Finance is a wide term and is considered the science of managing funds.
In ordinary parlance, finance means liquid funds or cash reserves to be utilized for various purposes, but in business, it means the funds needed to complete a project.
In both cases, the essence of the word remains the same—the change is only the amount of money. It means the issuance, distribution and purchase of liability and equity claims issued for the purpose of revenue-generating assets.
Finance squeezes even the last drop of effectiveness from every available rupee. If we put all activities from sourcing of funds to application of funds in a stream then finance is the glacier that keeps the stream flowing. With the passage of time the concept of finance has also changed. We find two concepts of finance—the traditional and modern concepts.
i. Traditional Concept of Finance:
Earlier, finance was treated narrowly. The traditional concept of finance has been expressed in Arthur S. Dewing’s The Financial Policy of Corporation in 1920. According to him finance relates to financial markets and securities and hence lesser attention was given to asset management. Under the traditional approach, too much emphasis is given on how funds will be arranged in business.
It interprets finance as the means and flows of funds by which a firm can carry out its objectives in the most efficient manner and meet its obligations whenever they become due. How the fund should be sourced so that the cost of procurement would be most economical was the ultimate objective of finance function; the traditional approach focused attention on the acquisition of funds and concerned itself with fulfilling only the need of investors.
ii. Modern Concept of Finance:
Failure of businesses during the depression of 1930s brought a sea change in the concept of finance and need was felt for according proper emphasis on asset and liquidity management. With development of new economic theory and mathematical models, a new approach to finance was developed. The modem concept of finance focuses mainly on financing decisions, investment decisions and profit planning decisions.
In contrast to the traditional concept modern concept of finance focuses both on acquisition and application of funds in an enterprise thereby satisfying the need of investors as well as of enterprise. Finance embraces a set of administrative functions in an organization that have to do with the management of flow of funds, both inward and outward, so that the firm will have the means to carry out its objectives as satisfactorily as possible. Therefore finance, under the modern concept, focuses on decision making with an eye on creating wealth for the business.