What is Finance | Importance Of Finance Functions
The adjective ‘financial‘ means relating to finance. It is a broad term we use to describe different aspects of the financial industry. Financial institutions, financial services, and financial instruments, for example, are some of the aspects of the industry. The plural noun ‘finances,’ on the other hand, refers how well or badly an entity is managing financially.
What Is Finance?
Finance could be a term generally describing the study and system of cash, investments, and different financial instruments. Some authorities choose to divide finance into 3 distinct categories: public finance, finance, and private finance. Other categories include the recently emerging area of social finance and behavioral finance, which seeks to identify the cognitive (e.g., emotional, social, and psychological) reasons behind financial decisions.
Classification Of Finance
The Finance function has been classified into three:
=> Long-Term Finance– This includes finance of investment three years or a lot of. Sources of long-term finance include owner capital, share capital, long-term loans, debentures, internal funds and so on.
=> Medium Term Finance– this can be financing done between one to three years, this can be sourced from bank loans and financial institutions.
=> Short Term Finance – this can be finance required below one year. Funds may be acquired from bank overdrafts, commercial paper, advances from customers, trade credit etc.
Present and Future Value of Money
Why do banking institutions loan money to people? It is simple: they want to earn a fee, or interest, for loaning out their money. For instance, someone could borrow $100 from a bank for one year at a six percent annual interest rate. At the end of that year, the borrower owes the bank $106. In other words, you can say that the future value of the $100 is $106, given a six percent interest rate and a one-year period. It follows, then, that the present value of the $106 the bank expects to receive in one year is $100 today.
Importance of Finance Functions
=> Identify want of Finance-To begin a business you would like to grasp how much is needed to open it. So, the finance perform helps you recognize how much the initial capital is, how much of it you have and how much you need to raise.
=> Identify Sources of Finance-Once you recognize what must be raised you check up on areas you’ll be able to raise these funds from. You can borrow or get from various shareholders.
=> Comparison numerous|of varied|of assorted} Sources of Finance– when identifying various fund sources compare the value and risk concerned. Then choose the best source of financing that suits your business needs.
=> Investment-Once the funds area unit raised it’s time to invest them. Investment choices ought to be worn out a way that a business gets higher returns. Cost of funds procurement ought to be not up to the come on investment, this can show a wise investment was created.
Also Read => What Is PayPal | Complete Review Of PayPal