What is Finance?
Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, and forecasting. There are three main types of finance: (1) personalPersonal FinancePersonal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and, (2) corporateCorporate Finance OverviewCorporate Finance involves the financial aspect of businesses wherein sources of funds are determined, existing assets invested, excess profits distributed. Corporate finance also includes the tools and analysis utilized to prioritize and distribute financial resources. The ultimate purpose of corporate finance is to, and (3) publicPublic FinancePublic finance is the management of a country's revenue, expenditures, and debt load thought various government and quasi-government institutions. Examples,/government. This guide will unpack the question: what is finance?
Finance Examples
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.
Finance examples:
- Investing personal money in stocksStockWhat is a stock? An individual who owns stock in a company is called a shareholder and is eligible to claim part of the company’s residual assets and earnings (should the company ever be dissolved). The terms "stock", "shares", and "equity" are used interchangeably., bonds, or guaranteed investment certificates (GICs)
- Borrowing money from institutional investors by issuing bonds on behalf of a public companyPrivate vs Public CompanyThe main difference between a private vs public company is that the shares of a public company are traded on a stock exchange, while a private company's shares are not. There are several more important differences to understand
- Lending money to people by providing them a mortgage to buy a house with
- Using ExcelExcel ResourcesWhat is finance? Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, forecasting spreadsheets to build a budget and financial modelWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model. A 3 statement model links income statement, balance sheet, and cash flow statement. More advanced types of financial models are built for valuation, plannnig, and for a corporation
- Saving personal money in a high-interest savings account
- Developing a forecastFinancial ForecastingFinancial forecasting is the processing or estimating or predicting how a business will perform in the future. The most common type of financial forecast is an income statement, however, in a complete financial model all three statements are foretasted. In this guide on how to build a financial forecast, we build the for government spending and revenue collection
Finance Topics
There is a wide range of topics 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.
Finance topics:
- Interest ratesInterest Rate CalculatorThis interest Rate Calculator will help you compute the effective interest rate based on the number of periods, type of interest rate (simple vs compound), and initial balance amount. Interest Rates are one of the vital concepts in finance and are a key element in most calculations. and spreads
- Yield (coupon payments, dividends)
- Financial statements (balance sheet, income statements, cash flow statement)
- Cash flowCash FlowCash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of Cash Flows and important uses for it in running a business (free cash flow, other types of cash flow)
- Profit (net income)
- Cost of capital (WACCWACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. The WACC formula is = (E/V x Re) + ((D/V x Rd) x (1-T)). This guide will provide an overview of what it is, why its used, how to calculate it, and also provides a downloadable WACC calculator)
- Rates of return (IRRInternal Rate of Return (IRR)The Internal Rate of Return (IRR) is the discount rate that sets the net present value of an investment equal to zero. This guide to calculating IRR will give several examples and who why it's used in capital budgeting, private equity and other areas of finance and investing. If IRR is greater than cost of capital,, ROIReturn on Investment (ROI)Return on Investment (ROI) is a performance measure used to evaluate the returns of an investment or to compare efficiency between different investments. ROI measures the return of an investment relative to the cost of the investment., ROAReturn on Assets & ROA FormulaReturn on assets (ROA), a form of return on investment, measures the profitability of a business in relation to its total assets. The ROA formula is used to indicate how well a company is performing by comparing the profit it's generating to the capital it's invested in assets. The higher the return, the more)
- DividendsDividendA dividend is the share of profits a shareholder receives, made on behalf of the corporation. When a company genearates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. Types include: cash, common, preferred, stock, property and return of capital
- Shareholders
- Creating valueEVA - Economic Value AddedEVA or Economic Value Added is a measure based on the Residual Income technique which measures the return generated over and above investors' required rate of return (hurdle rate). The metric serves as an indicator of the profitability of projects undertaken and its underlying premise consists of the idea that real
- Risk and return
- Behavioral financeBehavioral FinanceBehavioral finance is the study of the influence of psychology on the behavior of investors or financial practitioners and their effect on the markets.
Sources of Financial Information
To learn more about the industry, below are some of the most popular and helpful resources:
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 bankingCommercial Banking Career ProfileA Commercial Banking career path is providing clients with credit products, term loans, revolving lines of credit, syndicated facilities, cash management
- Personal banking (or private banking)
- Investment bankingInvestment Banking Career PathInvestment banking career guide - plan your IB career path. Learn about investment banking salaries, how to get hired, and what to do after a career in IB. The investment banking division (IBD) helps governments, corporations, and institutions raise capital and complete mergers and acquisitions (M&A). Analysts work 100
- Wealth management
- Corporate financeCorporate Finance OverviewCorporate Finance involves the financial aspect of businesses wherein sources of funds are determined, existing assets invested, excess profits distributed. Corporate finance also includes the tools and analysis utilized to prioritize and distribute financial resources. The ultimate purpose of corporate finance is to
- Mortgages / lending
- Accounting
- Financial planning
- TreasuryTreasury Career PathTreasury management involves ensuring that cash and financial risks in a business are properly managed & optimized. Treasury career path can lead to CFO
- Audit
- Equity researchEquity Research OverviewEquity research professionals are responsible for producing analysis, recommendations, and reports on investment opportunities that investment banks, institutions, or their clients may be interested in. The Equity Research Division is a group of analysts and associates. This equity research overview guide
- Insurance
MapWhat is finance? Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, forecasting
Additional Finance Resources
Thank you for reading this quick guide that answers the question: what is finance? CFI is on a mission to help anyone become a world-class financial analyst by creating the Financial Modeling & Valuation Analyst (FMVA)™FMVA™ CertificationThe Financial Modeling & Valueation Analyst (FMVA)™ accreditation is a global standard for financial analysts that covers finance, accounting, financial modeling, valuation, budgeting, forecasting, presentations, and strategy.
certification program. To continue developing and preparing for a career in the field, these additional materials will be helpful:
- Types of Financial ModelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types of Excel models in this detailed guide, including images and examples of each. Financial modeling is performed for many reasons including to value a business, raise money
- Interactive Career MapMapWhat is finance? Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, forecasting
- Compensation and salary guidesCompensationWhat is finance? Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, forecasting
- The Analyst Trifecta® GuideThe Analyst Trifecta® GuideThe ultimate guide on how to be a world-class financial analyst. Our process called The Analyst Trifecta® consists of analytics, presentation & soft skills
More Questions and Answers
CFI is the official global provider of financial modeling and valuation analyst FMVA DesignationFinancial Modeling CertificationFinancial Modeling Certification - earn your certificate in financial modeling and valuation, for careers in investment banking, equity research, FP&A, treasury and accounting. CFI is the official global provider of the Financial Modeling and Valuation Analyst (FMVA)™ designation, designed to transform.... 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 answersKnowledgeWhat is finance? Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, forecasting for you to explore further:
- What is are the types of financial models?Types of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types of Excel models in this detailed guide, including images and examples of each. Financial modeling is performed for many reasons including to value a business, raise money
- What is sensitivity analysis?What is Sensitivity Analysis?Sensitivity Analysis is a tool used in financial modeling to analyze how the different values for a set of independent variables affect a dependent variable under certain specific conditions. Sensitivity Analysis is performed in Excel to asses risks, measure potential outcomes, and plan for an uncertain future
- What is bookkeeping?AccountingWhat is finance? Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, forecasting
- What are the most common valuation methods?Valuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions. These methods of valuation are used in investment banking, equity research, private equity, corporate development, mergers & acquisitions, leveraged buyouts and finance
