What Is Finance?

Eye of Benjamin Franklin on currency
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At its most fundamental level, finance is the business discipline concerned with managing money efficiently. It often is rightly categorized as a branch of applied economics. Accordingly, people who are well-versed in the principles of economics typically grasp financial concepts quite readily, if not intuitively. Some of the most essential topics in finance include:

  • Investing

In the application of financial principles and methods, there tend to be specialized considerations based on the type of entity in question. As a result, finance often is described as comprising four main categories:

Financial Services and Financial Management: 

Yet another distinction must be drawn between the financial services industry and the financial management function. Follow the link for details.

In short, the financial services industry plays these key roles:

  • Moving funds efficiently between savers and borrowers
  • Raising capital for businesses and governments
  • Offering investment advice
  • Managing investment accounts
  • Mitigating the risks of financial loss (the essence of insurance)

Meanwhile, the financial management function exists in various forms within businesses, nonprofits and government entities alike.

People in this line of work are responsible for the wise, legal, proper and efficient use of organizational funds. In the case of for-profit businesses, financial managers play a key role in finding and implementing strategies to increase profitability.

Financial Data: 

Finance is heavily dependent on the collection, maintenance and analysis of data on money flows, assets (what is owned) and liabilities (what is owed).

Accordingly, many conventions have been established regarding financial record keeping and reporting, and the best organizations are constantly seeking improvements in their internal management reporting systems. Likewise, individuals and households that manage their own finances most effectively tend to be highly organized and precise in their own record keeping.

Measuring and Managing:

A very old adage in business is that you cannot manage what you cannot measure. Finance has a long history as being an especially data-driven field, and general managers in a wide variety of enterprises typically look to their financial organizations to supply and to interpret the data that is so essential to managing an enterprise intelligently.

Accounting and the Language of Business: 

Accounting long has been described as the language of business. In fact, a classic textbook in the field had precisely that as its title. Established accounting principles guide financial record keeping and reporting. As a result, having at least a passing familiarity with basic accounting concepts is highly beneficial, if not essential, for most financial professionals.

Public accounting firms, meanwhile, are entrusted with verifying the accuracy of financial reports upon which the investing public, money managers, securities analysts and financial advisors (among many others) rely.

Many of them also offer management consulting services that include giving advice on financial management methods and techniques.

Finance as an Academic Discipline: 

Courses in finance are core offerings of every school of business, at both the undergraduate and graduate levels. Moreover, at many business schools, finance long has been both the most popular major and finance courses tend to be heavily subscribed with students pursuing other majors. This is reflective of the proven utility of financial knowledge in the job market.

An interesting historical footnote regards the world's first collegiate school of business, The Wharton School of the University of Pennsylvania. At its founding in 1881, its full name was The Wharton School of Finance and Economy, changed to The Wharton School of Finance and Commerce in 1902.

Since 1972 it has simply been The Wharton School. Nonetheless, many people continue to call it The Wharton School of Finance, reflecting what has remained its most popular and notable course of study. 

More significantly, this history indicates that the importance of finance as a discipline goes back to the very start of formal business education. Also note the implied affinity between finance and economics as courses of study, in the school's first name.

Interestingly, while graduates of Wharton's MBA program get degrees in majors such as finance, accounting, marketing or management (among many others), all undergraduates get a BS in economics, despite most of their coursework being in true business fields such as finance, accounting, marketing and management, rather than in the theoretical economics as taught in liberal arts colleges. Wharton explains this by saying that these business-related fields fundamentally involve practical applications of economic theory.

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