Finance
Finance is the science of funds management. The general areas of finance are business finance, personal finance, and public finance. Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money and risk and how they are interrelated. It also deals with how money is spent and budgeted.
Finance works most basically through individuals and business organizations depositing money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans.
Finance works most basically through individuals and business organizations depositing money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans.
Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt instruments sold to investors for organisations such as companies, governments or charities. The investor can then hold the debt and collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly-traded corporations.
Central banks, such as the Federal Reserve System banks in the United States and Bank of England in the United Kingdom, are strong players in public finance, acting as lenders of last resort as well as strong influences on monetary and credit conditions in the economy.
The main techniques and sectors of the financial industry
An entity whose income exceeds their expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.
A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who may sell it on to private investors, or other financial institutions such as pension funds. The stock give part ownership in that company in proportion to shares owned.
In return for the stock, the company receives cash, which it may use expand its business; ("equity financing"), to reduce its debt. Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.
Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting.
Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.
An entity whose income exceeds their expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.
A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who may sell it on to private investors, or other financial institutions such as pension funds. The stock give part ownership in that company in proportion to shares owned.
In return for the stock, the company receives cash, which it may use expand its business; ("equity financing"), to reduce its debt. Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.
Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting.
Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.
Stock
Purpose of stock control
* Ensures that enough stock is on hand to satisfy demand.
* Protects and monitors theft.
* Safeguards against having to stockpile.
* Allows for control over selling and cost price.
Stockpiling
This refers to the purchase of stock at the right time, at the right price and in the right quantities.
There are several advantages to the stockpiling, the following are some of the examples:
* Losses due to price fluctuations and stock loss kept to a minimum
* Ensures that goods reach customers timeously; better service
* Saves space and storage cost
* Investment of working capital kept to minimum
* No loss in production due to delays
There are several disadvantages to the stockpiling, the following are some of the examples:
* Obsolescence
* Danger of fire and theft
* Initial working capital investment is very large
* Losses due to price fluctuation
Rate of stock turnover
This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.
Purpose of stock control
* Ensures that enough stock is on hand to satisfy demand.
* Protects and monitors theft.
* Safeguards against having to stockpile.
* Allows for control over selling and cost price.
Stockpiling
This refers to the purchase of stock at the right time, at the right price and in the right quantities.
There are several advantages to the stockpiling, the following are some of the examples:
* Losses due to price fluctuations and stock loss kept to a minimum
* Ensures that goods reach customers timeously; better service
* Saves space and storage cost
* Investment of working capital kept to minimum
* No loss in production due to delays
There are several disadvantages to the stockpiling, the following are some of the examples:
* Obsolescence
* Danger of fire and theft
* Initial working capital investment is very large
* Losses due to price fluctuation
Rate of stock turnover
This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.
Determining optimum stock levels
* Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness.
* Minimum stock level refers to the point below which the stock level may not go.
* Standard order refers to the amount of stock generally ordered.
* Order level refers to the stock level which calls for an order to be made.
Cash
Reasons for keeping cash
* Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
* The transaction motive refers to the money kept available to pay expenses.
* The precautionary motive refers to the money kept aside for unforeseen expenses.
* The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.
Advantages of sufficient cash
* Current liabilities may be catered for meeting the current obligations of the company
* Cash discounts are given for cash payments.
* Production is kept moving
* Surplus cash may be invested on a short-term basis.
* The business is able to pay its accounts in a timely manner, allowing for easily-obtained credit.
* Liquidity
* Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
* The transaction motive refers to the money kept available to pay expenses.
* The precautionary motive refers to the money kept aside for unforeseen expenses.
* The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.
Advantages of sufficient cash
* Current liabilities may be catered for meeting the current obligations of the company
* Cash discounts are given for cash payments.
* Production is kept moving
* Surplus cash may be invested on a short-term basis.
* The business is able to pay its accounts in a timely manner, allowing for easily-obtained credit.
* Liquidity
Management of fixed assets
DepreciationDepreciation is the allocation of the cost of an asset over its useful life as determined at the time of purchase. It is calculated yearly to enforce the matching principle.
Insurance
Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certain eventuality.
Uninsured risks
* Bad debt
* Changes in fashion
* Time lapses between ordering and delivery
* New machinery or technology
* Different prices at different places
Uninsured risks
* Bad debt
* Changes in fashion
* Time lapses between ordering and delivery
* New machinery or technology
* Different prices at different places
Requirements of an insurance contract
* Insurable interest
o The insured must derive a real financial gain from that which he is insuring, or stand to lose if it is destroyed or lost.
o The item must belong to the insured.
o One person may take out insurance on the life of another if the second party owes the first money.
o Must be some person or item which can, legally, be insured.
o The insured must have a legal claim to that which he is insuring.
* Good faith
o Uberrimae fidei refers to absolute honesty and must characterise the dealings of both the insurer and the insured.
