What is Finance? Why is it so important?

Finance is defined as the management and the creation of money which includes activities related to banking, investing, credit, capital markets, debt, forecasting, and budgeting.

In simple words, we can say that Finance is the study of all those processes in which money is circulated in the economy in the form of credit, loans, or investments to those entities(institutions or individuals) that most need it and can put it to the most productive use.

The Financial Service sector(banks, insurance companies, etc.) facilitates this circulation of money, and the study of all these institutions involved in this process also comes under Finance.

We now know the definition of finance. But why do we need finance? Why is finance important to everyone? Let me walk you through this. Finance is broadly divided into three subcategories:

Personal Finance

“What if I say you only have 24 hrs to secure your future finances? What are all things you will do to make the most of the money you have? You surely don’t want to waste your time seeking advice from random people, investing in over-hyped schemes suggested by Uncles.

And that’s where your knowledge comes into play”.

You indeed have enough time to manage your finances, but why start late? Here we present you the basics of what you need to get started.

Why is Personal Finance so important?

1. Financing: We all need money to fulfil our needs, but sometimes we can’t afford it, or we don’t have enough savings to meet our needs( a house, a car or anything), and for that, banks provide a financial instrument called a “Loan”, it can be a Home loan, education loan, auto loan, etc. and to make smart decisions we need to know about Loans.
2. Emergency: No one can predict the future. We don’t know what is going to happen the next moment. So to meet the expenses of an unforeseen situation in the future, it is advisable to have Emergency funds in the form of Fixed deposits, Savings, Liquid Mutual Funds, etc.
3. Retirement: You would not like to work throughout your life to meet your daily expenses, but if not you, who will finance your daily needs. Don’t worry, you can always invest in instruments like PPF, Mutual Funds, SIPs, Provident Fund, NPS, etc., and then despite retiring from your job, you would have money to finance your needs.
4. Protection: Term insurance and Health insurance are two ways an insurer provides financial security to the insured person and his family. So that if something happens to you or your family, they will provide you with the financial help they promised.
5. Transactions: We use Fintech Services, Google Pay, Phone Pay, Paytm, Net Banking, NEFT to transfer money daily, and it has become really easy for scammers to cheat us; therefore, in order to safeguard ourselves from all these scams, we have to be aware and financially literate.

No matter who you are, what you do, where you live, you need money. Because of that, we sometimes assume that “Money can do everything, we start believing that, with money, we can solve all our problems”, but the reality is Money never solves anyone’s problems Intelligence does, and it produces money too. Money without financial intelligence is money soon gone. No matter how much money you have, you need to know about Personal finance. Remember, “Money never makes you rich. Your financial literacy does.”

This is why finance is necessary and how it plays a significant role in our lives. Now let’s talk about corporations and their relation with finance. How do these giants manage money, and what are the issues they face?

Corporate finance

Corporate finance is the branch of finance that concentrates on sources of funding, the capital structure of corporations, and how they can make themselves as profitable as possible with the aim to maximise shareholder value with minimum risks involved in the process.

These corporations are basically Non-financial Corporates (Steel companies, IT companies, etc.), Financial Corporates (Banks, Insurance companies, Mutual Funds providers, etc.), and Not-for-Profit Corporates. All of these have the following requirements.

1. Financing: In order to meet their financial needs, a corporation takes Bank loans, issues their Bonds, and raises money through equity.
2. Investments: They Invest the surplus money with them in Debt & Equity mutual funds and buy Insurance for the corporation’s assets.
3. Risk Management: They are all the time exposed to Market Risk, Credit Risk, and Liquidity Risk, and it is their main aim to minimise risk as much as possible, and for that, corporations spend a massive chunk of money.
4. Transactions: Trade Finance, Bill discount, overdraft are the facilities that companies have.
5. M&A Advisory: A company needs an Advisory to take a few major decisions, such as raising a massive amount of funds through IPO or going for an acquisition. The company doesn’t specialise in the type of decision making, and for that, an Investment Bank helps the company take these major decisions.

These comprise a significant portion of what comes under Corporate Finance. So if you have a desire to work in corporations after studying finance, you would be expected to know about any of these fields. So we have discussed why we need finance in the corporate sector, Now comes Public Finance.

Public Finance

Public finance is the study of the role of the government in the economy. It consists of Central and State governments, PSUs( Ex- ONGC, NTPC, SAIL, etc.), and Institutions (RBI, SEBI, etc.). Public finance takes government revenue and expenditure into account and helps the government manage these funds and fulfil a desirable goal. The things that are taken into consideration are :

1. Taxation: Govt. plans regarding the revenue it will generate through Direct(Income tax, Capital gains tax, etc.) as well as Indirect Taxation(Sales tax, service tax, etc.).
2. Revenue Expense: It has control over the money spent on Subsidies, Salaries, Public Services.
3. Funding Deficit: Borrowings, PSU divestments come under this.
4. Capital Expense: It takes into account the money spent on Infrastructure projects financing.
5. Monetary Policy: Govt. makes policies regarding repo rates, reverse repo, CRR, SLR, etc., for the smooth functioning of our economy and the development of our country.

This was just a brief overview of What is finance? And why is it important? We will be discussing all these topics in detail in upcoming blogs. Stay tuned to know more about finance and How to build a career in the finance industry.