finance

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.

1. To provide or raise the funds or capital for: financed a new car.
2. To supply funds to: financing a daughter through law school.
3. To furnish credit to.

[Middle English finaunce, settlement, money supply, from Old French finance, payment, from finer, to pay ransom, from fin, end, from Latin fīnis.]

The science that describes the management of money, banking, credit, investments, and assets.

Investopedia Says:
Basically, finance looks at anything that has to do with money and the market.

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Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear. Financial Concepts

Corporate or Business Finance is basically the methodology of allocating financial resources, with a financial value, in an optimal manner to maximize the wealth of a business enterprise. There are three major decisions to be made in this allocation process: capital budgeting, financing, and dividend policy. Capital budgeting is the decision regarding the choice of which investments are to be made with the resources that have been brought into the business or earned and retained by the business. The choice depends on the returns to be made from the investment exceeding the cost of capital. The method used to do this is the discounted time-value of money of the cash flow from the investment. This value is the internal rate of return (IRR), a measure of return on investment. When the IRR exceeds the required return, which is equal to the cost of the funds invested—see weighted average cost of capital, below—then the investment should be made. If such a required return is used as the discount rate, then that is the same as saying the investment will yield a positive net present value (NPV). If there are two or more investments that can be made, but they are mutually exclusive, then they must be ranked; and the one with the highest NPV should be chosen. If there is a limited amount of funds to be invested, then some bankers or advisers who obtain additional funds for a business may require that the business choose among the investments so as not to exceed the limited level of funds available. This selection process, which is called capital rationing, should be done in a similar manner to rank the projects by selecting the combination of investments that do not exceed the total funds available and that yield the maximum total net present value.

Financing is the decision of which resources or funds are to be brought into the business from external investors and creditors in order to be invested in profitable projects. The first external source of finance is debt, which includes loans from banks and bonds purchased by bondholders. The debt creditors take less risk of nonrepayment because the business must repay them if there are funds available to do so when the debt becomes due. The second external source of finance is equity, which includes common stock and preferred stock. The equity investors in the business take more business risk and may not receive payment until the creditors are repaid and the management of the business decides to distribute funds back to the investors. The goal of the financing decision is to obtain all the resources necessary, to make all the investments that yield a return in excess of the cost of the funds invested or the required rate of return, and to obtain these funds at the lowest average cost, so as to reduce the required rate of return and increase the net present value of the projects selected.

Dividend policy is the decision regarding funds to be distributed or returned to the equity investors. This can be done with common stock dividends, preferred stock dividends, or stock repurchase by the business of its own stock. The aim of this decision is to retain the resources in the business that are required to run the business or make additional investments in the business, as long as the returns earned exceed the required return. In theory, management should return or distribute all resources that cannot be invested in the business at levels in excess of the required return. In practice, however, dividends are often maintained at or changed to certain levels in order to convey the proper signals to the investors and the financial markets. For example, dividends can be maintained at moderate levels to demonstrate stability, maintained at or reduced to low levels to demonstrate the growth opportunities for the business, or increased to higher levels to demonstrate the restoration of a strong financial (capital) structure (debt and equity capital) for the business.

Capital is the total of financial resources invested in the business. In terms of the sources, there are two types of capital: interest-bearing debt funds, such as loans, bonds, short-term notes, and interest-bearing payables to trade suppliers; and equity, such as common and preferred stock and the earnings retained in the business that add to stockholders' share of the entities. In terms of uses, there are also two types of capital: net working capital, such as operating cash, inventory, and receivables, less interest-free payables to trade suppliers; and fixed capital, such as property, plant and equipment. Capital is managed to maximize wealth by maximizing the rates of return on investments of capital and thus maximizing the total net present value of the business. This can be done by minimizing the amount of capital used for given business investments with given business returns.

Weighted average cost of capital is the weighted average of the returns on investment or future dividends for the stockholders and interest rates on debt for the creditors. This average return should be used as the required return for investments, as mentioned earlier, because it represents the weighted average of the required returns of all the different debt creditors and equity investors. It also represents the weighted average of the costs that can be saved by the business if the resources or financial funds are returned to the creditors and investors instead of being used for investments within the business.

Capital structure is represented by the types of sources of capital funds invested in the business. A common measure of sources is the percentage of debt relative to equity that appears on a company's balance sheet. Usually, the cost or required returns for the debt is much less than the equity, especially on an after-tax basis. Thus, the total cost of capital declines when some debt funds from creditors are substituted for equity funds from investors. Yet as more debt is added, the business becomes riskier because of the higher amount of fixed payments that must be made to creditors, whether or not the business is generating adequate funds from earnings; and then the costs of both the debt and equity funds are increased to the point where the weighted-average cost increases.

Acquisitions, which are purchases of other businesses, are merely another type of capital budgeting investment for a business. Such purchases should be evaluated in the same manner as any other capital investment, as outlined earlier, to obtain the maximum positive net present value, though the issues and data are often more complex to analyze.

Price/earnings ratio is often used in making acquisitions as an abbreviated measure of valuation. This ratio is of the value or price of a business or its stock to its earnings. Yet the actual decision to make an acquisition is a capital budgeting decision; the resultant determination of price or net present value can then be described in relative terms to the earnings in the price/earnings ratio.

Returns for any business or particular debt or investment made in the business are merely the cash flows that will ultimately be earned by the business or particular creditors and stockholders. These can be expressed in dollar terms or as percentages, with the latter being the average annual percentage of the cash flows relative to the overall investment in the business or the particular amounts of debt or stock involved. For debt instruments, these percentage rates are called interest rates. For specific investment decisions, the returns used should be those that are incremental of the specific investment.

Return/interest rates are based on three components: pure return for the investor or creditor providing funds; coverage of inflation rates, so that the purchasing power of the proceeds is maintained apart from the true return; and additional return for additional risk, such as an equity investment in a risky business as opposed to a bond from the U.S. government. These components are then compounded with each other, rather than merely added together, to obtain the overall interest rate or required return on equity investment. When calculating return or interest rates, any additional up-front money, such as closing costs, must also be added to the investment; this amount increases or reduces the return, depending on who pays for it.

Residual values are a portion of the returns to be earned in an investment that is returned to the business when the investment is sold or the project is terminated. This can be most important in the liquidation of inventory and receivables when operations of a portion of a business are terminated or when real estate ceases to be required and thus can be sold, for example, when a factory is closed or when a lease term is complete.

Maturities of debt instruments, such as bonds, loans, or notes payable, are the amounts of time outstanding before the debt becomes due. The financial management rule with respect to maturities is to match the duration of the funds being borrowed by the debtor, or invested by the creditor, with the timing of his or her own business needs for funds in the future. Thus, the financing of a new business—with the likely future expansions of property, plant, equipment, inventory, and receivables—can be done with longer-term debt funds. Yet the financing of a specific shorter-term need, such as the outlays on a construction project before completion payments are made, should be comparably shorter in maturity. Similarly, the investment of temporary excess cash should be in shorter-term instruments, such as short-term CDs or Treasury bills. If maturities are not matched, then the additional time before the debt becomes due from or to you becomes a period of speculation on the rise or fall of future interest rates.

International finance is concerned with the same methodology of allocating financial resources, but with modifications or areas of emphasis required by the restrictions of currency and capital movements among countries and the differences in the currencies used in different countries. The following paragraphs represent some of the major changes to the basic financial decisions:

1. Foreign capital budgeting requires the use of foreign cash flows and local tax rates, but U.S. inflation rates and U.S. dollars at the current exchange rates can be used. The required return or cost of capital then need only be adjusted, as with any investment, for the greater or lesser risk of the project in which the investment is made, which includes the greater or lesser risk of the country in which the investment is being made.
2. Foreign capital markets are a source for both debt and equity funds, for both foreign subsidiary operations and the general needs of the overall business. Foreign subsidiary capital structures often utilize more local debt when legally and practically available in order to reduce the risk of blockages of earned funds from repatriation to the parent company in another country. In addition, local-currency debt reduces the risk for the parent company if the exchange rates for the local currency change adversely.
3. Foreign-exchange rates can change dramatically and therefore pose a significant risk for the value of assets held in or future payments from foreign countries. These exposures may be in dealings with third parties or within a company's own foreign subsidiaries. Forward currency contracts or currency options, instruments used to purchase one currency for another currency in the future at guaranteed exchange rates, can be used to protect against such risk. While these contracts are often also used to make profits by managers who believe the exchange rates will change in a manner different from the expectations implicit in the overall currency market, such use should be viewed as risky speculation.
4. Personal finance is concerned with the same methodology of allocating resources, but with a greater emphasis on allocating some of them to obtain the maximum consumption satisfaction at the lowest cost, as opposed to earning income and cash flow returns on the investments.
5. Budgeting and financial planning are the processes used by financial managers to forecast future financial results for a business, a person, or a particular investment. Usually, the major components of earnings, cash flow, and capital are projected in the form of forecasted income statements, cash-flow statements, and balance sheets. The latter show where the capital funds are invested in the components of fixed and working capital, as well as the sources of these capital funds in terms of the debt, stock, and retained earnings.

Issues in Applied Corporate Finance and Valuation

Estimation of the Cost of Capital. In recent decades, theoretical breakthroughs in such areas as portfolio diversification, market efficiency, and asset pricing have converged into compelling recommendations about the cost of capital to a corporation. The cost of capital is central to modern finance, touching on investment and divestment decisions, measure of economic profit, performance appraisal, and incentive systems. Each year in the United States, corporations undertake more than $500 billion in expenditures, so how firms estimate the cost is not a trivial matter. A key insight from finance theory is that any use of capital imposes an opportunity cost on investors; namely, funds are diverted from earning a return on the next-best equal risk investment. Since investors have access to a host of financial market opportunities, corporate use of capital must be benchmarked against these capital market alternatives. The cost of capital provides this benchmark. Unless a firm can earn in excess of its cost of capital, it will not create economic profit or value for investors. A recent survey of leading practitioners reported the following best practices:

• Discounted cash flow (DCF) is the dominant investment-evaluation technique.
• Weighted average cost of capital (WACC) is the dominant discount rate used in DCF analyses.
• Weights are based on market, not book, value mixes of debt and equity.
• The after-tax cost of debt is predominantly based on marginal pretax costs, as well as marginal or statutory tax rates.
• The capital asset pricing model (CAPM) is the dominant model for estimating the cost of equity.

Discounted cash flow valuation models. The parameters that make up the DCF model are related to risk (the required rate of return) and the return itself. These models use three alternative cash-flow measures: dividends, accounting earnings, and free cash flows. Just as DCF and asset-based valuation models are equivalent under the assumption of perfect markets, dividends, earnings, and free cash-flow measures can be shown to yield equivalent results. Their implementation, however, is not straightforward. First, there is inherent difficulty in defining the cash flows used in these models. Which cash flows and to whom do they flow? Conceptually, cash flows are defined differently depending on whether the valuation objective is the firm's equity or the value of the firm's debt plus equity. Assuming that we can define cash flows, we are left with another issue. The models need future cash flows as inputs. How is the cash-flow stream estimated from present data? More important, are current and past dividends, earnings, or cash flows the best indicators of that stream? These pragmatic issues determine which model should be used. Although the dividend model is easy to use, it presents a conceptual dilemma. Finance theory says that dividend policy is irrelevant. The model, however, requires forecasting dividends to infinity or making terminal value assumptions. Firms that presently do not pay dividends are a case in point. Such firms are not valueless. In fact, high-growth firms often pay no dividends, since they reinvest all funds available to them. When firm value is estimated using a dividend discount model, it depends on the dividend level of the firm after its growth stabilizes. Future dividends depend on the earnings stream the firm will be able to generate. Thus, the firm's expected future earnings are fundamental to such a valuation. Similarly, for a firm paying dividends, the level of dividends may be a discretionary choice of management that is restricted by available earnings. When dividends are not paid out, value accumulates within the firm in the form of reinvested earnings. Alternatively, firms sometimes pay dividends right up to bankruptcy. Thus, dividends may say more about the allocation of earnings to different claimants than valuation. All three DCF approaches rely on a measure of cash flows to the suppliers of capital (debt and equity) to the firm. They differ only in the choice of measurement, with the dividend approach measuring the cash flows directly and the others arriving at them in an indirect manner. The free cash-flow approach arrives at the cash-flow measure (if the firm is all-equity) by subtracting investment from operating cash flows, whereas the earnings approach expresses dividends indirectly as a fraction of earnings.

The capital asset pricing model. This is a set of predictions concerning equilibrium expected returns on risky assets. Harry Markowitz established the foundation of modern portfolio theory in 1952. The CAPM was developed twelve years later in articles by William Sharpe, John Lintner, and Jan Mossin. Almost always referred to as CAPM, it is a centerpiece of modern financial economics. The model gives us a precise prediction of the relationship that we should observe between the risk of an asset and its expected return. This relationship serves two vital functions. First, it provides a benchmark rate of return for evaluating possible investments. For example, if we are analyzing securities, we might be interested in whether the expected return we forecast for a stock is more or less than its "fair" return given its risk. Second, the model helps us to make an educated guess as to the expected return on assets that have not yet been traded in the marketplace. For example, how do we price an initial public offering of stock? How will a new investment project affect the return investors require on a company's stock? Although the CAPM does not fully withstand empirical tests, it is widely used because of the insight it offers and because its accuracy suffices for many important applications. Although the CAPM is a quite complex model, it can be reduced to five simple ideas:

• Investors can eliminate some risk (unsystematic risk) by diversifying across many regions and sectors.
• Some risk (systematic risk), such as that of global recession, cannot be eliminated through diversification. So even a basket with all of the stocks in the stock market will still be risky.
• People must be rewarded for investing in such a risky basket by earning returns above those that they can get on safer assets.
• The rewards on a specific investment depend only on the extent to which it affects the market basket's risk.
• Conveniently, that contribution to the market basket's risk can be captured by a single measure—"beta"—that expresses the relationship between the investment's risk and the market's risk.

Finance theory is evolving in response to innovative products and strategies devised in the financial market-place and in academic research centers.

(See also: Financial Institutions; Financial Markets; Securities and Exchange Commission)

Bibliography

Bodie, Zvi, Kane, Alex, and Marcus, Alan J. (1999). Investments. New York: Irwin-McGraw-Hill.

Bruner, Robert F. (1998). Case Studies in Finance: Managing for Corporate Value Creation, New York: Irwin McGraw-Hill.

Bruner, Robert F. and Eades, Kenneth M., Harris, Robert S., and Higgins, Robert C. (1998). "Best Practices" in Estimating the Cost of Capital: Survey and Synthesis." Journal of Financial Practice and Education Spring.

Kaushik, Surendra K., and Krackov, Lawrence M. (1989). Multinational Financial Management. New York: New York Institute of Finance.

Krackov, Lawrence M., and Kaushik, Surendra K. (1988). The Practical Financial Manager. New York: New York Institute of Finance.

Stein, Jeremy. (1996). "Rational Capital Budgeting in an Irrational World." The Journal of Business (October).

White, Gerald I., Sondhi, Ashwinpaul C., and Fried, Dov. (1998). The Analysis and Use of Financial Statements. New York: Wiley.

[Article by: SURENDRA K. KAUSHIK; LAWRENCE M. KRACKOV; MASSIMO SANTICCHIA]

noun

The monetary resources of a government, organization, or individual. capital, fund (used in plural), money (often used in plural). See money.

verb

To supply capital to or for: back, capitalize, fund, grubstake, stake, subsidize. Informal bankroll. Idioms: put up money for. See help/harm/harmless, money.

Definition: offer loan money; set up in business
Antonyms: call in, take

For more information on finance, visit Britannica.com.

n.

The art or science of managing revenues and resources for the best advantage of the manager. The pronunciation of this word with the i long and the accent on the first syllable is one of America's most precious discoveries and possessions.

Tutor's tip: He tried hard to "finance" (to raise money for a project) a ring for his "fiancee" (the female of an engaged couple), but she easily paid for a tuxedo for her "fiance" (the male of an engaged couple).

Quotes:

"When it comes to finances, remember that there are no withholding taxes on the wages of sin." - Mae West

"Finance is the art of passing currency from hand to hand until it finally disappears." - Robert W. Sarnoff

"The Law of Triviality... briefly stated, it means that the time spent on any item of the agenda will be in inverse proportion to the sum involved." - C. Northcote Parkinson

"Women's battle for financial equality has barely been joined, much less won. Society still traditionally assigns to woman the role of money-handler rather than money-maker, and our assigned specialty is far more likely to be home economics than financial economics." - Paula Nelson

"What we now call finance is, I hold, an intellectual perversion of what began as warm human love." - Robert Graves

"The pen is mightier than the sword, but no match for the accountant." - Jonathan Glancey

See more famous quotes about Finance

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Finance

Financial markets Bond market Stock (Equities) Market Forex market Derivatives market Commodity market Money market Spot (cash) Market OTC market Real Estate market Private equity

Market participants Investors Speculators Institutional Investors

Corporate finance Structured finance Capital budgeting Financial risk management Mergers and Acquisitions Accounting Financial Statements Auditing Credit rating agency Leveraged buyout Venture capital

Personal finance Credit and Debt Employment contract Retirement Financial planning

Public finance Tax

Banks and banking Fractional-reserve banking Central Bank List of banks Deposits Loan Money supply

Financial regulation Finance designations Accounting scandals

Standards ISO 31000 International Financial Reporting Standards

Economic history Stock market bubble Recession Stock market crash History of private equity

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Finance is the science of funds management.^[1] The general areas of finance are business finance, personal finance, and public finance.^[2] Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money and risk and how they are interrelated. It also deals with how money is spent and budgeted.

Finance works most basically through individuals and business organizations depositing money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans.

Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt sold directly to investors from corporations, while That investor can then hold the debt and collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly-traded corporations.^{[dubious – discuss]}

Central banks act as lenders of last resort and control the money supply, which affects the interest rates charged. As money supply increases, interest rates decrease.^[3]

Contents 1 The main techniques and sectors of the financial industry 2 Personal finance 3 Corporate finance 3.1 Capital 3.2 The desirability of budgeting 3.2.1 Capital budget 3.2.2 Cash budget 3.3 Management of current assets 3.3.1 Credit policy 3.3.1.1 Advantages of credit trade 3.3.1.2 Disadvantages of credit trade 3.3.1.3 Forms of credit 3.3.1.4 Factors which influence credit conditions 3.3.1.5 Credit collection 3.3.1.5.1 Overdue accounts 3.3.1.5.2 Effective credit control 3.3.1.5.3 Sources of information on creditworthiness 3.3.1.5.4 Duties of the credit department 3.3.2 Stock 3.3.3 Cash 3.3.3.1 Reasons for keeping cash 3.3.3.2 Advantages of sufficient cash 3.4 Management of fixed assets 3.4.1 Depreciation 3.4.2 Insurance 4 Shared Services 5 Finance of states 6 Financial economics 7 Financial mathematics 8 Experimental finance 9 Behavioral finance 10 Intangible Asset Finance 11 Related professional qualifications 12 See also 13 References 14 External links

The main techniques and sectors of the financial industry

Main article: Financial services

An entity whose income exceeds their expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.

A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.

A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business; this process is known as "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.

Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting.

Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.

Personal finance

Main article: Personal finance

Questions in personal finance revolve around

• How much money will be needed by an individual (or by a family), and when?
• Where will this money come from, and how?
• How can people protect themselves against unforeseen personal events, as well as those in the external economy?
• How can family assets best be transferred across generations (bequests and inheritance)?
• How does tax policy (tax subsidies or penalties) affect personal financial decisions?
• How does credit affect an individual's financial standing?
• How can one plan for a secure financial future in an environment of economic instability?

Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.

Personal financial decisions may also involve paying for a loan, or debt obligations.

Corporate finance

Main article: Corporate finance

Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.

Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management – in choosing a portfolio – one has to decide what, how much and when to invest. To do this, a company must:

• Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
• Identify the appropriate strategy: active v. passive – hedging strategy
• Measure the portfolio performance

Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.

Capital

Main article: Financial capital

Capital, in the financial sense, is the money that gives the business the power to buy goods to be used in the production of other goods or the offering of a service.

The desirability of budgeting

Budget is a document which documents the plan of the business. This may include the objective of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment. Also budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a vision to the company; short term is an annual budget which is drawn to control and operate in that particular year.

Capital budget

This concerns proposed fixed asset requirements and how these expenditures will be financed. Capital budgets are often adjusted annually and should be part of a longer-term Capital Improvements Plan.

Cash budget

Working capital requirements of a business should be monitored at all times to ensure that there are sufficient funds available to meet short-term expenses.

The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget has the following six main sections:

1. Beginning Cash Balance - contains the last period's closing cash balance.
2. Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales)
3. Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortisation, etc)
4. Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists.
5. Financing - discloses the planned borrowings and repayments, including interest.
6. Ending Cash balance - simply reveals the planned ending cash balance.

Management of current assets

Credit policy

Credit gives the customer the opportunity to buy goods and services, and pay for them at a later date.

Advantages of credit trade

• Usually results in more customers than cash trade.
• Can charge more for goods to cover the risk of bad debt.
• Gain goodwill and loyalty of customers.
• People can buy goods and pay for them at a later date.
• Farmers can buy seeds and implements, and pay for them only after the harvest.
• Stimulates agricultural and industrial production and commerce.
• Can be used as a promotional tool.
• Increase the sales.
• Modest rates to be filled.

Disadvantages of credit trade

• Risk of bad debt.
• High administration expenses.
• People can buy more than they can afford.
• More working capital needed.
• Risk of Bankruptcy.

Forms of credit

• Suppliers credit:
• Credit on ordinary open account
• Installment sales
• Bills of exchange
• Credit cards
• Contractor's credit
• Factoring of debtors
• Cash credit
• Cpf credits

Factors which influence credit conditions

• Nature of the business's activities
• Financial position
• Product durability
• Length of production process
• Competition and competitors' credit conditions
• Country's economic position
• Conditions at financial institutions
• Discount for early payment
• Debtor's type of business and financial positions

Credit collection

Overdue accounts

• Attach a notice of overdue account to statement.
• Send a letter asking for settlement of debt.
• Send a second or third letter if first is ineffectual.
• Threaten legal action.

Effective credit control

• Increases sales
• Reduces bad debts
• Increases profits
• Builds customer loyalty
• Builds confidence of financial industry
• increase company capitlisation

Sources of information on creditworthiness

• Business references
• Bank references
• credit agencies
• Chambers of commerce
• Employers
• Credit application forms
• Credit repair companies

Duties of the credit department

• Legal action
• Taking necessary steps to ensure settlement of account
• Knowing the credit policy and procedures for credit control
• Setting credit limits
• Ensuring that statements of account are sent out
• Ensuring that thorough checks are carried out on credit customers
• Keeping records of all amounts owing
• Ensuring that debts are settled promptly
• Timely reporting to the upper level of management for better management.

Stock

Purpose of stock control

• Ensures that enough stock is on hand to satisfy demand.
• Protects and monitors theft.
• Safeguards against having to stockpile.
• Allows for control over selling and cost price.

Stockpiling

Main article: Cornering the market

This refers to the purchase of stock at the right time, at the right price and in the right quantities.

There are several advantages to the stockpiling, the following are some of the examples:

• Losses due to price fluctuations and stock loss kept to a minimum
• Ensures that goods reach customers timeously; better service
• Saves space and storage cost
• Investment of working capital kept to minimum
• No loss in production due to delays

There are several disadvantages to the stockpiling, the following are some of the examples:

• Obsolescence
• Danger of fire and theft
• Initial working capital investment is very large
• Losses due to price fluctuation

Rate of stock turnover

This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.

Determining optimum stock levels

• Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness.
• Minimum stock level refers to the point below which the stock level may not go.
• Standard order refers to the amount of stock generally ordered.
• Order level refers to the stock level which calls for an order to be made.

Cash

Reasons for keeping cash

• Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
• The transaction motive refers to the money kept available to pay expenses.
• The precautionary motive refers to the money kept aside for unforeseen expenses.
• The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.

Advantages of sufficient cash

• Current liabilties may be catered for.
• Cash discounts are given for cash payments.
• Production is kept moving
• Surplus cash may be invested on a short-term basis.
• The business is able to pay its accounts timeously, allowing for easily-obtained credit.
• Liquidity

Management of fixed assets

Depreciation

Depreciation is the allocation of the cost of an asset over its useful life as determined at the time of purchase. It is calculated yearly to enforce the matching principle.

Insurance

Main article: Insurance

Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certain eventuality.

Uninsured risks

• Bad debt
• Changes in fashion
• Time lapses between ordering and delivery
• New machinery or technology
• Different prices at different places

Requirements of an insurance contract

• Insurable interest
  • The insured must derive a real financial gain from that which he is insuring, or stand to lose if it is destroyed or lost.
  • The item must belong to the insured.
  • One person may take out insurance on the life of another if the second party owes the first money.
  • Must be some person or item which can, legally, be insured.
  • The insured must have a legal claim to that which he is insuring.
• Good faith
  • Uberrimae fidei refers to absolute honesty and must characterise the dealings of both the insurer and the insured.

Shared Services

There is currently a move towards converging and consolidating Finance provisions into shared services within an organization. Rather than an organization having a number of separate Finance departments performing the same tasks from different locations a more centralized version can be created.

Finance of states

Main article: Public finance

Country, state, county, city or municipality finance is called public finance. It is concerned with

• Identification of required expenditure of a public sector entity
• Source(s) of that entity's revenue
• The budgeting process
• Debt issuance (municipal bonds) for public works projects

Financial economics

Main article: Financial economics

Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.

It studies:

• Valuation - Determination of the fair value of an asset
  • How risky is the asset? (identification of the asset appropriate discount rate)
  • What cash flows will it produce? (discounting of relevant cash flows)
  • How does the market price compare to similar assets? (relative valuation)
  • Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)

• Financial markets and instruments
  • Commodities - topics
  • Stocks - topics
  • Bonds - topics
  • Money market instruments- topics
  • Derivatives - topics

• Financial institutions and regulation

Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships.

Financial mathematics

Main article: Financial mathematics

Financial mathematics is a main branch of applied mathematics concerned with the financial markets. Financial mathematics is the study of financial data with the tools of mathematics, mainly statistics. Such data can be movements of securities—stocks and bonds etc.—and their relations. Another large subfield is insurance mathematics.

Experimental finance

Main article: Experimental finance

Experimental finance aims to establish different market settings and environments to observe experimentally and provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to discover new principles on which such theory can be extended. Research may proceed by conducting trading simulations or by establishing and studying the behaviour of people in artificial competitive market-like settings.

Behavioral finance

Main article: Behavioral finance

Behavioral Finance studies how the psychology of investors or managers affects financial decisions and markets. Behavioral finance has grown over the last few decades to become central to finance.

Behavioral finance includes such topics as:

1. Empirical studies that demonstrate significant deviations from classical theories.
2. Models of how psychology affects trading and prices
3. Forecasting based on these methods.
4. Studies of experimental asset markets and use of models to forecast experiments.

A strand of behavioral finance has been dubbed Quantitative Behavioral Finance, which uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation. Some of this endeavor has been lead by Gunduz Caginalp (Professor of Mathematics and Editor of Journal of Behavioral Finance during 2001-2004) and collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran, Huseyin Merdan). Studies by Jeff Madura, Ray Sturm and others have demonstrated significant behavioral effects in stocks and exchange traded funds. Among other topics, quantitative behavioral finance studies behavioral effects together with the non-classical assumption of the finiteness of assets.

Intangible Asset Finance

Main article: Intangible asset finance

Intangible asset finance is the area of finance that deals with intangible assets such as patents, trademarks, goodwill, reputation, etc.

Related professional qualifications

There are several related professional qualifications in finance, that can lead to the field:

• Accountancy:
  • Qualified accountant: Chartered Accountant (ACA - UK certification / CA - certification in Commonwealth countries), Chartered Certified Accountant (ACCA, UK certification), Certified Public Accountant (CPA, US certification)
  • Non-statutory qualifications: Chartered Cost Accountant CCA Designation from AAFM
• Business qualifications: Master of Business Administration (MBA), Bachelor of Business Management (BBM), Master of Commerce (M.Comm), Master of Science in Management (MSM), Doctor of Business Administration (DBA)
• Generalist Finance qualifications:
  • Degrees: Masters degree in Finance (MSF), Master of Financial Economics, Master Financial Manager (MFM), Master of Financial Administration (MFA)
  • Certifications: Chartered Financial Analyst (CFA), Certified International Investment Analyst (CIIA), Association of Corporate Treasurers (ACT), Certified Market Analyst (CMA/FAD) Dual Designation, Corporate Finance Qualification (CF)
• Quantitative Finance qualifications: Master of Science in Financial Engineering (MSFE), Master of Quantitative Finance (MQF), Master of Computational Finance (MCF), Master of Financial Mathematics (MFM)

See also

Wikipedia:Books has a book on: Finance

• Financial crisis of 2007–2009
• Local Government Finance in Kerala

References

1. ^ Gove, P. et al. 1961. Finance. Webster's Third New International Dictionary of the English Language Unabridged. Springfield, Massachusetts: G. & C. Merriam Company.
2. ^ finance. (2009). In Encyclopædia Britannica. Retrieved June 23, 2009, from Encyclopædia Britannica Online: http://www.britannica.com/EBchecked/topic/207147/finance
3. ^ Microsoft. 2009. Finance. uk.encarta.msn.com, http://www.webcitation.org/5hlUjB4mc

External links

Look up finance in Wiktionary, the free dictionary.

Wikiversity has learning materials about Finance

• Wharton Finance Knowledge Project - aimed to offer free access to finance knowledge for students, teachers, and self-learners.
• Professor Aswath Damodaran (New York University Stern School of Business) - provides resources covering three areas in finance: corporate finance, valuation and investment management and syndicate finance.
• Some Information for those who are interested in Finance

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Dansk (Danish)
n. - finansiering, finans, finansvæsen
v. tr. - finansiere

idioms:

• financial backer    finansbagmand
• high finance    højfinans

Nederlands (Dutch)
financieren, verkopen op krediet, met geldzaken bezig zijn, financiën, financieel beheer

Français (French)
n. - finance
v. tr. - financer, commanditer

idioms:

• financial backer    bailleur de fonds, prêteur, commanditaire
• high finance    haute finance

Deutsch (German)
n. - Finanzen, Geldwesen, Geldmittel
v. - finanzieren

idioms:

• financial backer    Geldgeber
• high finance    Hochfinanz

Ελληνική (Greek)
n. - δημοσιονομία, (σύστημα που διέπει την) οικονομία, χρηματοδοτικές πηγές, (πληθ.) η οικονομική κατάσταση (κάποιου)
v. - χρηματοδοτώ

idioms:

• financial backer    χρηματοδότης
• high finance    (οικον.) χρηματοοικονομικές δραστηριότητες υψηλού επιπέδου

Italiano (Italian)
finanziare, finanze

Português (Portuguese)
n. - finanças (f pl)
v. - financiar

idioms:

• high finance    altas finanças

Русский (Russian)
финансировать, предоставлять кредит, финансы, доход, финансирование

idioms:

• high finance    финансовые операции, выражающиеся в больших денежных суммах

Español (Spanish)
n. - fondos, recursos, finanzas
v. tr. - financiar, finanzas

idioms:

• financial backer    comanditario, financiador, fiador
• high finance    altas finanzas

Svenska (Swedish)
n. - finans, finansväsen
v. - finansiera, göra finansoperationer, skaffa pengar

中文（简体）(Chinese (Simplified))
财政, 财务, 供给...经费, 负担经费

idioms:

• financial backer    提供资金者
• high finance    巨额融资, 巨额融资营业所

中文（繁體）(Chinese (Traditional))
n. - 財政, 財務
v. tr. - 供給...經費, 負擔經費

idioms:

• financial backer    提供資金者
• high finance    巨額融資, 巨額融資營業所

한국어 (Korean)
n. - 제정
v. tr. - 융자하다

日本語 (Japanese)
n. - 財政, 金融, 財政学, 財源, 資金調達
v. - 金を融通する, 融資する, 掛け売りする, 資金を調達する, 資金を供給する

العربيه (Arabic)
‏(الاسم) تمويل , علم دراسه الموارد الماليه (فعل) يمول‏

עברית (Hebrew)
n. - ‮מימון, ממונות, פיננסים‬
v. tr. - ‮מימן‬

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