Finance Definition

What is Finance?

Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting.

The financial system includes the circulation of money, the management of investments, and the lending of funds. In businesses, the finance team is responsible for ensuring the company’s capital is adequate, that the appropriate investments are made, and that the company’s revenues and expenses are well managed.

This guide will unpack the question: What is finance?

What are the Types of Finance?

There are three main types of finance:

1. Personal
2. Corporate (Business)
3. Public (Government)

1. Personal Finance

From a personal perspective, finance is the management of one’s income, expenses, investments, and obligations. Individuals often work with a personal banker, investment advisor, accountant, mortgage broker, and other professionals to manage their financial situation.

Below are examples of the types of items people deal with on a personal financial level.

Examples:

• Bank accounts
• Credit cards
• Mortgages
• Lines of credit
• Employment income
• Personal spending and expenses
• Taxes
• Savings
• Investments (stocks, bonds, real estate, etc.)

2. Corporate Finance (Business)

From a business perspective, corporate finance is the management of a company’s funding, its sources of revenue, use of capital, and the management of its profit and loss (P&L) statement. The professionals at a business who are responsible for managing this area include accountants, financial analysts, managers, and executives, such as the Chief Financial Officer (CFO).

Examples:

• Debt
• Equity
• Cost of Capital
• Capital Structure
• Return on Investment (ROI)
• Assets
• Liabilities
• Balance Sheet
• Revenues
• Expenses
• Profit
• Income Statement
• Cash Flow
• Dividends
• Cash Flow Statement

3. Public Finance (Government)

From a government perspective, finance includes the management of a country’s national budget, the treasury department, the central bank, and other government agencies. It focuses on collecting tax revenue and spending that money on national services and programs such as roads, hospitals, and social security.

Examples:

• Income tax
• Sales tax
• Property tax
• Inflation
• Infrastructure spending (roads, hospitals, etc.)
• Social security and insurance
• Supply of money
• International trade
• Employment
• Gross national product (GNP)
• National debt
• National budget

Video Explanation of Finance

Watch this short video to quickly understand the main concepts covered in this guide. It’ll explain the definition of finance, provide examples of finance, and cover some of the common topics on finance.

Examples of Finance Activities

The easiest way to define finance is by providing examples of the activities it includes. There are many different career paths and jobs that perform a wide range of finance activities. Below is a list of the most common examples:

• Investing personal money in stocks, bonds, or guaranteed investment certificates (GICs)
• Borrowing money from institutional investors by issuing bonds on behalf of a public company
• Lending money to people by providing them with a mortgage to buy a house
• Using Excel spreadsheets to build a budget and financial model for a corporation
• Saving personal money in a high-interest savings account
• Developing a forecast for government spending and revenue collection

Finance Topics

There is a wide range of topics that people in the financial industry are concerned with. Below is a list of some of the most common topics you should expect to encounter in the industry.

• Interest rates and spreads
• Yield (coupon payments, dividends)
• Financial statements (balance sheet, income statement, cash flow statement)
• Cash flow (free cash flow, other types of cash flow)
• Profit (net income)
• Cost of capital (WACC)
• Rates of return (IRR, ROI, ROA)
• Dividends and return of capital
• Shareholders
• Creating value
• Risk and return
• Behavioral finance

Finance Careers

A definition of finance would not be complete without exploring the career options associated with the industry. Below are some of the most popular career paths:

• Commercial banking
• Personal banking (or private banking)
• Investment banking
• Wealth management
• Corporate finance
• Mortgages/lending
• Accounting
• Financial planning
• Treasury
• Audit
• Equity research
• Insurance

Excel Modeling Skills

Across the entire industry, one of the most important and highly sought-after skill sets is financial modeling and the ability to create an Excel model that evaluates a certain situation. The screenshot below shows an example from one of CFI’s Excel modeling courses.

Additional Finance Resources

To continue developing and preparing for a career in the field, these additional CFI materials will be helpful:

• Free Corporate Finance Fundamentals Course
• Types of Financial Models
• Interactive Career Map
• Compensation and Salary Guides
• The Analyst Trifecta® Guide

More Questions and Answers

CFI’s mission is to help anyone become a world-class financial analyst and has a wide range of resources to help you along the way. In order to become a great financial analyst, below are some additional questions and answers for you to explore further:

• What are the Types of Financial Models?
• What is Sensitivity Analysis?
• What is Bookkeeping?
• What are the Most Common Valuation Methods?
• See all wealth management resources