Lecture notes

INTRODUCTION:

Business concern needs finance to meet their requirements in the economic world. Any kind
of business activity depends on the finance. Hence, it is called as lifeblood of business
organization. Whether the business concerns are big or small, they need finance to fulfil their
business activities. In the modern world, all the activities are concerned with the economic
activities and very particular to earning profit through any venture or activities. The entire
business activities are directly related with making profit. (According to the economics
concept of factors of production, rent given to landlord, wage given to labour, interest given
to capital and profit given to shareholders or proprietors), a business concern needs finance to
meet all the requirements. Hence finance may be called as capital, investment, fund etc., but
each term is having different meanings and unique characters. Increasing the profit is the
main aim of any kind of economic activity.

MEANING OF FINANCE

Finance may be defined as the art and science of managing money. It includes financial
service and financial instruments. Finance also is referred as the provision of money at the
time when it is needed. Finance function is the procurement of funds and their effective
utilization in business concerns. The concept of finance includes capital, funds, money, and
amount. But each word is having unique meaning. Studying and understanding the concept of
finance become an important part of the business concern.

DEFINITION OF FINANCE

According to Khan and Jain, “Finance is the art and science of managing money”.

According to Oxford dictionary, the word ‘finance’ connotes ‘management of money’.

Webster’s Ninth New Collegiate Dictionary defines finance as “the Science on study of the
management of funds’ and the management of fund as the system that includes the circulation
of money, the granting of credit, the making of investments, and the provision of banking
facilities.

TYPES OF FINANCE

Finance is one of the important and integral part of business concerns, hence, it plays a major
role in every part of the business activities. It is used in all the area of the activities under the
different names. Finance can be classified into 3 categories:
What is Personal Finance?
Personal Finance is managing the finance or funds of an individual and helping them achieve
the desired goals in terms of savings and investments. Personal Finance is specific to
individuals and the strategies depend on the individuals earning potential, requirements,
goals, time frame, etc. Personal finance includes investment in education, assets like real
estate, cars, life insurance policies, medical and other insurance, saving and expense
management.
Personal Finance includes:

 Protection against unforeseen and uncertain personal events

 Transfer of wealth across generations of the family
 Managing taxes and complying with tax policies (tax subsidies or penalties)
 Preparing for retirement
 Preparing for long term expenses or purchases involving a huge amount
 Paying for a loan or debt obligations
 Investment and wealth accumulation goals

What is Corporate Finance?

Corporate Finance is about funding the company expenses and building the capital structure
of the company. It deals with the source of funds and the channelization of those funds like
the allocation of funds for resources and increasing the value of the company by improving
the financial position. Corporate finance focuses on maintaining a balance between the risk
and opportunities and increasing the asset value.
Corporate Finance Includes:

 Capital budgeting
 Employing standard business valuation techniques or real options valuation
 Identifying the source of funding in the form of equity, shareholders’ funds, creditors,
debts
 Determining the utility of unappropriated profits for future investment, operational
utilization, or distribution to the shareholders
 Acquisition and investment in stock or other assets
 Identifying relevant objectives, opportunities, and constraints
 Risk management and tax considerations
 Stock issuance while going public and listing on the Stock exchange

 
What is Public Finance?
This type of finance is related to states, municipalities, provinces in short government
required finances. It includes long term investment decisions related to public entities. Public
finance takes factors like distribution of income, resource allocation, economic stability in
consideration. Funds are obtained majorly from taxes, borrowing from banks or insurance
companies.
Public Finance includes:

 Identifying the expenditure required by the public entity

 The sources of revenue for the public entity
 Determining the budgeting process and source of funds
 Issuing debts for public projects
 Tax management