Finance is one of the most important functional areas of business and within business firms. It joins other functional areas like marketing, operations technology, and management as key areas of business. Business owners and business managers have to have at least a basic understanding of finance even if they outsource certain areas of their financial operations. The goal of this website is to provide that sort of understanding to its readers. The goal of this article is to help you understand the three areas of finance and their relationship to your company.
There are three major areas of finance:
Corporate or Business Finance
Financial Markets and Institutions
Corporate or business finance is the area of finance that incorporates the actions of the company when it makes decisions about the financing decisions of the firm and the investing decisions of the firm. When a business firm invests in a project, such as buying inventory, that firm has to figure out a way to pay for that inventory. Paying for the inventory, in terms of finance, is making a financing decision for the firm. For each investment decision by a business firm, there has to be a financing decision. In other words, every time a business owner buys something, they have to figure out how to pay for it.
Other areas of corporate finance within a business firm are budgeting, managing working capital, financial analysis, financial statement development, and more.
Many students who study finance in college study corporate finance with the job goal of working in a major corporation when they graduate. In order to get a leg up on the competition, some students are interested in landing an internship in a major company in which they are interested.
Another area of finance is investments. Within a business, particularly a large business, the firm invests in assets ranging from short-term securities that are marketable securities to long-term securities like stocks and bonds. The business invests for the same reason individuals invest - to earn a return.
Business firms invest in both financial assets such as stocks of other firms and in physical assets such as buying a new building or new equipment.
Financial markets and financial institutions are the third area of finance. Financial markets are the stock and bond markets, the primary and second markets, and the money and capital markets, to only name a few ways that financial markets are classified.
Financial markets, such as the stock market, help facilitate the transfer of funds between savers of funds and users of funds. Savers are usually households and users are generally businesses and the government. In the case of the stock market, that particular financial market provides a seamless exchange of ownership of a company between one person or business and another.
The financial institutions work hand in hand with the financial markets regarding financial transactions. Financial institutions are actually financial intermediaries that help make transfers of funds between businesses and savers. For example, an individual might deposit money into a savings account. Then, the financial institution would take that money and loan it out to a business.
These three areas of finance are taught in colleges and universities and are typically the areas in which finance graduates find jobs. As for businesses, business professionals work in each of these areas for the good of the business firm. The larger the business, the more activity there will be in the investments and financial markets areas,