Text 7. Finance

The field of finance is broad and dynamic. It directly affects the lives of every person and every organization, financial and non-finan­cial, private or public, large or small, profit-seeking or non-profit.

One of the primary considerations when going into business is money. Without sufficient funds a company cannot begin operations. The money needed to start and continue operating a business is known as capital. A new business needs capital not only for ongoing expenses but also for purchasing necessary assets. These assets — inventories, equipment, buildings, and property — represent an investment of cap­ital in the new business.

Finance can be defined as the art and science of managing money. All individuals and organizations earn or raise money and spend or invest money. Finance is concerned with the process, institutions, markets, the instruments involved in the transfer of money among and between individuals, businesses and governments.

Finance can be defined at both the aggregate or macro level and the firm or micro level. Finance at the macro level is the study of financial institutions and financial markets and how they operate within the financial systems. Finance at the micro level is the study of finan­cial planning, asset management, and fund raising for business firms and financial institutions.

Finance has its origin in the fields of economics and accounting. Economists use a supply-and-demand framework to explain how the pric­es and quantities of goods and services are set in a free-enterprise or market-driven economic system.

Accountants provide the record-keeping mechanism for showing ownership of the financial instruments used to facilitate the flow of finan­cial funds between savers and borrowers. Accountants also record revenues, expenses, and profitability of organizations involved in the pro­duction and exchange of goods and services.

Large-scale production and a high degree of specialization of labour can function only if there exists an effective means of paying for produc­tive resources and final products. Business can obtain the money it needs to buy capital goods such as machinery and equipment only if the institutions and markets have been established for making savings avail­able for such investment. Similarly, the federal government and other governmental units can carry out their wide range of activities only if efficient means exist for raising money, for making payments, and for borrowing.

Financial markets, institutions or intermediaries, and business fi­nancial management are basic elements of well-developed financial sys­tems. Financial markets provide the mechanism for carrying out the allo­cation of financial resources or funds from savers to borrowers. Financial institutions such as banks and insurance companies, along with other financial intermediaries, facilitate the flow of funds from savers to bor­rowers. Business financial management involves the efficient use of fi­nancial capital in the production and exchange of goods and services. The goal of the financial manager in a profit-seeking organisation is to maximize the owners' wealth through effective financial planning and analysis, asset management, and of financial capital. The same financial management functions must be performed by financial managers in not-for-profit organizations, such as governmental units or hospitals, in order to provide the desired level of service at acceptable costs.

EXERCISES

Exercise 1. Answer the questions.

1. What is finance?

2. Where does finance have its origin?

3. What are the basic elements of financial system?

Exercise 2. Ask ten questions on the text.

Exercise 3. Insert the correct word from the list.

Goods, elements, accountants, not-for-profit, finance, capital, goal, art, investment, field, institutions, business, funds.

1. The …… of finance affects the lives of every person.

2. People go into ……to earn money.

3. Without sufficient …… nobody can start business.

4. The money needed to start a business is called …….

5. We can call inventories, equipment, buildings, and property an ……of cap­ital in the business.

6. We can call finance the …… and science of managing money.

7. …… has its origin in the fields of economics and accounting.

8. …… record revenues, expenses, and profitability.

9. Financial markets, institutions or intermediaries, and business fi­nancial management are basic …… of well-developed financial sys­tems.

10. Financial …… such as banks and insurance companies facilitate the flow of funds from savers to bor­rowers.

11. Business financial management involves the efficient use of fi­nancial capital in the production and exchange of …… and services.

12. The …… of the financial manager is to maximize the owners' wealth through effective financial planning.

13. The financial manager in a …… organization can use the effective financial planning and analysis in order to provide the desired level of service at acceptable costs.

Exercise 4.. Match the definitions with the words given below.

Fee, executive, insure, skill, capacity, profile, applicant, charisma, ensure, guideline, superior.

1. Ability to do something well.

2. Short biographical or character sketch.

3. Payment made for professional advice or services.

4. Person or body with managerial or administrative responsibility.

5. Make certain.

6. Secure compensation in the event of loss or damage by advance regu­lar payments.

7. In a higher position; of a higher rank.

8. Principle directing action.

9. Power to certain, receive, experience, or produce.

10. The ability to attract, influence, and inspire people by your personal qualities.

11. Someone who formally asks to be given something, such as a job or a place at a college or university.

Exercise 5. Read the text once again and explain, in your own words, the meaning of the following terms:

1. profit-seeking organization, non-profit organization, financial organization, non-finan­cial organization, private organization, public organization.

2. money, funds, capital, investment, finance, economics, accounting.

3. managing money, to earn money, to raise money, to spend money, to invest money.

4. finance at the macro level, finance at the micro level.

Exercise 6. Match the word with its definition.

Finance house (company), financial institution, financier, finance, financial year, financial instrument, financial, financial futures, financial capital,

financial intermediary, financial accountant.

1. capital involved in a project loan of money for a particular purpose.

2. organization providing finance for hire-purchase agreements.

3. accountant whose primary responsibility is the management of the finances of an organization and the preparation of its annual accounts. Financial adviser.

4. the liquid as opposed to physical assets of a company.

5. futures contract in currencies or interest rates.

6. an organization that collects funds from individuals, other organizations or government agencies and invest these funds or lends them on to borrowers.

7. formal financial document.

8. bank, building, society, finance house, insurance, company, investment trust etc. that holds funds borrowed from lenders in order to make loans to borrowers; sometimes you can call so an organization that sells insurance but is not directly employed by an insurance company.

9. any year connected with finance, e.g. a company's accounting period or a year for which budgets are made up; it is a specific period relating to corporation tax.

10. ratios between particular groups of the assets or liabilities of an enterprise and corresponding totals of assets or liabilities; or between assets and liabilities and flows like turnover or revenue.

11. person who uses his one money to finance a business deal or venture or who makes arrangements for such a deal.