What Are the Basics of Finance?

The definition of Finance can be easy to understand but challenging to define. In simple terms, finance is the art or science of acquiring and managing resources that produce value in the process of economic activity. Finance is more than simply getting loans. It also includes the knowledge and skills needed to manage those loans through an informed and strategic decision making process.

Broadly speaking, there are three key aspects of public finance included in the broad field of macroeconomics. These include budgeting, investment management and microfinance. Each of these aspects is intimately linked to all the others. Let’s take a look at each separately to get a better understanding.

Budgeting is a broad term that refers to the process of planning and preparing for the future by creating a budget and discussing the financial impact of those plans as a whole. In broad terms, budgeting manages money for the purposes of financing specific projects or activities. In more technical terms, budgeting considers the choices made between debt and revenue, the source of budgeted funds and the timing and amount of those funds over the life of the project. Some examples of types of projects typically funded through budgeting are research and development, procurement, welfare programs and education.

Microfinance is the second aspect of finance that is quite technical in nature. Microfinance is very similar to budgeting in that it considers both debt and revenue needs for a project. Microfinance can be more specifically targeted at helping homeowners who need to borrow funds to purchase a home. Examples of common microfinance programs available through banks may include mortgage refinancing, debt consolidation loans, savings accounts and other forms of high-risk personal loans.

The final aspect of finance to consider is liquidity. This refers to the ability of banks to lend money when they have adequate quantities of liquid assets (receivables). Banks can fail just like any other business, but by having enough liquid funds, banks can continue to lend money to their customers.

Learning about the basic financial decisions involved in running a business can help people become better informed about their own finances. A basic understanding of bank accounts, credit cards and personal assets allows people to understand how their funds are being used and where they need to make major financial changes. Without knowledge of these basics, businesses may find themselves facing financial hardship in the future.

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