consider is to fund it. Money acts as blood circulating throughout the business, keeping it alive. Therefore the concept of finance in business has a significant role. Starting a company has different expenses, keeping it alive needs money, and growing it bigger is costly. Just like the economies, a business needs to have a cash flow. Hence, managing the capital we start our business with is vital because we need to run everything with the estimated capital. After that, planning for how much money should be used for different sections/departments of the business (budgeting) is important along with managing to pay debts, dividends, and so on. Managing the financial points in a company is both vital and challenging, therefore we would need to have a clear understanding of the financial system and learn how to manage our monetary funds. This would help us manage our company in order to make the highest profit out of the lowest expenditures, resulting in being successful in running our business. This also shows why finance managers are important for companies!
Did you know?

Financial issues are the number one reason for more than 60% of business owners’ failures!

Blog at a glance

Money is one of the important things in anyone’s life. Due to the limitations to the amount of money we have, we need to know how to manage it in order to be able to use it for our needs and wants, save the rest for the future, or invest it to grow its value. Especially when it comes to the aspect of starting our business we should definitely understand how to plan for our money in order to reduce the risks of failure. Here I have talked about the basics of finance and how is it helpful in running a business. The financial world is so broad, however, learning about its basics will give us a clear thought about what it actually is and how it is beneficial for us!

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