What is the definition of finance?

Finance inside companies

Finance inside companies includes three activities. Each activity is determined by a question:

• What things do the company needs to buy?
• Where to get the money to buy those things?
• How to manage them efficiently once the company bought them?

What things do the company needs to buy?

This question is to define the requirements to achieve the company's goals. The requirements can be long-term or short-term.

In a more simple explanation, the company needs to define what big things and small things they need to buy.

• Big things (long-term): buy a new building, machines, etc.
• Small things (short-term): buy new products for inventory, hire data scientists for research, expand marketing team, etc.

Of course, all of those things are neither big nor small. It's just a way of explanation.

Where to get the money to buy those things?

The company can get the money from different sources such as:

• Shareholders, investors
• Borrow from the bank
• Or get the money from company internal profit

The board of directors needs to decide where to get the money. This is usually what people implicitly understand when they talk about finance.

How to manage them efficiently?

This is the problem of management. The company needs to schedule and spend company resources like machines or staff to manage, control, process, use them efficiently.

Finance outside companies

Three main entities are swimming around in the ocean of economy:

• Entrepreneurs: creators who have ideas/objectives but got no money
• Investors: individuals/companies who saved money and want to lend/invest it
• Facilitators: institutions who match entrepreneurs and investors

Entrepreneurs

About the entrepreneurs who create and operate the companies, we have already talked about the financial issues inside a company above.

Investors

Investors look for investment opportunities. They need to answer some questions:

• Under what conditions/circumstances
• And with what contracts should they provide money to entrepreneurs?
• Should they lend/invest the money?
• How to form the portfolio of investments? What things should they invest in to not put all eggs in one basket?

Investors balance available opportunities and provide money that results in the best return.

Facilitators

There are different types of facilitators:

• Banks
• Investment banks
• Mutual funds
• Private equity funds
• Insurance companies

Conclusion

Finance gives us tools to look at three main entities which are swimming around in the ocean of economy, to see how they work and interact with each other.

Finance is defining what to purchase, how to get the money to purchase, and how to manage those purchases efficiently.