Chapter 1 Notes Principles of Financial Management

Chapter 1 – The Financial Environment I. What is Finance? Finance = the study of how individuals, businesses, and the government acquire, spend, and manage financial resources (money). In other words, finance in an action whereby someone is watching to understand how we get, spend, and manage our money. This concept is very important because it explains how we make decisions about spending and saving money. II. The Origin of Finance The discipline of finance originated from accounting and economics. Accounting refers to the process of keeping and verifying accounts. The focus of accounting is financial ownership, revenues, and expenses that are expressed as debits and credits. Economics refer to the study of choices made by people when there is scarcity (limited resources). The focus of economics is the movement of resources through buying and selling that is expressed as demand and supply. The discipline of finance was originally created for the purpose of large businesses. However, over the years, it has evolved to include both individuals and small businesses. Therefore, it has evolved to create personal finance and entrepreneurial finance. Personal finance = the study of how individuals accumulate wealth, prepare for financial emergencies, and protect against premature death and property loss. Entrepreneurial finance = the study of how growth-driven, performance-focused, early-stage businesses raise financial capital and manage operations and assets. III. Understanding the Financial Environment Finance exists in the financial environment. Financial environment = the environment that consists of individuals, financial institutions, financial markets, and a financial system that works to make the economy operate efficiently. In order to understand the financial environment, we must understand the concept of an economy, as well as what it means to “operate efficiently.” An economy