Finance is a general term meaning things concerning the science, development, and management of funds and financial investments. It deals with how money is made to finance activities, such as business start ups, investment, retirement plans, and saving for the future. Finance is an important part of business management as it deals with the decisions that need to be made when managing finances. Without proper decisions, businesses cannot function properly. Proper decisions mean the difference between success and failure. Therefore, knowledge about the subject matter is very necessary.
The term finance is also used in a much broader sense, to refer to all the various financial practices and systems that are related to the financial systems. These include business banking, investment banking, individual savings accounts, mortgage banking, commodity and bond markets, and insurance. All these terms are intertwined with each other and affect each other in complicated ways. For example, all these terms are related to banking and the term banking includes all the various types of financial activities such as saving, borrowing, investing, and money market and so on. Hence, it is very essential to know the difference between these three terms.
The banking term simply refers to the process of creating money by putting money into banks or other financial institutions. This is often done through creating bonds, stocks, and commercial paper. Businesses that have strong cash flows can leverage their capital by making large investments that will yield them returns over a long period of time.
In contrast, finance refers to the process of using banks and other financial institutions to create money that will be used for the purpose of funding operations. Finance deals with spending of cash by businesses. This involves creating new investments, equities, and/or profits. Most importantly, this involves ensuring that cash flow is maintained to avoid overdraft and liquidity problems.
We must always remember that finance deals with the purchase of goods and services and the issuance of debt instruments. It is where banks and other lenders acquire assets to meet their financial needs. One example of such purchase is the borrowing of funds created by lending. Another example is the purchase of corporate securities. Finance in this context also refers to the provision of credit by banks and other financial organizations to individuals, enterprises, and other entities for the purpose of facilitating debt repayments.
The role of finance in the overall economy is crucial since it determines the supply of funds needed by the economy. Short term finance facilitates economic activity by ensuring the availability of finance. However, too much financing can create problems. Hence, we should always remember that finances play an important role not only in the long term but also in short term economic markets.