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Watching: What is Finance?
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The analysis of the birth and development of finance in the previous section has shown that financial activities include the activities of the initial distribution and redistribution of the total social product in the form of value. Gross social product is understood as the totality of products produced by an economy and accepted by the market (that is, can be consumed in the market). The distribution of the value of social products is done in the form of money, in other words, the distribution in finance is the distribution in money, not in kind. Financing involves not only the formation of monetary funds but also the use of such funds where such use leads to the formation of another monetary fund. Example: The activity of paying workers is a financial activity because it involves the distribution of a portion of the value of the products produced by the workers. Payroll activities form a monetary fund for employees. If an employee uses the entire monetary fund for consumption by purchasing the goods or services he or she needs, the use of that monetary fund is not considered a financial activity. But if the employee deducts a part of that monetary fund to accumulate or to repay a debt, this action creates a new monetary fund (a monetary fund for accumulation or a monetary fund for debt repayment) and thus is a financial activity. Here, the worker has “redistributed” his monetary fund and thereby created a new monetary fund. Through such analysis, it can be seen that: the movement of value flows in the form of money between monetary funds as a result of the creation and use of these funds to meet spending or accumulation needs. The accumulation of economic actors is an external manifestation of the financial category.
The aforementioned monetary funds are also called financial resources because they are the basis of formation and the object of financial activities. In fact, financial resources can be called with names such as monetary capital, money capital, capital money or in each specific field, by specific names such as people’s capital, credit capital, budget capital… Financial sources are not only formed from monetary funds but also from physical assets that can be converted into money. These assets when needed can be converted into currency to become financial resources. For example, a household’s financial resources may not only come from the monetary funds it holds, but can also come from their movables and real estate, which, when needed they can sell to increase their monetary fund. On a national scale, financial sources are formed not only from domestic monetary funds but also from monetary funds mobilized from abroad. In particular, financial resources are also understood to include not only present values but also values that are likely to be received in the future. This is a very important expansion in the concept of financial resources because it expands the limit of financial resources that each economic entity holds. An economic entity when making decisions about the use of current monetary funds is not only based on the financial resources they currently hold but also the financial resources they expect to have in the future.
On the basis of the above analysis, the following definitions of finance can be drawn:
Finance is the process of distributing financial resources to meet the needs of economic entities. Financial activities are always associated with the relative independent movement of value streams in the form of money through the formation and use of monetary funds in the economy.
To clarify the concept of finance, it is necessary to compare it with the concept of money and commerce which are related concepts and have many similarities. In commercial activities, money acts as an intermediary in the exchange of goods, a means to make the exchange process easier and more efficient. However, in commercial activities, money only acts as a means and goods are the object of exchange. Similarly, in finance, distribution activities among economic actors are carried out through the creation and use of monetary funds. Surface expression Outside of financial activity is the movement of money flows, however the essence of finance is to distribute the products created in the economy in the form of value. Financial activities must be through money to distribute value, so in finance, money is only a means, and products are the objects of distribution. The difference between finance and commerce is that: in commerce, the movement of money is always associated with the movement of goods and services participating in the exchange process, and in finance, the movement of Money is relatively independent of the movement of goods and services thanks to its function of a medium of exchange and a store of value.
It should also be noted that the traditional view of the concept of finance in many current Finance textbooks in Vietnam emphasizes economic relationships arising in the distribution of financial resources. This view emphasizes that financial activities are essentially the activities of “distributing total social products in the form of value” among economic actors, so for financial activities to be developed and effective, must deal well with the economic relationships between the actors involved in the distribution process – relationships that are considered the basis for deciding how to distribute social products. For example, the payment of wages reflects the economic relationship between the employer and the employee. Business owners want to pay low wages to have high profits, but this will not encourage employees to create surplus value that makes profits for the business. Therefore, the payment of wages is only effective when the economic relationship between business owners and employees is well resolved. Similarly, in the tax-paying relationship between tax-paying enterprises and the state, the state needs to consider making tax decisions so that it can both meet its spending needs and ensure incentives. encourage enterprises to develop production to maintain long-term ability to pay taxes.
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Thus, according to the traditional view, effective financial activities must well deal with the economic relationships between economic actors arising in the distribution of benefits from the distribution of total social products. In other words, financial activities that ensure fairness in the distribution of benefits arising from financial activities will be effective and developed.
The classic textbooks on finance in developed countries approach the concept of finance from a different angle. These courses emphasize finance, as a scientific field, the study of how limited financial resources are allocated over time. All economic actors face constraints on limited financial resources while their financial needs are diverse and often limitless. Therefore, the problem for economic actors is how to optimize the allocation of their financial resources for their needs. Two important features of financial decisions are that the costs and benefits of financial decisions 1/ take place over a period of time and 2/ cannot always be known with certainty. Example: To decide to invest in a project, a business must compare the costs it has to spend on that project with the expected revenues from that project. The whole investment process lasts for a certain period of time, and it is difficult to be certain of the exact value of those returns. Even the exact cost is often unpredictable. Furthermore, when making a financial decision, a firm must trade off the opportunity cost of using a financial resource for the benefits that can be derived from its capital decision. It is the limitation of financial resources and the uncertainty about the benefits of using financial resources that require economic actors to always weigh the opportunity costs and benefits of using resources. finance. Therefore, in order for financial activities to be effective, economic actors must accurately assess the opportunity costs and benefits of using their limited financial resources and control the risks that may arise. may arise during use.
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The following are illustrations of the basic decisions households and businesses face in their financial performance:
Financial decisions a household will face
1. The division between consumption and saving
2. Choose a portfolio for your savings
3. Decide how to finance spending
4. Manage the risks associated with your financial activities
Financial decisions a business will face
1. Determination of investment strategy: selection of investment fields, development orientation
2. Make a procurement budget: make a specific spending plan for the selected investment project
3. Define structure mobilized capital: determine the ratio between raising capital through issuing shares or raising capital through issuing debt
4. Working capital management: managing working capital to ensure the project achieves the expected profit.