Understanding the Primary Areas of Business Finance
Corporate Finance, Investments, and Financial Markets and Institutions
Finance is one of the most important functional areas of business and within a firm. It joins other functional areas like marketing, operations technology, and management as key areas of business. Business owners and business managers have to have at least a basic understanding of finance even if they outsource certain areas of their financial operations. The goal of this article is to help you understand the three areas of finance and their relationship to your company.
Primary Areas of Business Finance
There are three primary areas of business finance, which include:
- Corporate Finance
- Financial Markets and Institutions
While there is some overlap, each of these areas also cover distinct aspects of managing the financials of a business.
1. Corporate Finance
Corporate finance is the area of finance that incorporates the actions of the company when it comes to making decisions about financing. In other words, every time a business owner buys something, they have to figure out how to pay for it. For instance, when a company buys inventory, the company has to figure out a way to pay for that inventory.
Other areas of corporate finance include budgeting, managing working capital, financial analysis, financial statement development, and more.
Another area of finance is investments. Within a business, particularly a large business, the firm may invest in assets ranging from short-term securities to long-term securities like stocks and bonds.
The business invests for the same reason individuals invest - to earn a return.
Companies invest in both financial assets such as stocks of other firms and in physical assets such as buying a new building or new equipment.
3. Financial Markets and Institutions
Financial markets and financial institutions comprise the third area of business finance.
Financial markets include everything from the stock and bond markets, the primary and second markets, and the money and capital markets.
Financial markets, such as the stock market, help facilitate the transfer of funds between savers of funds and users of funds. Savers are usually households and users are generally businesses and the government. The stock market, for instance, provides a seamless exchange of ownership of a company between one person or business and another.
The financial institutions work hand in hand with the financial markets. Financial institutions generally act as intermediaries that help make transfers of funds between businesses and savers (working as a broker or agent for the trade). For example, an individual might deposit money into a savings account. Then, the financial institution would take that money and loan it out to a business.
Studying Finance in School
These three areas of finance are taught in colleges and universities and are typically the areas in which finance graduates look for finance jobs post-graduation. Business owners and their employees may work in each of these areas for the good of the company.