Basic Financial Management terms

Finance and financial management encompass numerous business and governmental activities. In the most basic sense, the term finance can be used to describe the activities of a firm attempting to raise capital through the sale of stocks, bonds, or other promissory notes. Similarly, public finance is a term used to describe government capital-raising activities through the issuance of bonds or the imposition of taxes. Financial management can be defined as those business activities undertaken with the goal of maximizing shareholder wealth, utilizing the principles of the time value of money, leverage, diversification, and an investment's expected rate of return versus its risk.

Within the discipline of finance, there are three basic components. First, there are financial instruments. These instruments—stocks and bonds—are recorded evidence of obligations on which exchanges of resources are founded. Effective investment management of these financial instruments is a vital part of any organization's financing activities. Second, there are financial markets, which are the mechanisms used to trade the financial instruments. Finally, there are banking and financial institutions, which facilitate the transfer of resources among those buying and selling the financial instruments.

In today's business environment, corporate finance addresses issues relating to individual firms. Specifically, the field of corporate finance seeks to determine the optimal investments that firms should make, the best methods of paying for those investments, and the best ways of managing daily financial activities to ensure that firms have adequate cash flow. Financial management influences all segments of corporate activity, for both profit-oriented firms and non-profit firms. Through the acquisition of funds, the allocation of resources, and the tracking of financial performance, financial management provides a vital function for any organization's activities. Furthermore, finance provides stockholders and other interested parties a tool with which to assess management activities.