Finance : What is finance and what is it for?

Finance: What is finance and what is it used for?

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What is finance ?

Finance is a very broad field that concerns both companies and individuals. It has an impact on many activities associated with banking, debt, credit, capital markets, money and investment. Basically, finance covers everything to do with money management and the process of acquiring the necessary funds. There are three main types of 'finance': personal finance, public finance and corporate finance.

Personal finances

Personal finances are specific to each individual's situation and activity. It depends largely on income, basic needs, goals and desires. Personal finances are managed by taking out loans (property or other), taking out insurance (home, health, car, etc.) and subscribing to one or more savings products to finance retirement or other projects.

Public finances

Public finance includes taxation, spending, budgeting and debt issuance policies that affect how the state pays for the services it provides to the public. The State defines budgetary policy and oversees the allocation of resources, income distribution and economic stability. Financing is provided mainly through taxation and the management of public debt through various borrowings from banks, finance companies or insurance companies.

Corporate finance

Corporate finance refers to the financial activities involved in running a company, usually through the creation of a specific division or department to oversee these financial activities. To finance itself, a company may, for example, decide to raise additional funds through a bond issue or a share offering. Start-ups can also approach investors to receive capital in exchange for a percentage of the company. On a day-to-day basis, corporate finance involves all the financing decisions that will enable the company to grow: choosing the most appropriate investments, optimising the financial structure and the policy for remunerating capital providers.

What is the role of finance ?

Any business, whether it's a small country bakery or LVMH, needs money to operate and has to spend it before it can start earning it. It has to finance its stocks and supplies, its equipment, its rent and its employees' salaries. That's why finance, although not as visible an activity as marketing or production, is essential to a company's success.

Financial management - that is, the ability to manage a company's money so that it can achieve its objectives - does not depend solely on the finance department. All management decisions have financial consequences. Managers in all departments need to work closely with finance staff: the company's credit and collection policies, for example, will affect its ability to make sales, and financing new computers for employees can improve their profitability.

Revenue from the sale of the company's products is its main source of finance, but the money from sales doesn't always arrive on time. That's why the finance director has to keep track of all the cash coming in and going out to determine how the available funds will be used and choose the best sources to obtain the financing required.

For example, a finance director will oversee day-to-day operational data such as cash receipts and disbursements to ensure that the company has sufficient liquidity to meet its obligations. In the longer term, he or she may also determine the most appropriate way to finance a project (expansion or acquisition, creation of a new department, etc.).

Financial management is closely linked to accounting. In most companies, these two areas are the responsibility of the Finance Director. The accounting department collects and presents the figures that are then used to make financial decisions, taking cash flow into account to ensure that cash is available when needed.

The difference between economics and finance

In a nutshell, economics is a social science that studies the management of goods and services in the broadest sense, from their production to their consumption, as well as the factors that affect them. The field of finance more specifically concerns the management of available funds required to carry out economic operations. In simple terms, we could say that economics is theoretical and finance more practical.

Although they are often taught and presented as separate disciplines, economics and finance are nevertheless interdependent and influence each other. As a social science, economics studies the human decisions that affect the allocation of resources. Finance focuses more on the techniques and tools used to manage money. But economics and finance have much in common when it comes to how companies and investors assess risk and return. More generally, both disciplines pay particular attention to the health of financial markets. Economists study the major market trends that will then enable financiers to develop their commercial strategies.

The main difference between degrees in economics and finance is the breadth of the field of study. Economics students will study all facets of the economy from production to consumption, learn how to measure the total value of a region's gross domestic product and analyse government policies on trade and tax regulation. Finance students, on the other hand, will focus on the day-to-day decisions that change a company's wealth rather than simply looking at how the market acts.

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