finance

An entity whose income 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), 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.
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.
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?
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.
Capital
Capital, in the financial sense, 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.
Sources of capital
Long Term - usually above 7 years
Share Capital
Mortgage
Retained Profit
Venture Capital
Debenture
Sale & Leaseback
Project Finance
Medium Term - usually between 2 and 7 years
Term Loans
Leasing
Hire Purchase
Short Term - usually under 2 years
Bank Overdraft
Trade Credit
Deferred Expenses
Factoring
Capital market
Long-term funds are bought and sold:
Shares
Debentures
Long-term loans, often with a mortgage bond as security
Reserve funds
Euro Bonds
Money market
Financial institutions can use short-term savings to lend out in the form of short-term loans:
Credit on open account
Bank overdraft
Short-term loans
Bills of exchange
Factoring of debtors
Borrowed capital
This is capital which the business borrows from institutions or people, and includes debentures:
Redeemable debentures
Irredeemable debentures
Debentures to bearer
Hardcore debentures
Own capital
This is capital that owners of a business (shareholders and partners, for example) provide:
Preference shares/hybrid source of finance
Ordinary preference shares
Cumulative preference shares
Participating preference share
Ordinary shares
Bonus shares
Founders' shares
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.
In case of dissolution of firms debenture holders are paid first as compared to shareholder.
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.
Factors determining fixed capital requirements
Nature of business
Size of business
Stage of development
Capital invested by the owners
location of that area
Working capital
This is money which is used to buy stock, pay expenses and finance credit.
Factors determining working capital requirements
Size of business
Stage of development
Time of production
Rate of stock turnover ratio
Buying and selling terms
Seasonal consumption
Seasonal production