Meaning of Finance

In simple words, Arrangement of funds is called finance. All organizations need finance for operating its different activities. So, we can say finance is just like blood for survival the business in changing economic environment. Fund, money, saving, cash, reserves and assets are the basics of finance. Finance word is very deep and in modern age, this word is also known Business Finance. To create equilibrium in  business finance, we used different tools like financial analysis, financial planning, ratio analysis, cash flow analysis, fund flow analysis and working capital management analysis.

Historical Background of Finance

If we unlock its historical background, we find many facts that finance and financial activities are inter-connected. Main aim of finance to get high margin on loan, in beginning Banks started the transactions of depositing money at very low rate of interest and then banks sell this money to the person who needs money immediately at high rate of interest. Slowly, these banks developed  both capital and money markets. Now, other professional companies and organizations have started finance business. If we take the example of Dubai financial market, it has traded shares more than $380 bn in last year.

Explanation of Finance

Suppose a businessman starts his business with his own capital of $ 100000. He chooses business of trading in commodity market. Now for opening the shop and purchasing the furniture, he uses his own money. This will be his fixed capital because with this money he is purchasing fixed assets. Use of fund for purchasing of fixed assets is finance. We can say businessman has financed his fixed assets with his own fixed capital. Suppose he used 70% of his total capital. Now he has balance of 30% of total capital. He purchases goods and keeps some cash in his pocket. After this, these goods and cash in hand are nothing but these will make his working capital. Again, we can say that he has financed his current assets with his own working capital. Now think a large company. That company’s main source of money is share capital and debt. When company needs money for purchasing fixed assets or current assets or paying old debt, this share capital and debt are converted into finance. We often say that XYZ Company has financed $ 50000 new debt for paying $ 40000 old debt.


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Accounting Education: Meaning of Finance
Meaning of Finance
Accounting Education
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