Finance is a broad term encompassing various matters concerning the study, creation, allocation, and distribution of funds. Financial theory is the study of how money produces behaviour that matches its purposes. The discipline attempts to explain how people make decisions about money that impacts the value, availability, risks, rewards, as well as timing of investment decisions. Finance thus includes the broad area of accounting, economics, business studies, public finance, and banking. There are five major areas in which finance makes an impact on society.
One of the major influences of finance is the production and distribution of economic activity. Economics influences governmental policies, taxation, spending, and economic growth. Finance has many aspects, such as micro-economics such as affecting markets such as currencies and interest rates, macroeconomics such as affecting businesses and financing, and business cycles such as cycle weeks, cyclical fluctuations, and the business cycle. Another influence of economics is distribution of income and wealth. The distribution of income and wealth can affect consumption, saving, investment, and government programs.
Another effect of economics is financial institutions. Financial institutions can either be governmental or private. Public financial institutions include banks, credit unions, savings and loans, and mortgage companies. Private financial institutions include hedge funds, securities firms, individual investors, investment firms, municipal finance, and credit unions.
The third major influence of economics is public finance. Public finance is concerned with the provision of services and goods by the public sector. Examples include health care, education, parks, roads, and public utilities. Public institutions are influenced by economics in two different ways. Firstly, they may have direct public purposes, which may differ from other purposes as determined by their owners.
Secondly, the decision of whether to undertake a project or not to undertake one may also depend on the analysis of public finance. Finance in this context refers to assets and liabilities that will ultimately determine the level of financial service delivery. An important role in the determination of finance output is played by the borrowing and lending decisions made by the governments, central banks, and households. When the goal of an institution is to generate domestic financial surplus, the approach to financing changes is essentially different from the one taken when the aim is the generation of public debt. In order to understand the inter-relationship between finances and public finance, it is necessary to study the financial side of the economy.
The concepts of economics play a vital role not only in macroeconomics, but also in microeconomics, the area of specific industries and businesses. The analysis of such enterprises helps in the formulation of policies affecting economic growth, output, employment, and investment. In the corporate sector, the location, size, and activities of corporations provide important information on the economic situation. The analysis of these factors allows managers to make rational decisions regarding investment, growth, and sales. Corporate finance is related to the management’s decision making in the realization of the company’s goals and objectives.
