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Finance, Financial Services & Financial Management

Finance and its definition

We hear the term "finance" frequently in our every day life. What does it convey? In our simple understanding the term is perceived as equivalent to 'Money'. We read about Money and banking in Economics, about Monetary Theory and Practice and about "Public Finance". But finance exactly is not money, it is the source of providing funds for a particular activity. Thus public finance does not mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government. We will study some of the definitions of the word 'finance', both as a source and as an activity i.e. as a noun and a verb.

The American Heritage® Dictionary of the English Language, Fourth Edition defines the term as under-

  1. "The science of the management of money and other assets.";

  2. "The management of money, banking, investments, and credit. ";

  3. "finances Monetary resources; funds, especially those of a government or corporate body"

  4. "The supplying of funds or capital."

Finance as a function (i.e. verb) is defined by the same dictionary as under-

  1. "To provide or raise the funds or capital for":financed purchase of a new car

  2. "To supply funds to": financing a daughter through law school.

  3. "To furnish credit to".

Another English Dictionary, "WordNet ® 1.6, © 1997Princeton University " defines the term as under-

  1. "the commercial activity of providing funds and capital"

  2. "the branch of economics that studies the management of money and other assets"

  3. "the management of money and credit and banking and investments"

The same dictionary also defines the term as a function in similar words as under-

  1. "obtain or provide money for"; "Can we finance the addition to our home?"

  2. "sell or provide on credit "

All definitions listed above refer to finance as a source of funding an activity. In this respect providing or securing finance by itself is a distinct activity or function, which results in Financial Management, Financial Services and Financial Institutions.

Finance therefore represents the resources by way funds needed for a particular activity. We thus speak of 'finance' only in relation to a proposed activity. Finance goes with commerce, business, banking etc. Finance is also referred to as "Funds" or "Capital", when referring to the financial needs of a corporate body. When we study finance as a subject for generalising its profile and attributes, we distinguish between 'personal finance" and "corporate finance" i.e. resources needed personally by an individual for his family and individual needs and resources needed by a business organization to carry on its functions intended for the achievement of its corporate goals.

As distinguished from this the term money represents the physical currency, cash or token that is used as a medium of exchange. "Money is a matter of functions four, a medium, a measure, a standard, a store". Another definition says that "Money is what money does". As we have defined the four functions of money, anything which serves to fulfill these functions may be understood as "money". Money also includes different negotiable instruments like cheques, bills of exchange, promissory notes etc. Money can be earned or spent, but finance is either provided or secured (i.e. lent or borrowed)

While all other assets give benefit when they are productively used, finance provides you benefits when it is used in business or when invested diligently outside the business. A redundant asset may remain idle without a return, with the additional burden of a "holding cost", but not surplus finance, available with you over and above your current requirements. This is because such an asset can be invested prudently and gainfully in the "money market" or "debt market" (also called "capital market"). Unlike other assets which may turn into "dead-assets" or unproductive assets, financial assets, utilised or invested carefully always fetches a return.

Financial Institution & Financial Service

Those Institutions, which exclusively deal with finance as their business product and cater to the financial requirements of individuals and/or corporate bodies either by way of providing them their need-based finance or accepting their investible funds, as a deposit or otherwise for interest or dividends, are called financial institutions and the services extended by then is called "financial Services" Some of the financial institutions are -

  1. commercial banks,

  2. Term lending financial institutions,

  3. co-operative banks

  4. insurance companies,

  5. mutual funds,

  6. chit funds,

  7. non-banking financial companies (like hire-purchase & Leasing Companies)

Financial Market

Market refers to a group of buyers and sellers for a particular commodity or category of commodities. Financial market signifies the group of investors and capital-seekers and intermediaries. There are three identified financial markets, as under-

  1. Money market, which deals with investment and lending of short-term money, generally for periods ranging from as short as one day but less than one year.

  2. Debt or Capital market which deals of financial investment or borrowing spread over a period of more than one year. It may be medium term investment/borrowing representing periods between 3 to 7 years or supply/procurement of long-term funds, which in respect of housing finance companies or those corporates engaged in financing plantation may exceed 15 or even 20 years.

  3. Forex Market(Foreign Exchange Market) that represent buyers and dealers of foreign currency, to finance imports, exports, foreign remittances, foreign travel etc.

Financial Intermediation & Financial Intermediaries

A financial intermediary is a go-between agency connecting investors and capital seekers, or lenders and borrowers. They pool savings of large number of individual investors and make bulk finance available to those who need such finance. They are as such, traders in "finance", i.e. as traders in grains and other commodities procure from producers and sell them to consumers, financial intermediaries link finance-surplus and finance-deficit points in the market. All Financial Institutions are financial Intermediaries. Service provided by these Intermediaries is called financial service.

Financial Management

Finance represents productive assets. It is needed as a source to promote any activity. It is therefore necessary to manage finance efficiently to ensure success of the business. In particular efforts to mobilise adequate funds at the required time, to deploy funds appropriately, to control prudential use of funds and to trade off between risk and return, are essential features of any business enterprise. Financial Management deals with the overview of corporate finance function and the financial decisions that are required to be taken by corporate managers. The common thread running through all decisions taken by various managers is finance, as every activity is based on a study of cost vs. benefit. There is hardly any manager in any organization to whom finance does not concern. The results of all activities in an organisation are reflected in the financial statements in Rupees (or such other currency of the country). Financial decisions are however monitored centrally by the Finance Manger.

The subject matter of financial management has been changing at a rapid pace. The Recent approaches in Financial Management accord a far greater importance to the finance manager's role in management decision-making and policy. Financial manager (CFO) of today is ranked at the top of the hierarchical order next only to the CMD. He is responsible for shaping the fortunes of the enterprise and is involved in the most vital management decision of allocation of capital. This is due to liberalisation of the economy resulting in a greater role for private sector in the national economy and the process of globalisation of business and services. The development of information technology has enabled up-to-date financial data readily available for making real-time management decisions, and in turn has enormously enhanced the value and benefit of financial analysis and forecast.

This module in the following pages describes the objectives, functions of financial management, the various sources of finance available to corporate managers and the tools and techniques of financial management. Miscellaneous topics are covered under caption Financial Analysis Frequently Asked Questions. Reference may be made to this index-page, while these topics are listed with proviions for linking to the respective topics as listed.

The latest structural changes in the Financial Sector are dealt with in another module titled "Indian Banking in the New Millenium" under the sub-title "Banking & Financial Services".

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