What Does Finance Mean? Its History, Types, and Importance Explained
Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting. The financial system includes the circulation of money, the management of investments, and the lending of funds. In businesses, the finance team is responsible for ensuring the company’s capital is adequate, that the appropriate investments are made, and that the company’s revenues and expenses are well managed. This guide will unpack the question: What is finance?
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What are the Types of Finance?
There are three main types of finance:
1. Personal Finance
From a personal perspective, finance is the management of one’s income, expenses, investments, and obligations. Individuals often work with a personal banker, investment advisor, accountant, mortgage broker, and other professionals to manage their financial situation.
Below are examples of the types of items people deal with on a personal financial level.
Examples:
Bank accounts
Credit cards
Mortgages
Lines of credit
Personal spending and expenses
Taxes
Savings
Investments (stocks, bonds, real estate, etc.)
2. Corporate Finance (Business)
From a business perspective, corporate finance is the management of a company’s funding, its sources of revenue, use of capital, and the management of its profit and loss (P&L) statement. The professionals at a business who are responsible for managing this area include accountants, financial analysts, managers, and executives, such as the Chief Financial Officer (CFO).
Examples:
Debt
Equity
Capital Structure
Assets
Liabilities
Revenues
Expenses
Profit
Cash Flow
Dividends
3. Public Finance (Government)
From a government perspective, finance includes the management of a country’s national budget, the treasury department, the central bank, and other government agencies. It focuses on collecting tax revenue and spending that money on national services and programs such as roads, hospitals, and social security.
Examples:
Income tax
Sales tax
Property tax
Infrastructure spending (roads, hospitals, etc.)
Social security and insurance
Supply of money
International trade
Employment
National debt
National budget
Video Explanation of Finance
Watch this short video to quickly understand the main concepts covered in this guide. It’ll explain the definition of finance, provide examples of finance, and cover some of the common topics on finance.
Examples of Finance Activities
The easiest way to define finance is by providing examples of the activities it includes. There are many different career paths and jobs that perform a wide range of finance activities. Below is a list of the most common examples:
Investing personal money in stocks, bonds, or guaranteed investment certificates (GICs)
Borrowing money from institutional investors by issuing bonds on behalf of a public company
Lending money to people by providing them with a mortgage to buy a house
Using Excel spreadsheets to build a budget and financial model for a corporation
Saving personal money in a high-interest savings account
Developing a forecast for government spending and revenue collection
Finance Topics
There is a wide range of topics that people in the financial industry are concerned with. Below is a list of some of the most common topics you should expect to encounter in the industry.
Interest rates and spreads
Yield (coupon payments, dividends)
Financial statements (balance sheet, income statement, cash flow statement)
Cash flow (free cash flow, other types of cash flow)
Profit (net income)
Cost of capital (WACC)
Dividends and return of capital
Shareholders
Risk and return
Finance Careers
A definition of finance would not be complete without exploring the career options associated with the industry. Below are some of the most popular career paths:
Personal banking (or private banking)
Wealth management
Mortgages/lending
Accounting
Financial planning
Audit
Insurance
Across the entire industry, one of the most important and highly sought-after skill sets is financial modeling and the ability to create an Excel model that evaluates a certain situation. The screenshot below shows an example from one of CFI’s Excel modeling courses.
Additional Finance Resources
To continue developing and preparing for a career in the field, these additional CFI materials will be helpful:
More Questions and Answers
CFI’s mission is to help anyone become a world-class financial analyst and has a wide range of resources to help you along the way. In order to become a great financial analyst, below are some additional questions and answers for you to explore further:
Written by
John Doe
With 20+ years of Experience in Corporate finance and a Professional Economy Analyst.
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