Finance is a broader term encompassing many things about the study, development, and management of financial resources. A lot of people consider themselves as “financial” when it comes to their finances. Finance is used to analyze how individuals and companies handle their money and where those funds are going. While not every individual or company is serious about finance, anyone who does business needs to have a good understanding on the matter. In fact, most businesses depend on some type of finance for day to day operations. Without proper management, businesses wouldn’t survive long.
The discipline of modern financial studies evolved from the advent of modern banking several centuries ago. During that time, there were few financial theories that made any solid sense. Over time however, with the advancements in technology, better methods of banking came about, along with better tools to use them with. Some of those tools include modern financial theories.
One of the most prevalent theories in the field of finance is behavioral theory. The primary goal of this theory is to explain why people make the financial decisions they do. By understanding what behaviors cause people to make financial decisions, a planner or manager can use those behaviors to improve the way they run their businesses. The main areas of behavioral finance research include finding out why people borrow money, how they make investments, and how they manage their personal finances.
Another part of modern economics that directly impacts finance includes cash flow. Cash flow is basically how much money is being pumped into an investment at any given time. It’s used as a means of describing how an investment is going to be worth the total money being invested in it, and what the expected returns will be. The analysis of cash flow, or the lack thereof, is closely studied by finance professionals.
Lastly, another branch of finance that is important to anyone wanting to understand how the world works financially is finance theory. Finance theory deals with the methods of creating wealth. It studies how money is made, where it goes and why. Some of the areas that are covered in finance theory include: asset pricing, savings, investment, optimal allocation, international trade, financial crisis, risk, central bank intervention, globalization, international capital markets, and inflation. Finance theory is extremely important to anyone interested in the world of finance, as it discusses the factors that cause and affect the economies of nations.
Finance theory can be applied to all aspects of the business world, including corporate finance, which is the area of investing for the benefit of the company. Corporate finance is an essential part of any company’s success, because it allows for the funding of large-scale purchases that can make a company more profitable. Finance also affects the government, because it helps decide which laws should be passed to protect the financial interests of all citizens. Understanding the various areas of finance and the policies that affect them is the key to making intelligent financial decisions in the face of uncertainty.