Finance is a broad term for things about the study, creation, and management of financial assets and liabilities. In particular, it concerns the issues of how money is acquired, used and disposed of-called capital in the business context. The word itself, as well as the discipline, go back to the middle ages and has been referred to variously as fable, tale, economy, book, wheel, or stick of threads. One common thread through all these descriptions is the fact that the study of finance is viewed as a science of the exchange of commodities-goods-for-services-for money-and is therefore a prerequisite for economic progress.
Although much modern day academic work has fallen short of establishing a generally accepted definition, most contemporary discussions of finance attempt to describe a set of interrelated fundamental theories. Some of these are interest rate theory, asset theory, capital theory, nominalism, magnetism, socialism, and globalization. As each of these is further discussed below, the reader will gain additional insight into the practical applications of finance and monetary policy. To begin, a brief mention of the most important concepts associated with modern day economics will be made. These include the concepts of cost function, the production function, distribution, and time value.
A central focus of modern financial theory is efficiency. In modern financial theory efficiency is defined as the mean value of a discounted value of an asset over time. Most often, this means that a firm’s value of equity is the value of the total return it receives minus the sum of its costs of capitalization.
Another important theoretical concept in modern financial management is the theory of demand. This refers to the level of activity required to make a firm’s value of equity equal to its value of funds. Another important concept in financial services is a financial risk. This refers to the chances that an investment will lose its value. Other theories in finance include insurance risk, business risk, bank risk, equity risk, portfolio risk, price risk, growth cycle risk, inflation risk, deflation risk, liquidity risk, reinvestment theory, liquidity effects of changes in monetary conditions, capital budgeting, asset allocation theory, and market design. While all of these theories have important practical value in the decision making process of financial management, they also play a significant role in the evaluation of an organization’s risk and capital structure.
One area of specialization within the field of finance is that of cash flow analysis. A financial analyst who specializes in cash flow analysis will examine a company’s balance sheet, its income statement, its cash flows, its accounts payable and its accounts receivable. They will then apply economic theory to evaluate how well the company’s cash flow functions. Because cash flow analysis is very important in the determination of an organizations success or failure, many organizations require the services of a financial analyst who is skilled in this particular area.
The other specialization area of finance is in international financial services. Some countries have a strong influence over the foreign currencies of the world, while others trade fairly heavily with other countries. In addition to the export market, the financial services sector of the economy is very important to any country’s prosperity. Finance graduates who specialize in this particular area can be found in banks, financial companies, investment firms, and elsewhere throughout the financial services sector.