In simple words, the term finance refers to the management of assets and liabilities over a period of time. Finance can be also defined as the art of money management. Business organizations need financial resources to fulfill their long-term as well as short-term requirements.
Important aspects of finance
There are two important aspects to finance:
- Corporate Finance
Corporate finance deals with the management of revenue, expenditure, and debt for running a business corporation. - Personal Finance
Personal finance involves planning of personal expenses, budgeting, savings, and insurance.
Why do we need finance?
Business entities need finance for efficiently carrying out their business operations. Companies need to purchase fixed assets like machinery, furniture, and equipment. Finance is also required for meeting expenses like rent, salary for the workforce, employee benefits, and marketing. An individual can borrow money from financial institutions in the form of loans to achieve their business or personal goals. Banks, co-operative societies and lenders lend money to the individual or borrower for a specific time period. The borrower has to return the loan amount at a certain rate of interest as set by the lender. You also need finance for the following reasons:
- For starting a new business venture
- To meet day to day consumption expenditure
- Purchasing gold as an investment
- Purchase of capital goods, assets and for acquiring shares or equity funds
- Expenditure for health and medical purposes
- For research and analysis for the development of new products
- For purchasing land
- For buying a house
What are the sources of finance?
Finance is essential for the smooth functioning of business organizations. There are 5 main sources of finance from where business entities can borrow money. They are:
- Commercial Banks
This is the first and most important source of finance. Commercial banks offer loans to business organizations as per their requirements. Banks lend the money in the form of a loan upon being provided a collateral or security deposit. Banks also lend in the form of cash credit, overdraft and by discounting bills. Commercial banks have reasonable rates of interest. - Local bankers
The main aim of private lenders is to lend money. They can be individuals or private firms offering to lend money at a rate of interest that may be higher than that of commercial banks. - Advances
Some business organizations borrow money from their agents and customers. It works out to be the cheapest source of finance. - Trade Credit
Trade credit fulfills the short term financial requirements of organizations through its suppliers. Companies with a good reputation try to avail such types of credit for the smooth functioning of business activities. - Installment Credit
It involves the purchase of certain goods but the payment is not made in one installment but rather it is made in small amounts of cash or in multiple installments.
What is meant by financial transactions?
Financial transactions are the agreements or contracts between one or more buyers and sellers. It is an act which involves borrowing money from private firms or lenders or depositing money in return for purchase or sale of goods and services. These kind of financial transactions are recorded through bookkeeping for accounting purpose.
