What is finance? The nature and functions of finance


 Finance reflects the synthesis of economic relationships generated in the process of distributing financial resources, specifically loans and lending, affecting the level of money supply in the market. The nature of finance is the economic relationship between the subjects of the economy.

Finance is a term in the economic category, reflecting the distribution relationship of social wealth in the form of value generated in the process of formation, creation and distribution of monetary funds to achieve the goals of the organizations. subject under each given condition. The two basic causes leading to the birth of finance are the production of goods and money, and the emergence of the State.

I. What is finance?

In addition to belonging to the economic category, finance is also a historical category that was born and developed in association with the development of the commodity economy.

Finance – in English is Finance – reflects the synthesis of economic relationships generated in the process of distributing financial resources. In a narrow sense, finance reflects the monetary revenue and expenditure activities of a country’s government. In general terms, finance reflects loans and lending, affecting the money supply level in the market.

Financial concept

Financial concepts are relatively vague and difficult to visualize

Finance is a tool for distributing national products and a tool for managing and regulating the economy at the macro level. Finance has three main functions: mobilization, distribution and supervision. The financial system includes public finance, corporate finance, financial markets and international finance.

According to modern economics, finance represents capital in the form of money, in the form of funds that can be borrowed or contributed capital through financial markets.

II. History of the birth of finance

Some basic reasons leading to the birth of finance include:

1. Due to the production of goods and money

When society has a division of labor and different appropriation of labor products and means of production, commodity production is born, leading to the emergence of currency as a tool for payment . . Economic organizations, individuals and social organizations create and use monetary funds aimed at consumption and investment for economic and social development. The emergence of commodity and monetary production promotes the birth of financial resources, which is social wealth expressed in the form of value. 

As the exchange of goods takes place more and more frequently, it is necessary to have an equivalent to facilitate the transaction process, this is currency. Since then, the form of currency has been used by subjects in society to distribute social products and national income to create separate monetary funds for each subject’s personal purposes.

Due to the production of goods and currency

The production of goods and money was the beginning of the birth of finance

2. Due to the emergence of the State

The state was born due to class division, with its functions and power also promoting the development of financial activities. To maintain operations, the State creates a budget fund through the process of distributing total social product in the form of value, forming the State financial sector. From there, promote the development of the commodity economy and expand the scope of financial activities.

Although financial distribution activities are objective, they are controlled by the State through policies issued and applied to the economy such as monetary policy, tax policy…

Thus, with its political power, the State has created a legal environment for financial operations through a system of policies and regimes. At the same time, the State also holds the right to mint money, print money and circulate money in the economy.

III. The nature and role of finance

1. What is the nature of finance?

The nature of finance is the economic relationship between the subjects of the economy. During the operation process, there will be operating methods and currency transfers between subjects, and this is the relationship in the distribution and use of financial resources.

The nature of finance

Finance reflects relationships and money flows between subjects

In terms of phenomena, finance manifests itself as methods of operation related to the circulation of cash flows between economic subjects:

– People and businesses conduct business, buy and sell goods and services and pay taxes to the government.

– The Government mobilizes capital by issuing bonds , combined with collected taxes and fees, the State uses this money source to allocate funds for activities such as security, national defense, education, and healthcare. , culture and social welfare (social insurance, policies for war invalids, martyrs’ relatives, natural disaster support)

– Individuals deposit money into financial institutions (banks, brokerage companies, insurance companies, etc.)

– Enterprises supported by the state continue to invest in expanding production and business.

2. The role of finance

Finance is a tool for distributing national products : Through the distribution process, a monetary fund is formed for all stages of the financial system. The State monetary fund is used to implement social goals.

The important role of finance

Finance plays an important role in regulating the economy

Finance is a management tool to regulate the economy at the macro level: Finance regulates the macro economy by: Impacting economic relations to move according to the direction of the State, guiding businesses production and business in accordance with the State’s economic policies. Control and adjust economic relationships to adapt to fluctuations in the economy.

IV. What is the function of finance?

Important function of finance

Finance has an important function that helps coordinate the entire economy

In Vietnam, finance has three main functions. 

– Mobilization function, specifically mobilizing capital, creating financial resources needed for economic development needs. Capital mobilization must follow supply and demand relationships and market mechanisms to bring about the highest efficiency

– The distribution function is the distribution of total social products in the form of value. Through this function, centralized and non-centralized monetary funds are formed to be used for different purposes. Distribution through finance includes both the initial distribution process and the redistribution process.

– The supervision function refers to the objective ability of the financial category, playing an important role in organizing inspection and supervision of the mobilization process of financial sources to create and use funds. currency. 

All three functions support each other to help businesses achieve maximum profits.

V. Important financial relationships

Finance establishes many important economic relationships, specifically:

The financial relationship between enterprises and the State budget is expressed through the allocation, capital support and share capital contribution of the State according to certain principles and methods, so that enterprises can carry out production. business and profit sharing. This financial relationship also reflects economic relationships in the form of value arising in the process of distributing and redistributing total social product and national income between the State budget and businesses. through corporate tax payment.

The financial relationship between businesses and the financial market is expressed in financing capital needs. With the money market, through the banking system, businesses that qualify will receive loans, with a commitment to repay both capital and interest until the maturity date.

Regarding the capital market, businesses can find many other sources of capital funding through the system of intermediary organizations that guarantee the issuance of securities . The enterprise will have to pay all interest to the entities participating in the investment a certain amount of money, the amount can be specific or depending on the business performance (profit/loss) of the enterprise. Through the financial market, businesses can also invest money in different items or deposit money into the banking system.

Important financial connections

Important financial relationships that you need to pay attention to

Financial relationships between businesses and other markets such as the service market, goods market, labor market… Because businesses need raw materials, equipment, workers and related services to operate. production and business activities are effective. Through market surveys, businesses also determine the demand for products and services from which to plan supply, plan marketing strategies, and develop plans for the company, ensuring market satisfaction. tastes of the target customer group.

Financial relationships within the enterprise are expressed through the payment of salaries, bonuses, and penalties to employees, financial payments between departments, distribution of after-tax profits, and distribution of dividends to shareholders. mobilize and set aside necessary reserve funds.

BECAUSE. What does the financial system consist of?

The financial system is a network – where trading activities or buying and selling of various financial instruments take place. Components of the financial system include:

What does the financial system consist of?

4 important components of the financial system

1. Public finance

Public finances reflect economic relationships in the process of creating and using public funds, that is, synthesizing all revenue and expenditure activities of the State. The purpose is to perform the functions of the State to serve the common interests of the entire society.

2. Corporate finance

Is a system that reflects the movement and transformation of a business’s financial and monetary resources to serve its production and business activities.

There are many businesses that use financial leverage as a tool to increase income and profits for equity. However, using this tool needs to be carefully calculated to ensure the financial stability of the business and avoid risks.

In corporate finance, financial reports are required to provide all information about business activities and cash flow of the business. Financial reporting is done by accountants collecting and checking data, creating a complete financial report. Reporting time must comply with regulations issued by the State.

Concept of corporate finance

Corporate finance is the monetary transformation in production and business

3. Financial market

The financial market is a market in which subjects can exchange securities products, goods, services or valuable items. Simply put, the financial market is where buying and selling activities of payment instruments and financial instruments take place.

4. International finance

International finance reflects the economic relationships between countries and between international financial organizations and member countries when exchanging goods and services and transferring capital flows.

In addition, the financial system also includes personal and household finance, and the finance of intermediary organizations (credit and insurance).

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