Finance Basics for Small Business Owners
Finance is a broad term encompassing concepts concerning the study, development, management, and allocation of financial resources. It is also used to refer to the profession that concerns itself with the study or practice of money, its values, risks, and opportunities. All aspects of the science of funds are included. Financial science refers to a number of academic disciplines including: accounting, economics, banking, credit, insurance, mortgage, and investment.
Accounting is the process of collecting information about transactions and managing them for purposes of making reports to investors, managers, and creditors. It includes the measurement, interpretation, reporting, and reporting of financial transactions. By contrast, economics describes the process of obtaining the allocation of resources in terms of optimal production or use. The branch of accounting normally deals with material, land, capital, and operating finances while business activity is concerned with corporate assets, corporate debts, and financial systems.
Finance is closely related to economics and business, because it studies both goods and services offered by firms and the impact of the owners’ equity on those goods and services. Finance is also called the science of enterprise. Equity theory and practice in banking are what draws the attention of most finance students. Equity theory is the traditional view that the value of a firm and its assets increases with the net worth of its liabilities. Finance also considers debt as an equity component and considers the effect of debt dilution on bank balance sheets. Banking, like other sectors of the economy, relies heavily on non-financial assets such as fixed capital and retained earnings.
The field of Finance has many faces. There are many areas of Finance that are nearly related to one another. These include money management, investment, savings and loan, and securities issuance. All of these areas have important applications and contribute to the overall objective of efficient and effective finance. Money management manages the resources of the firm and is related to financial management.
Proper financial management is necessary to prevent financial problems before they happen. Many forms of Finance are applied in everyday operations. The major areas of Finance are budgeting, investment, and financial reporting. All of these require discipline, detailed planning, accurate monitoring of expenses, and accurate timely reporting to the management and investors.
There are four main parts to the study of public finance. Public Finance Theory is the theoretical framework from which all other financial decisions are made. Public Finance Theories considers how various economic problems arise, how to solve them, and what role the government can play in solving the problem. Public Finance Theories also deals with how the distribution of wealth occurs, how various taxes are used, and the role that public agencies and institutions play in the process.
Private Finance The study of private finance is mostly concerned with investment programs. Unlike public finance, investment in a private firm is not primarily concerned with meeting the needs of the public. Rather, private investors seek profits from their investment. Examples of businesses with private funds are real estate, the stock market, bonds, mutual funds, and insurance.
International Finance This area of finance considers how foreign countries invest their money. Typically, international finance scholars will analyze the impact of foreign direct and indirect investment on the performance of the domestic money management systems of the United States. International Finance is a fast-growing field. Examples of places where international finance research is performed include: the international banking industry, policy development at the national level, international macroeconomics, financial services such as pensions and insurance, and the political economy of international trade.
Budgeting and Management Finance have three main areas of study: savings, spending, and budgeting. Savings is the effort to use available resources to replace current expenses. Spending is the opposite of savings. Budgeting and management deals primarily with the three factors of spending and budgeting.
Financial Theory The study of financial theory is one of the most important elements within the discipline of finance. It studies how financial activities affect the economy and how they could be altered to improve the system. The key elements of financial theory are: elasticity, demand, investment, and pricing. Elasticity refers to the tendency of prices to change without the effect of supply and demand. Demand is the overall demand for a product among all buyers. Investment refers to the efforts made by managers to increase the return on their investment.
Budgeting and financial management are among the most studied areas of study in the business and accounting world. Among other things, financial statements provide information regarding a company’s financial health, such as its assets, liabilities, revenues, and reserves. All businesses should be thoroughly examined for their financial health.