What Is Finance?

There are various ways in which word "Finance" is used, like in economics it is considered as the management of money while generally it is attributed as an activity for providing funds. Finance deals with the concepts of money, time and risk and also their interrelationship. For example, for starting a new business, finances can be raised by two means; debt or equity. In small and large companies there are different functional departments and one common department is the finance department. This department manages the funds available to the company. In this way finance deals with the financial assets and the money transactions.

In a strictly business sense, the term 'finance' is a very broad categorization that is used to study and understand the way different individuals, institution, organizations, and businesses raise, allocate, and utilize monetary resources over a specific time period.

From this definition, it is understood that the term finance contains within it the study of monetary units and other related assets, the management and control of these monetary units and assets, and profiling and management of risks associated with the use of these assets.

Another definition of finance states it as the different techniques that individuals and organizations utilize to manage their monetary affairs, with special reference to the difference between income and expenditure, and taking into account the risks associated with their investments.

The term finance is borrowed for use nowadays across a range of business activities; hence, you find different kinds of finance nowadays. The different kinds of finance nowadays include business finance, personal finance, finance for shared services, public finance, etc.

Finance is a blood of business. It flows in mostly from sale of goods and services. It flows out for meeting various types of expenditures. These are activating elements in any business which may be an industrial or commercial undertaking in finance.  Business finance is defined as business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise.  Business finance is mainly developed around three major objectives. First of all its objective can be to obtain an adequate supply of capital for the needs of the business. Second is to conserve and increase the capital through better management.

Third is to make profit from the use of funds which is an overall objective of a business enterprise. Before the advent of the industrial revolution finance was not of much importance. The methods of production were very simple. For example the artisan used to work in the open or in a small hut. He had simple tools mostly made by himself. labor at that time was more important than capital and finance did not pose any problem. Since the beginning of the industrial revolution there has been a remarkable growth in production.

Finance is the life blood of business. If flows in mostly from sale of goods and services. It flows out for meeting various types of expenditure. The activating element in any business which may be on industrial or commercial undertaking is the finance.

Business finance has been defined by CA Dayton as;"Those activities which have to do with the provision and management of funds for the satisfactory conduct of a business." According to BO Wheeler:"Business finance is defined as that business activity which is concerned with the acquisition and conservation of capital funds in meting the financial needs and overall objectives of business enterprise.'


Before the advent of Industrial Revolution, was not of much importance. The methods of production were very simple. For example: the artisan used to work in an open or in small hut. He had simple tools mostly made by himself. Labour at that time was more important than capital and finance did not pose any problem. Production in those days was therefore labour intensive.

Since the beginning of Industrial Revolution, there has been remarkable growth in production. The output per worker in every field (which may be farming, manufacturing, mining, etc.) has increased many ties. The methods of production are roundabout and complex. The time lag between production and consumption is long. It has, therefore, increased the importance of finance.

Two kinds of financial or capital requirements of a business. First, there is the capital which is required by a business to own durable assets such as building, land, machinery, etc. this capital is called fixed capital. Secondly, capital is required for investment in short term assets such a purchase of raw material, payment of salaries, wages rents, etc. this capital is termed as current or working capital.

Fixed capital or long term finance:
Fixed capital as the name signifies is the fund which is used for meeting the permanent or long term needs of business. Before a business is carried out, the long term needs of a business are land, building and equipment and other sundry expenses, such as fees, commission, insurance, furniture's, vehicles etc. as regard the amount of fixed capital requirements for a business, it varies with the nature of business, size of business unit and techniques of production.

A heavy industry like, railway, iron steel mills, electric supply company, water supply, etc, requires heavy investment  in fixed assets. Whereas, a trading concern requires less capital for fixed assets. The fixed capital requirements of a business also depend upon its size and type of business: sole trade ship, partnership or a company. The larger the size of the business, the heavier is the investment in fixed asset and vice versa.

Finance means procurement of funds and their effective utilisation in business is called finance

"To pay some thing with credit or productive money is called finance".