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Definition of Finance
The word finance is thrown around by the news media at an overwhelming pace. However, many people do not truly understand what the definition of finance is. Several folks around the water cooler may throw around the term finance loosely, again not truly understanding the proper definition. Most people know it has to do with money, but the understanding at times stops there. In summary, finance is the decision or planning of applying an individual’s or businesses income to invest in new projects or to deal with existing debt. In this article, we will focus on financing as it relates to business or corporate finance. However, there are several articles on RealFinance.info, if you are looking for more information on personal financial definitions. In the business world, the term finance is used to describe how the business will optimize its assets, loans, and income to build the wealth or future assets of the corporation. Typically, these are broken up into three categories: Capital Budgeting is the process of deciding which projects will be undertaken by the company, using the resources brought in by the business’ activities. In other words, after subtracting the cost of capital, the business will be left with a certain amount in which it can decide on given projects to undertake that will benefit the organization. Financing is the determination of resources and funds that are to be brought into the firm for upcoming projects. This can be done by taking on debt, through the form of loans from a banking institution. Bonds purchased by bondholders are also a source of financing to fund upcoming projects. Another source could be equity, which includes the sale of common and preferred stock. When the corporation is pursuing financing, it should plan to do so in a way that yields a return greater than the obligation it takes on by financing the project. Dividend Policy is the agreed upon amount of funds that will be distributed back to the equity investors. As we described above, this includes the preferred and common stock holders. The goal of this decision for a business is to return the amount it is unable to use for running the business or preparing itself for new investments. However, the dividend policy is typically viewed as a signal to investors regarding its economic strength. Clearly, a company with a relatively large dividend must be fiscally secure, according to investors. In summary, finance encompasses all the decisions necessary to secure economic stability and growth for the firm. Through the allocation of capital budgeting, financing, and dividend policy, a company can make decisions to secure the economic strength and growth for the company in a way that secures prosperity to the company into the future. |
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