The Nature of Finance

Finance is the area of activity that concerns itself with the purchase of assets, the handling or management of financial resources, and the utilization of these resources in order to produce a surplus or to meet needs. Finance can be subdivided into three main strands micro-business finance, capital budgeting, and macro-business finance. Micro-business finance is concerned with managing small business financial activities. This involves day-to-day cash flows and represents the “selling” of assets by businesses in order to raise needed funds. This type of finance can be very complex and is the most widely used form of commercial lending.

Capital budgeting is the study of a company’s financial position and management in respect of its monetary resources. The purpose of capital budgeting is to set up and maintain a steady flow of cash resources, so that small businesses may engage in many activities without worrying about immediate repayment of cash advances. Monetary resources are always short in small businesses. Therefore, financial policy must be adopted that ensures the long-term availability of monetary resources. Moreover, finance is important for setting prices and for raising and lowering prices.

Besides finance, there are two other major strands of finance banking and bond market. Banking refers to the buying and selling of financial instruments such as bank certificates of deposit, commercial paper, and negotiable order of payment. Banks control debt and keep portfolios of secured and uninsured liabilities. Most banking activities are carried out under the operating agreement system which is usually a financial arrangement between the banks. It sets down the scope for the banks to make loans and to take payments from their customers, on terms and conditions agreed upon between the banks.

Bond market involves borrowing from investors either individually or through banks. Bonds are secured by the assets underlying them property, land, buildings, and inventories. There are two types of bonds debt-backed securities (DBS) and equity-backed securities (EBS). The main objective of banking is to make loans on securities, both debt and equity, at a prescribed interest rate and at a specified time value.

Investment banks are intermediaries between individual investors and corporate finance. They are responsible for ensuring that accredited investors provide required financial assistance. Through investment banks, institutional investors, corporate enterprises, and the government can raise a considerable amount of finance. The funds raised by investment banks are used for the funding of financial activities. Most of the finance coming from investment banks is channeled towards fixed income securities and equities.

Private finance relates to the business activities of individual entrepreneurs and corporate bodies. Private finance involves borrowing from financial institutions and individuals. Borrowing from other people entails repaying it with interests derived from the borrower’s assets. Most of the funds obtained through private finance are channeled into debt finance. This is followed by debt consolidation, refinancing, and the issuance of corporate bonds.