Finance is a general term for subjects about the science, invention, management, and evaluation of financial and other financial resources. In particular, it includes the questions of who, what, when, where and why an individual, firm or government obtains the funds necessary for successful operation; known as capital in the business context. It also covers the process of allocation and distribution of those resources to achieve the most optimal ends in terms of returns. The concepts and practices associated with management of finances are also relevant to the study of finance.
One of the most important elements in modern financial services is banking, which are the system of creating and managing financial instruments such as currency and savings accounts, bank loans, depositary receipts, certificates of deposits, debentures and other financial assets. Banking is therefore a large part of the financial system. Banking influences the production and distribution of capital, makes transactions in money markets and determines the level of interest the system receives. Banking influences the cost of conducting business and determines the level of output and employment.
The study of business finance is closely related to the study of economic growth and inflation, because the two processes are intimately connected. Both economics and finance are influenced by the structure of the financial markets and the rules that govern them. Finance is an essential element of the process of economic growth, because it enables a firm to utilize its resources to gain advantage over other firms and to determine the costs and expenses it incurs in doing so.
The study of the financial markets enables a firm to make better use of its capital and income resources and to determine appropriate uses for surpluses arising from investment, savings and loan activities. Without proper funding strategies, firms will not be able to conduct business as usual. Properly funded businesses are able to plan for and handle changes in financing schemes and to maximize their use of their available resources.
In general, there are five distinct types of capital in the banking system: surplus cash funds, retained earnings, capital assets, short-term and long-term debt obligations and liabilities. The role of finance in a market economy is to facilitate the circulation of funds and to provide opportunities for individuals and firms to invest in productive activity. Finance is an important element in all of these processes. Its role is particularly vital in determining the level of output and employment in a country. A country’s level of output and employment depends to a large extent on the amount of financial wealth it has available for investment, growth and welfare of the public as a whole. A country’s financial system is also vulnerable to shocks if the rate of interest rises or if the financial system loses its credibility.
Different measures are used to measure the value of a nation’s finance. Some economists consider total finance as the whole economic potential of a nation. Other economists refer to it as the time value of money or credit value of deposits. Still other economists use both time value and credit value of deposits as the basis of measuring finance.