importance of finance essay

importance of finance essay

The Importance of Finance in Today’s World

1. Introduction

Throughout human history, breakthroughs in finance have always had impacts on the world’s economy. From the invention of double-entry bookkeeping by Luca Pacioli in the Middle Ages, which led to Venice becoming the trading center in the world, to that of networks of banks providing credits across Europe through the use of promissory notes which set the stage for the industrial revolution, finance solutions have never been more urgent. Up to the 20th century, most of these financing activities flourished locally, requiring the respective financiers and solvers to have an understanding in depth about both the issuer and the lender, and about the territory, culture, and regulatory frameworks. Today’s world is different; globalization has integrated or complicated the world’s financial relationships and challenges are working in various dimensions for the ultimate goal of creating humanity’s prosperity.

Recent technological advances, from those in personal computers to those in the internet and mobile phones, have created new opportunities and improved people’s living standards. But, will further advances in new technologies continue to do so in the future too? Will creative disruptions, now mostly restricted to a few areas like energy and some diseases, extend more broadly to solve other common man level issues too, say that of quality education and affordable health, all over the world? Extracting meaningful information from vast amounts of data, leading to deep discoveries, has the power to broadly resolve multiple man’s problems. Such a path implies financial solutions; for discovery would require creative teams and motivated talented individuals working long hours. In many areas currently, such people find it hard to fund their basic needs. The role for solutions by finance has never been more pronounced and important. In essence, finance is about creating prosperity in the longest sense of the term. Let us reflect on the challenges for 21st-century finance: that of creating shared prosperity that is not just for now, but also for the future.

From the beginning of human history to the 21st century, finance has always been about managing or solving real-world problems. What can be more important in finance in today’s world than that of solving the big problems facing the world? Today, the world is faced with big issues: from education quality to global health and universally affordable clean energy. We have examples of technological disruptions in energy production, CRISPR, and others in genomics, solving some of the problems in affordable clean energy and some diseases that were not solvable effectively a few years ago. In the area of education and affordable health, however, no disruptions are in sight; they would require innovative funding models for expensive research, technology solutions, and marketing.

2. Understanding the Role of Finance

The broad areas of finance are personal finance, public finance, and business finance. Personal finance includes the study of personal resources management and personal and family budgets. Financial goals are specific and defined money goals expected to be accomplished within a specific time frame. Various individuals determine their financial goals and take the necessary steps to achieve them. The success of achieving these goals depends on know-how, work determination, and the research being done to pursue successful goal settings. Public finance introduces the fiscal science development as one of the branches and studies the economic life aspects. Business finance deals with the procurement and the lucrative use of the financial resources of the business organization. To run a business, obtain finance, at a cost by which the fund so obtained is invested in the organization to earn the desired profit. The financial management is mainly important for the business organization, 1) to make decisions systematically, 2) to derive the benefits of finance sector, and 3) to maximize shareholders and investors’ wealth.

Finance is the study of how investors allocate their assets over time and under conditions of uncertainty. It includes the dynamics of assets and liabilities over time under conditions of different degrees of uncertainties and risks. Finance can also be defined as the science of money management. Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among people, businesses, and governments. It concentrates on pricing and the allocation of resources for their efficient usage. Finance helps to gain an understanding of the way money is spent and budgeted as well as the behavior of the economies. Finance is not restricted to household budgets, how we spend our money, and save for the future, but all aspects of the organization, governments, and business organizations. Management of finance is important for profitable and successful operations. A firm’s efficiency in the financial management leads to efficient use of resources, which further leads to efficient operations.

3. Financial Management for Individuals and Businesses

Whether it is a cost-cutting strategy, an investment approach, or an acquisition strategy that you are trying to implement in your business, you have to rely on senior management to decide where the new capital needed will come from. Funds also play a crucial part in any business’s building processes, which will help to attract a wider consumer base in the market. In today’s economy, businesses simply cannot function without strong financial departments. The role of finance in business is to ensure that the company has adequate liquidity. Without proper management and forecasting, cash flow problems can spiral out of control and eventually cause catastrophic situations. Every business needs to make enough revenue to be successful as a business and keep the mission statement first in mind when capital decisions are being made. Providing financial assistance through all means will help businesses gain more in terms of investment returns and advantages.

Individuals need knowledge of finance in order to manage their day-to-day financial decisions, including budgeting, purchasing insurance, paying taxes, and planning for the future. Likewise, many businesses have finance personnel who help them with important decisions, such as whether it is better to trade in the equity market or invest in the debt market.

Just as every organisation needs to manage its operations by making various decisions about production and marketing, it also has to manage its financial resources. Within the finance domain, financial management encompasses a range of functions including finance, accounting, banking, and insurance. Moreover, financial management encompasses not only records of past transactions but also future planning and budgeting. So, finance is vital to the operation of every organisation, whether it is a profit-making enterprise or a non-profit charity, where everyone has a role to play.

4. The Impact of Finance on Economic Growth

Finance, when broadly considered, contributes to economic growth. It contributes to growth to the extent that, halting external factors, the output is increasing, allowing the majority of inhabitants and firms to obtain a higher standard of living. This increase will render the distribution of the economy’s (current) wealth more fair, and the optimization of the investments will be more effective, creating greater possibilities for higher profit. When the population benefits from a higher standard of living, it is by way of stronger demand that results from the effect of this increased level of wealth, which will further motivate investment. Therefore, there is a dependence-relation that can be seen between these two: higher levels of investment result in increased levels of economic output, and an increased level of output (for a given economic framework) will mostly result from a higher level of investment (new establishment and development). Therefore, whenever the economic output increases, the citizens’ general welfare uplifts, along with society’s development. The established relationship is really cyclical.

Finance in general, however, focuses on both the science of funds management and the art of investment. It includes the dynamics of assets and liabilities under conditions of uncertainty and risk. The impact of finance pertains to the allocation and use of economic resources, the behavior of economic agents, and the activity of the economy in the presence of uncertainty. An additional approach is the output and the risk-return determination relevant to an investor. Each of these areas describes the use and need for funds in any and every sector of the economy. In broad terms, there are three categories of finance: personal finance, corporate finance, and public finance. Each, in various ways, contributes to wealth within an economy and helps to improve the standard of living for people across the world.

Finance is a complex field, comprising hundreds of related concepts such as investing, the stock market, banking, forecasting, and predictions. Though finance itself is a broad discipline, it can be split broadly into three categories: personal finance, corporate finance, and public finance. Each of these relates to money management, though they have different ends and means. Generally, finance pertains to the management of funds, the value of money, and large public, private, and governmental systems.

5. Conclusion: Embracing the Power of Finance

Financial expertise is no longer about freeing our stocks from Alexandrion or extracting a higher return on them by unexplained funds flowing in from all over the world. Finance is about allocating trillions of dollars around the clock; who are we to say that the fury of market forces will inevitably give us rewards in the shape of good allocations? It is crucial that we recognize our limitations, and respect the imperfections of the special asset which is the safety system used in financial matters, and not allow the (long overdue) substantial increased attention paid to the importance of finance to turn us into a dominion unto ourselves and especially, not into dominion which harms significant social functions. But we need to treat finance expertise somewhat like we treat the constructive use of sway braces or piles for the good of your real estate; checking their fair value mercenary possibilities becomes poor consolation if the brush turns out to rust away or the building collapses. Finance needs to be guided; now seems at last the right time to think a little more deeply about the assumptions which underlie the discipline and put this recognition in a serious quantitative framework. Like J.M. Keynes and T.A. Thomas, we can no longer forget “probabilities” and can no longer be “mere radicals.”

We have described the growing importance of the finance field in the modern economy and the immense profits and social productivity gains which are now generated by a vibrant financial sector. Our tailored ideas, full of reality, are at last starting to permeate the public consciousness. Meanwhile, older ideas which fed into the “urge to just save more” started in the 1950s continued much longer. Paradoxically, it could have been that the seeds of our successes were sown at the very time of the seemingly hegemonic triumph of the status quo. The type of advice dispensed during the 1950s (such as “just save more”) was only the early yield of Keynes’s putative paradoxes of thrift once we reaffirmed that it was part of the standard Keynesian fabric.