Finance – What is it?

Author: Prof. Jayapandian, Adjunct Professor, SMOT School of Business, Chennai

                                    

In our mundane life, one often comes across terms such as personal finance, corporate finance and public finance being used by different people at different times in different places with different connotations.  Indians talk about it, so also the foreigners. Masters talk about it, so also the servants. Men talk about it, so also women. They were talking about it in the past, are talking about it now and would be talking about it in future. It is talked about at break fast, lunch or dinner, at parties, at picnics, at meetings, at places of learning, at places of business, at places of entertainment, at places of worship and at any gathering where humans meet for any purpose. When two or more people join for an occasion, whether personal, social, national, international, economical or political reference is invariably made to finance and financial problems. Some talk about it as elixir for all ailments, while others, mostly those who have failed to get hold of it, talk about it as the cause of all ills. What is this strange creature that seems to be omniscient, omnipotent and omnipresent? Is it the magic wand that can convert water into wine, pebbles into gems, molehills into mountains and vice versa? Or is it a mirage that eludes as one approach it? The answer to these questions is not that simple.

Finance is the lifeblood of all economic endeavours. Although every one feels the importance of finance, in one way or the other, no one has so far clearly understood what finance is. Its meaning is taken for granted. Economists, who, while attempting to define finance, have made reference to the functions of finance rather than what it is. Paul G.Hasings has defined finance as “the management of the monitory affairs of the company. It includes determining what has to be paid for and when, raising the money on the best terms available and devoting the available funds to the best uses.” To Kenneth Medley and Ronald Burns, finance is “the process of organizing the flow of funds so that a business can carry on its objectives in the most efficient manner and meet its obligations as they fall due”. George Christy and Peter Roden observe that “finance is the study of money- its nature, behaviour, regulation and problems”. Howard and Upton feel that finance is “an administrative area or a set of administrative functions in an organization which have to do with the management of the flow of cash so that the organization will have the means to carry out its objectives as satisfactorily as possible”. According to F.W.Paish, finance is the position of money at the time it is wanted. In the words of John J. Hampton, the term finance can be defined as the management of the flows of money through an organization, whether it will be a corporation, school, bank or government agency. Even Encyclopedia Britannica has defined finance as “the art of providing the means of payment”.

It could be seen from the above definitions that finance has been associated with money, its functions and its management. These are like the blind men’s description of an elephant. The authors have described the attributes of finance. Still, the question what finance is remains largely unanswered. To seek an acceptable answer to this question, we have to take a look at the usage pattern of income. Income is the monetary measure of the reward for the sacrifice made by the factors of production in the process of creating wealth. A part of the income is consumed by the factor owners in the process of earning the income. We call it cost. Another part consumed by them in satisfying the different strata of needs. These needs are for subsistence, comfort and luxury. Maslow had categorized human needs into four strata, namely basic needs, social needs, egoistic needs and self-accentuation needs. After the satisfaction of one stratum of needs the underlying strata would emerge. After meeting basic needs, social needs would arise, followed by egoistic needs and self-accentuation needs. The means of satisfying the needs is a part of consumption. That part of the income, which remains after meeting the consumption requirements, is savings.

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As consumption gives satisfaction, it should only be logical that income earners should endeavour to consume their entire income to maximize their immediate satisfaction. Why, then, people should save and postpone their current levels of satisfaction? What is their anticipation in deferring current consumption in favour of a future consumption? People do save for meeting unexpected expenditures in future. But that is only a part of the story. The major reason for saving is the expectation of higher degree of satisfaction in future consumption than what the present consumption would give. Savings are thus deferment of current consumption with expectation of higher satisfaction in future.

Savings of people need not necessarily be in the form of money alone, although bulk of savings is in that form. Savings could be in the forms of any of the five resources, commonly   referred to as 5 Ms- money, materials, machines, methods and men. We know that motivating factors behind savings of individuals or groups are security and higher satisfaction from future consumptions. People save for their rainy days and for meeting social and personal obligations in future. Education of their children, their marriage, meeting unexpected expenses such as health care is some of the inducing factors for saving. These factors prompt them to set aside a part of their savings in liquid assets for meeting the requirements as and when they arise. Lord Maynard Keynes, a renowned economist of the modern times, has classified the need for liquidity preference into three motives. These are transaction motive, precautionary motive and speculative motive. The surplus of savings, which remains after providing for liquidity needs, is finance. The surplus, if retained with the savers would not grow and give higher satisfaction. It has to be gainfully purveyed into investment avenues. We could therefore refine the definition and say that Finance is that part of surplus savings which is available for investment. The saver himself could use the finance to enhance his future levels of satisfaction or could allow others to use it for a consideration. If the finance is used by the savers themselves, it is equity and when they allow others to use it is debt. Finance thus could take the forms of equity and or debt. Finance mobilized from a number of sources is fund.

When finance is managed by individuals themselves, it is personal financial management. When companies manage their funds it is corporate financial management. Countries too manage their finance when it takes the form of public financial management.