Finance

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Finance

Financial Markets
Bond market
Stock (Equities) Market
Forex market
Derivatives market
Commodity market
Spot (cash) Market
OTC market
Real Estate market
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
Personal finance
Credit and Debt
Employment contract
Retirement
Financial planning
 Public finance
Tax
Banks and Banking
Central Bank
List of banks
Deposits
Loan
Financial regulation
Finance designations
Accounting scandals
History of finance
Stock market bubble
Recession
Stock market crash
vde

Finance studies and addresses the ways in which individuals, businesses, and
organizations raise, allocate, and use monetary resources over time, taking into account
the risks entailed in their projects. The term "finance" may thus incorporate any of the
following:

• The study of money and other assets;

• The management and control of those assets;
• Profiling and managing project risks;
• The science of managing money;
• As a verb, "to finance" is to provide funds for business or for an individual's large
purchases (car, home, etc.).

The activity of finance is the application of a set of techniques that individuals and
organizations (entities) use to manage their money, particularly the differences between
income and expenditure and the risks of their investments.

An income that exceeds its 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 in a process called "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), etc., 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, 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.

Contents
[hide]

• 1 Personal finance
• 2 Business finance
o 2.1 Capital
 2.1.1 Sources of capital
 2.1.1.1 Capital market
 2.1.1.2 Money market
 2.1.2 Borrowed capital
 2.1.3 Own capital
 2.1.4 Differences between shares and debentures
 2.1.5 Fixed capital
 2.1.5.1 Factors determining fixed capital requirements
 2.1.6 Working capital
 2.1.6.1 Factors determining working capital requirements
o 2.2 The desirability of budgeting
 2.2.1 Capital budget
 2.2.2 Cash budget
o 2.3 Management of current assets
 2.3.1 Credit policy
 2.3.1.1 Advantages of credit trade
 2.3.1.2 Disadvantages of credit trade
 2.3.1.3 Forms of credit
 2.3.1.4 Factors which influence credit conditions
 2.3.1.5 Credit collection
  2.3.1.5.1 Overdue accounts
 2.3.1.5.2 Effective credit control
 2.3.1.5.3 Sources of information on creditworthiness
 2.3.1.5.4 Duties of the credit department
 2.3.2 Stock
 2.3.3 Purpose of stock control
 2.3.3.1 Stockpiling
 2.3.3.1.1 Advantages
 2.3.3.1.2 Disadvantages
 2.3.3.2 Influence of stock management on rate of return
 2.3.3.3 Rate of stock turnover
 2.3.3.4 Determining optimum stock levels
 2.3.4 Cash
 2.3.4.1 Reasons for keeping cash
 2.3.4.2 Advantages of sufficient cash
o 2.4 Management of fixed assets
 2.4.1 Depreciation
 2.4.2 Insurance
 2.4.2.1 Uninsurable risks
 2.4.2.2 Requirements of an insurance contract
• 3 Shared Services
• 4 Finance of states
• 5 Financial economics
• 6 Financial mathematics
• 7 Experimental finance
• 8 Related Professional Qualifications
• 9 See also

• 10 External links

[edit] 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) at various

points in the future?
• Where will this money come from (e.g. savings or borrowing)?
• How can people protect themselves against unforeseen events in their lives, and
risk in financial markets?
• How can family assets be best transferred across generations (bequests and
inheritance)?
• How do taxes (tax subsidies or penalties) affect personal financial decisions?
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.

[edit] Business finance

Main article: Corporate finance

In the case of a company, managerial or corporate finance is the task of providing the
funds for the corporation's activities. For small business, this is referred to as SME
finance. It generally involves balancing risk and profitability.

Long term funds would be provided by ownership equity and long-term credit, often in
the form of bonds. These decisions lead to the company's capital structure. Short-term
funding or working capital is mostly provided by banks extending a line of credit.

On the bond market, borrowers package their debt in the form of bonds. The borrower
receives the money that it borrows by selling the bond, which includes a promise to repay
the value of the bond with interest. The purchaser of a bond can resell it so that the actual
recipient of the interest payments can change over time. Bonds allow lenders to recoup
the value of their loan by simply selling the bond.

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. In doing so, one needs to...

• 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.

[edit] Capital

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

[edit] Sources of capital

[edit] Capital market

• Long-term funds are bought and sold:

o Shares
o Debentures
o Long-term loans, often with a mortgage bond as security
o Reserve funds

[edit] Money market

• Financial institutions can use short-term savings to lend out in the form of short-
term loans:
o Credit on open account
o Bank overdraft
o Short-term loans
o Bills of exchange
o Factoring of debtors

[edit] Borrowed capital

This is capital which the business borrows from institutions or people, and includes
debentures:

• Redeemable debentures
• Irredeemable debentures
• Debentures to bearer

[edit] Own capital

This is capital that owners of a business (shareholders and partners, for example) provide:

• Preference shares:
o Ordinary preference shares
o Cumulative preference shares
o Participating preference shares
• Ordinary shares
• Bonus shares
• Founders' shares

[edit] Differences between shares and debentures

• Shareholders are effectively owners; debenture-holders are creditors.

• Shareholders may vote at AGMs and be elected as directors; debenture-holders
may not vote at AGMs or be elected as directors.
• Shareholders receive profit in the form of dividends; debenture-holders receive a
fixed rate of interest.
 • If there is no profit, the shareholder does not receive a dividend; interest is paid to
debenture-holders regardless of whether or not a profit has been made.

[edit] Fixed capital

This is money which is used to purchase assets that will remain permanently in the
business and help it to make a profit.

[edit] Factors determining fixed capital requirements

• Nature of business
• Size of business
• Stage of development
• Capital invested by the owners

[edit] Working capital

This is money which is used to buy stock, pay expenses and finance credit.

[edit] Factors determining working capital requirements

• Size of business
• Stage of development
• Time of production
• Rate of stock turnover
• Buying and selling terms
• Seasonal consumption
• Seasonal production

[edit] The desirability of budgeting

[edit] Capital budget

This concerns fixed asset requirements for the next five years and how these will be
financed.

[edit] 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.

[edit] Management of current assets

[edit] Credit policy

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

[edit] 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.

[edit] Disadvantages of credit trade

• Risk of bad debt

• High administration expenses
• People can buy more than they can afford.
• More working capital needed

[edit] Forms of credit

• Suppliers credit:
o Credit on ordinary open account
o Instalment sales
o Bills of exchange
o Credit cards
• Contractor's credit
• Factoring of debtors

[edit] 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 position

[edit] Credit collection

[edit] Overdue accounts

• Cards arranged alphabetically in card index system

• 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.
[edit] Effective credit control

• Increases sales
• Reduces bad debts
• Increases profits
• Builds customer loyalty
[edit] Sources of information on creditworthiness

• Business references
• Bank references
• Credit agencies
• Chambers of commerce
• Employers
• Credit application forms
[edit] 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

[edit] Stock

[edit] 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.

[edit] Stockpiling

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

• 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
[edit] Disadvantages

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

[edit] Influence of stock management on rate of return

• Right price
• Right quantity
• Right quality
• Right place
• Right time
• Right property

[edit] 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.

[edit] 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.

[edit] Cash

[edit] Reasons for keeping cash

• 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 the money kept aside to take advantage of
suddenly arising opportunities.

[edit] Advantages of sufficient cash

 • Current liabilities 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.

[edit] Management of fixed assets

[edit] Depreciation

Depreciation is the decrease in the value of an asset due to wear and tear or obsolescence.
It is calculated yearly to ensure realistic book values for assets.

[edit] Insurance

Insurance is the undertaking of one party to indemnify another, in exchange for a

premium, against a certain eventuality.

[edit] Uninsurable risks

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

[edit] Requirements of an insurance contract

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

[edit] 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.

[edit] 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

[edit] 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

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

• Financial markets and instruments

o Commodities - topics
o Stocks - topics
o Bonds - topics
o Money market instruments- topics
o Derivatives - topics

• Financial institutions and regulation

[edit] Financial mathematics

 Main article: Financial mathematics

Financial mathematics is the 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.

[edit] Experimental finance

Main article: Experimental finance

Experimental finance aims to establish different market settings and environments to

observe experimentally and 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.

[edit] Related Professional Qualifications

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

• Qualified accountant qualifications: Chartered Certified Accountant (ACCA,

UK certification), Chartered Accountant (CA, certification in Commonwealth
countries), Certified Public Accountant (CPA, US certification)
• Non-statutory accountancy qualifications: Chartered Cost Accountant CCA
Designation from AAFM
• Business qualifications: Master of Business Administration (MBA), Doctor of
Business Administration (DBA)
• Finance qualifications: Chartered Financial Analyst (CFA),Certified
International Investment Analyst(CIIA), Association of Corporate Treasurers
(ACT), Masters degree in Finance, Certified Market Analyst (CMA/FAD) Dual
Designation, Master Financial Manager (MFM), Corporate Finance Qualification
(CF) Register Financial Planner (RFP), Certified Financial Consultants (CFC)
• Quantitative Finance qualifications: Master of Quantitative Finance (MQF),
Master of Computational Finance (MCF), Master of Financial Mathematics
(MFM)

[edit] See also

Main lists: List of basic finance topics and List of finance topics

• Funding, a synonym of financing

 • There are also over 250 other finance articles in Wikipedia. See list of finance
topics.
• Important publications in finance
• Forex
• Financial plan
• Economic Calendar
• Financial planning
• Payday loan
• Right-financing
• Settlement (finance)
• Behavioral finance

[edit] External links

Look up Finance in
Wiktionary, the free dictionary.

• Wharton Finance Knowledge Project - aimed to offer free access to finance

knowledge for students, teachers, and self-learners.
• For material covering three areas in finance - corporate finance, valuation and
investment management, see Prof. Aswath Damodaran
• For links to finance web sites, grouped by topic see Web Sites for Discerning
Finance Students, Prof. John M. Wachowicz-
• For the introductory finance web site at the University of Arizona,
studyfinance.com
• For introductory articles, a full glossary and links to resources on behavioral
finance see the BF gallery
• For the law of the financial markets see SECLaw.com
• For stock market related financial definitions see TheStreet.com Glossary
• The Finance Director provides access to essential suppliers of financial services
and solutions
• Middle East Banking & Finance News — ArabianBusiness.com

Retrieved from "http://en.wikipedia.org/wiki/Finance"

Categories: Articles lacking sources from June 2007 | All articles lacking sources |
Cleanup from September 2007 | All pages needing cleanup | Finance

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