The first question is what is finance?
What is finance?
Finance can be defined as the art and science of money management.
Art, like dance, singing and painting, is based on emotion.
But science is more about facts and figures, you have to experiment, come up with theories
Explain what you believe. So, finance is basically a blend of the art and science of money management.
The key word here is to manage money. This is what we call financial management.
Financial management is a very important aspect for companies. it is because
Financial management is about the maintenance and creation of economic value or wealth.
What is wealth? Let us take an example.
Let’s say Company A has a market cap of $100 billion.
Company A’s investors together invested $30 billion.
So taking $100 billion, minus $30 billion, you get $70 billion.
We call this amount of money created for investors. Shareholders only paid $30
billion to buy back shares, but the company created an additional $70 billion for shareholders. Absolutely,
This will be a good sign for investors, because the value of the company has increased.
personal finance vs corporate finance
For finance, it has two broad subjects. personal finance, and corporate finance.
Personal finance is about managing your own money.
It is the process of planning and managing your personal financial resources to achieve
Your short-term and long-term financial goals. These goals may include, buying
A house or a car, saving money for your child’s education, saving for retirement, etc.
Personal finance includes budgeting, saving for emergencies and future expenses.
Paying off debt, and investing for your future. It’s about making smart choices with your money,
So that you can live the life you want today and have mental peace for tomorrow.
It will answer questions like, how much you spend, how much you save,
And how you invest your savings. In short, it is about personal financial planning.
But for corporate finance, it is more on how to manage the company’s money.
Corporate financial management is the process of making strategic decisions about how to conduct
Allocating a company’s financial resources to achieve its goals and objectives.
It’s like a game of chess, where you make each move with your financial resources, such as cash.
Investing and borrowing is a strategic decision that can lead to victory or defeat.
So, it is about making smart decisions with the firm’s money,
To reach the long-term goals of the firm and remain competitive in the market.
It will answer questions, such as how companies raise money from investors,
How companies invest money to make profits, whether profits are to be reinvested in the business,
Or distribute them back to investors.
accounting vs finance
Well, another question is whether finance is the same as accounting. The answer may be, yes.
No more. Yes, because some functions of accounting and finance are closely related and overlapping.
No, because there are some distinct differences in terms of their focus, responsibilities and goals.
People associated with accounting are controllers, while people associated with finance are basically treasurers.
People involved in finance always focus on how to invest and earn more money for the company. They
Just like the accelerator of a car. To drive the car you have to press the accelerator.
The harder you press, the faster the car can go. But at the same time, you have to have breaks too.
This is the function of accounting, which we call controlling.
When people in finance are moving too fast, investing too much money in too many projects,
The accounting people will brake, slow them down for safety purpose. Keep one thing in mind,
Only in large corporations will we have two separate accounting and finance departments. but in small
In firms, typically the financial manager will perform both accounting and finance functions.
Another aspect, accounting focuses on recording and reporting financial transactions,
Whereas finance focuses on the management and allocation of financial resources.
Accounting involves preparing financial statements, such as
Balance sheet, income statement and cash flow statement. However, finance managers are using
Information prepared by the accounting department for making business decisions,
Such as investing in a new project, or repaying the company’s outstanding loan.
On the other hand, accounting focuses on the past and present, while finance focuses on
Future. Accounting deals with historical financial data, and provides information about
What has happened in the past.
