The subject of finance is not only discussed, but is part of all disciplines and all facets of socio-economic activities of humans. Finance has evolved to assume a very important position in the decisional process of households, businesses, governments and other non-business organisations. No financial decision can be efficiently and effectively implemented without financial management.
In this introductory Unit, we shall attempt to answer the following questions:
- How is finance related to other disciplines?
- How do we explain financial management structure
After studying this unit, you should be able to:
- enumerate the roles of finance in other disciplines;
- explain the concept of financial management structure
4.0 MAIN CONTENT
3.1 Definition of Finance
The field of finance is broad and dynamic. It directly affects the lives of every person and every organisation. There are many areas for study and large number of career opportunities available in the field of finance.
Finance has been defined in different ways. Each definition however reflects the perception of finance relative to its role and scope. However, it may not be possible to give a precise and very comprehensive definition to such a wide, complex and important subject which is of interest to everybody.
Webster’s third International Dictionary, for example, defines finance as “the system that includes the circulation of money, the granting of credit, the making of investments and the provision of banking facilities.” This definition gives an indication to the fact that finance is a system by itself and thus a broad field of activities at the centre of economic operations or social activities with economic implication.
The Shorter Oxford English Dictionary defines finance as “to lend, to settle debt, pay ransom, furnish, and procure, etc. — the management of money — the science of levying revenue in a state, corporation — the provision of capital.” This definition looks at finance as a science which applies to both the public and private sectors.
The Encyclopedia of Banking and Finance has however given a broader definition of finance. Its definition is classified into three categories as follows:
(iv) to raise money necessary to organise, re-organise or expand an enterprise whether by sales of stocks, bonds, notes, etc.
(v) a general term to denote the theory and practice of monetary credit, banking and promotion of operations in the most comprehensive sense. It includes money, credit, banking,
, investment, speculation, foreign exchange, promotion, underwriting brokerage trusts, etc.
Christy and Roden (1973) tried to narrow the definition of finance by defining it as the study of the nature and use of the means of payment. This definition has tried to avoid the mention of money as the centrepiece of finance. This is because finance can equally take place without money as its main feature.
Lastly, Gitman (2000) defines finance as the art and science of managing money. In contrast with Christy and Roden (1973), money is mentioned here. Virtually all individuals and organisations earn or raise money and spend or invest money. Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among and between individuals, businesses and governments.
3.2Relationship between Finance and Other Disciplines
Finance is related to many other disciplines in that it can act as a “tool” for decision making in disciplines like administration, management, educational administration, science and technology, law, economics, etc.
This is due to the fact that finance has evolved from a purely descriptive course to a normative one. That is, finance focuses on statements which enunciate rules that help to attain specified goals. Thus, each discipline makes use of the finance rules.
Finance is a special functional area of business administration.
3.2 CONCEPT OF FINANCIAL MANAGEMENT
The activities of organisations whether business or non-business, have finance as their centrepiece. The role of finance however reflects the objectives of an organisation. Therefore, financial management is a reflection of the nature and objectives of the organisation. Financial management is thus a very important aspect of finance although it is not easy to separate financial management from the rest of other finance activities (Myres, 1976). However, an attempt to limit the areas of financial management can be made if one agrees with the fact that financial management itself requires the simultaneous consideration of three key financial decisions (Christy and Roden, 1973), namely:
- anticipation of financial needs of the organisation;
- acquisition of financial resources for the organisation; and
- allocation of financial resources within the organisation.
These three key financial decisions provide the basis for periodic financial analysis and interpretation of historical financial practices. The control measures which may be contemplated by management or re-orientation of management strategies in turn depend on the analysis and interpretation of historical financial data.
Financial management is, therefore, a dynamic and evolving art of making daily financial decisions and control in households, businesses, non-business organisations and government. It is a managerial activity which is concerned with planning, providing and controlling the financial resources at the disposal of an organisation.