What are finances?

Daily we heard people talking about finances everywhere. If you turn on the news you will see how they speak about international finances. If you go out to a cafe, you will probably hear people talking about their finances and how they are going. Banks offer financial products, looking to help people in their personal and professional projects.

However, despite being a really popular term, if you ask a random person, they will probably won’t be able to tell you what finances are, let alone how they work. If think this is your case, don’t worry, we are here to help you out. We will talk about the importance of finances and how you can manage your resources effectively. What are finances anyway?

What are finances?

The branch of economics that evaluates the use of resources by individuals or organizations is known as finances. It is a discipline that is based on techniques for the proper management of resources, decision making and the accounting recording of the economic operations of financial agents.

The etymology of this word goes back to the Latin term finis, which means “final”. The term “debt” was used to refer to the payment of a debt. If you think about it, modern finance is based on commercial exchanges between individuals and entities.

The value of finance

The importance of finance lies in the fact that it enables individuals, companies and even governments to properly manage their resources. This exercise allows financial agents to make informed and responsible decisions, to estimate risks in their investments and to develop financial strategies to increase these resources.

If you want to buy a house, you can’t just go to a real estate agency and sign a deed. Instead, you must first figure out your numbers and whether you can afford a mortgage. You should also consider rising interest rates and what would happen if you lose your job. You can use this information to make good decisions and invest resources wisely.

The same principle is applied at different scales, from personal level, to businesses and organizations, big and small, and even countries. The goal is always the same: manage your money effectively and make it grow. What are finances? 

What is the purpose of finances?

The main purpose of finance is to examine and maintain control of the economic movements of an individual or group in order to meet their needs, fulfill their duties and make the most of their resources. Because of this, finances are so important.

Individuals and companies can invest, spend and buy when their finances are well managed. However, financial managers do not perform these operations. The sole responsibility of finance is to determine whether the transaction is appropriate for economic well-being, whether it carries risks, or whether they are sound decisions.

As you can see, this discipline is fundamental to many of our daily and, especially, business activities.

Types of finances

As we have seen so far, proper control of resources is essential to maintaining a healthy financial life. But not all individuals and organizations should manage their finances in the same way. To make good financial decisions, it is important to understand the different types of finances to know how we can proceed in any different situation. To understand the different types, let’s see them in detail.

• Personal finances

Personal finances is the one we are most familiar with. As you can see, their focus is on managing the financial movements of specific individuals and optimizing the use of resources.

Our daily financial activities include choosing a restaurant for lunch based on our available resources, tracking weekly expenses, or purchasing a product on installments. Unfortunately, in many cases we do not monitor our finances effectively, which explains why up to 70% of people lack long-term financial plans.

Although in some cases they may rely on private professionals or agents of banking institutions for monitoring and management, most people are in charge of their own finances which can yield good results, or bad results if proper care is not exercised.

• Business and corporate finances

Another type of private finance is corporate finances. They respond to the interests of the organizations or collectives of people that make up a company, not to the needs of specific individuals. The objective in this case is to make good use of resources to make the company grow.

Business actions that depend on a prior financial study include investments, hiring personnel, launching business projects and applying for loans. Only then can companies make good decisions, invest their money in the right place and expect to make a profit. Considering that two out of three companies close due to poor financial management, this is extremely important.

Companies often entrust such decisions to expert accountants and financial agents who are part of the company’s management team. These professionals are responsible for enforcing a company’s responsibilities, assessing the state of its operations and being alert to the risks of its business movements.

• Public finances

Public finance is, on the other hand, the counterpart of private finance. This type of finance aims to optimize the use of a state’s public resources to improve general welfare. The main characteristic of this type of finance is that they are public. This means that the management of resources should be under the supervision of the people and its ultimate goal is the development of the society of a city or country.

The government can obtain debts, invest in infrastructure and distribute resources in its territory through the use of public finance.

Because of the importance of this type of finance, governments often have areas dedicated to managing the country’s wealth. The responsibilities of collecting taxes, allocating budgets to other departments and making decisions on public investment fall to these units.

• International finances

Whether it is because trade channels are established between countries or because a state invests in private industry, international finance can be both public and private. Whatever the case, the objective is to assess the relevance of economic transactions with other global organizations.

This type of finance is macroscopic and requires a thorough evaluation of all those involved in a borrowing, purchase, acquisition or investment decision. Because of this, there are important institutions, such as the Stock Exchange, that are able to assess the dangers and predict the success of investments on a global level.

It is common for accounting teams to rely on personnel trained in international companies for these types of financial exercises.

• Social finances

Finally, social finance is a little-known type. They are distinguished by a goal which is making a positive impact on society rather than being profitable or making money. Social finance has gained relevance among companies because in this case it is common to have an altruistic purpose.

Although it is not about making money, the objective of this type of finance is to make resources work to increase the benefits of an expense. For example, this occurs when a company decides to donate houses to low-income people but performs a financial evaluation to find out how it can reduce costs to provide a home to a greater number of people.

What is the definition of accounting?

Accounting is a branch of economics that is responsible for collecting financial information from companies inside and outside. It allows us to be in control and make the best decisions.

Differences between accounting and finance

Accounting is responsible for collecting economic data from both inside and outside the company. This is done to analyze and understand how the company operates and to improve the near future of the company.

In this way, the company’s finances can be improved, including decisions about what investments can be made and how they will be financed. Most small companies have a single employee who is in charge of accounting and finance. On the other hand, in a larger organization, the accounting clerk usually reports to the CFO in a hierarchical manner.

Summary: what are finances?

The importance of finance can’t be taken for granted, since the fundamental principle of all economics is that the resources available in the world are finite while the needs to be covered with them are infinite.

Finance allows individuals, groups and governments to act in the best possible way to obtain the necessary resources for their economic growth and that of the country. A business can be ruined due to bad investment, administrative disorder and bad decisions. Therefore, resource management is essential to achieve the success we all desire. The purpose of establishing a company is to make a profit and maintain its operation for many years. However, it is essential that the processes related to this field are constantly optimized, especially with the help of technologies that make them more efficient.

The importance of finances can’t be taken for granted. It can make or break the life of a person, putting them into a stressful situation when they can’t make ends meet. For companies and corporations this is important as well, a business that is not making money it is destined to close sooner or later.

Finances can be intimidating, but remember, you’re not alone on this journey. Resources abound, experts are ready to guide you and success stories encourage you. Take comfort in this – financial literacy is at your fingertips to answer that question: what are finances?. Go ahead, make informed choices, build a future to be proud of and remember, true wealth lies not just in numbers, but in the freedom and security they create.