Financial Definition: Type, Function, and Purpose

Understanding Finance – Surely many of us are familiar with what finance is. Because, almost everywhere, this term is often used. Especially by people who are struggling in the economic field. So, finance is a term that exists in the economic sector and also in discussions about finance.

Many define finance as finance. Indeed, this is not wrong, the definition of finance in a broader sense is an economic field that focuses on finance. In this article, we will discuss what finance is and the importance of finance in everyday life. Here is a full explanation:

Financial Definition

Finance is a word that comes from English. When interpreted, financial means finance. However, in the KBBI dictionary, finance is defined as something that deals with finance. If we examine more deeply, to discuss our own finances is not only about financial conditions that are in a large scope. Finance is how we study the financial condition of a business, individual, organization, and also a country. Starting from how it is managed, increasing, allocating, empowering, calculating risks, as well as future prospects related to finance.

Even within a company or institution, finance can enter into the administration aspect. In an administrative context, finance itself can be interpreted as an activity of managing an incoming and outgoing money transaction within a company or institution.

This activity is defined as financial management, namely a series of activities that begin with obtaining money and managing the finances as a whole. Not only are financial conditions in good condition, often financial conditions are also in a difficult position. This can happen due to improper financial management, be it individually, organization, institution or business.

Financial Types

When studying finance, of course we will also know the various types of finance itself. Here are some types of finance that need to be understood:

1. Individual Finance

Individual financial conditions can be seen based on the income or salary they have. Then, how their financial condition can meet all aspects of that person’s needs. Individual finances will usually also look at a person’s financial condition in the short, medium and long term.

How do they spend the budget they have to meet their living needs. An individual who has a healthy financial condition, will have greater income than his expenses. Meanwhile, those who do not have a healthy financial condition will generally have large amounts of debt, have a consumptive lifestyle, and have no savings.

2. Company Finance

The next type of finance is the finance of a company. Where this type of finance is the financial condition that exists in a company, be it a company that is still small, medium, to large companies. The same goes for government owned companies. A company that has a healthy financial condition will have a stable financial condition.

If the company has large enough cash and has relatively little or no debt. That is a sign that the company has a healthy financial condition. The development and growth of the balance which is always positive every month is one aspect of the company’s excellent performance.

3. Government Finance

The next type of finance is government finance. One of the factors that can determine the financial condition of a country is the level of welfare of the people in that country. Benchmarks for assessing the state’s financial condition are very complicated and also complex. This is due to the many assessment factors of unemployment, poverty, currency exchange rates, and also the purchasing power of the people in that country.

Financial Function

From the explanation above, we already understand what finance is and also the types. In the following we will discuss the function of finance. Both for companies, individuals, and other institutions. Because finance is one of the most important aspects in the life of an individual, business or country. Below is a full explanation.

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1. Planning

The main function of finance is as a means of financial planning. When we have a large amount of funds. Whether it’s an individual, a company, or a business owner. We must still be able to plan our finances or finances. Because, it can not be done spontaneously. In planning good finances, we must have the main focus on meeting basic needs. Make it a balance between income and expenses. Everything must be well planned. So, we will not experience boncos or losses. Maximum budget management can be a sign that the finances we have are relatively healthy.

2. Control

As an ordinary human being who often still makes mistakes. This also includes mistakes in terms of financial use that are not properly controlled and according to plan. Even though all the financial posts have been done, things like that can still happen. Where we neglect to use funds that have been posted for things that are consumptive or something that is not too important.

3. Examination

Finances or finances also need to be examined. In the language of accounting this is usually referred to as an audit. Where the audit process must be carried out routinely and periodically. Starting from monthly, quarterly, semester, and also on an annual basis. Every time there are posts that seem suspicious, we can immediately carry out an evaluation to prevent the same thing from happening in the next period.

4. Reporting

Finances do require reports, especially for companies and governments. Everything must be reported to show transparency in the use of finance. For companies, the report is done by making financial reports according to the accounting period. Then the results will be reported to stakeholders and shareholders in the company.

Financial Goals

Of course, many are wondering what the actual purpose of financial existence is for individuals or companies. So, good financial management will help us to manage finances optimally and be more adept at managing finances in personal and business life. Here are some of the goals of financial existence in the life of individuals and businesses.

1. Instill a Disciplined and Organized Attitude

As previously explained that finance is all activities related to finance, carried out in a disciplined and orderly manner. That way, we can control, plan, and make good use of financial conditions. Every thing we want to buy must be planned in advance. Even though the price of the product to be purchased is relatively cheap. In a business, discipline and regular financial management will greatly impact the stable financial condition of the business and also avoid the threat of loss.

2. Maximizing Profits or Profits

As an individual, when the financial process is carried out in a planned manner. Then it will help us to achieve financial success. We can better prepare something bigger for our own future. Then we can also plan for old age, so that we feel safer without having to think about debt and other financial problems.

Meanwhile for the company itself, financial management will greatly impact profits which have the potential to always increase or can guarantee financial security in the future. Because, we all never predict with certainty the economic condition of a company in the future.

3. Avoiding Debt

Some people think that humans can never be separated from debt. At first glance, this is indeed true, humans cannot live without debt. Whether it’s a debt of money or debt of goods or services. Especially with increasing needs, sometimes it’s easy for someone to go into debt to meet those needs.

Even though sometimes the desired needs are types of needs that are actually not important or not urgent. Likewise, when running a business, business owners who want fast-paced business usually find it easy to get into debt. Even though this can actually disrupt the financial condition of the business. It’s better if you want to owe it, try to think it over carefully, before you have trouble paying it off.

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4. Optimal Planning

By understanding what finance is, benefits, types, and purposes, we will have optimal planning. With careful planning, we can plan for the future better. We can live more frugally without thinking about debt. As for business owners, optimal financial planning will help maintain maximum profits. Thus making the future of the business more focused and the use of company cash can also be used wisely.

5. Successfully Achieve Financial Goals

With regular and disciplined financial planning, of course it will make it easier for us to achieve financial goals. Whether it’s by collecting emergency funds, preparing for retirement funds, marriage funds, and also financial freedom. We will also have no more difficulties in managing finances.

6. Develop Owned Money

With finances, we will be more easily encouraged to develop the money we now have. This is because we understand that relying on income alone will not be enough to fulfill future needs. From there, we will be compelled to build a business to earn additional income. We can also start utilizing investment instruments to gain profits.

Signs Someone Is Financially Independent

Being financially independent is a process of developing, both emotionally and spiritually, to become a successful and happy person according to our wishes. That means, being financially independent doesn’t just have abundant wealth and assets. But also we can achieve anything we want. The following are some signs of someone who can be said to be financially independent:

1. Have Health Insurance

One of the things that must be owned by someone who is financially independent is self-protection. Therefore, insurance is very important because it can minimize risks that may occur in the future. Without protection through insurance, this risk could have a negative impact on our financial stability. For example, health insurance can help us pay for hospital fees without burdening our finances.

2. Start Investing

The sign of someone who is financially independent is that they will think ahead by making the money they have work and make a profit. To obtain this, one thing that can be done is to invest. Investment is one way to achieve financial independence. We can invest in any form. But most importantly, the investment we make can provide a return above inflation. If we can manage investments well, then we will achieve financial freedom more easily.

3. Have a Pension Fund

Who doesn’t want their old age to be safe and secure? Everyone certainly wants that right? Retirement is one of the most important periods in people’s lives. The amount of income and savings while still working will affect one’s retirement. The sooner we think about retirement, the bigger the savings we will have when we are old. Therefore, preparing for a retirement fund should be done early when we are still in our productive period. In addition to saving, retirement can also be prepared by investing.

4. Owe For Productive Things

Debt can be a very dangerous thing if it is used for consumptive things. However, life will never be separated from debt, both for personal debt and debt to financial institutions. One of the conditions for achieving financial independence is to free our lives from consumptive debts. People who are financially independent will certainly be wiser in debt. Usually they will be in debt for something productive and productive.

5. Have an Emergency Fund

Emergency funds are one of the most important investment activities for our survival in the future. We can do this activity by saving half of the salary received each month. With an emergency fund, we no longer need to be confused and worried when there is a sudden need and require substantial funds. In addition, if there is no sudden need, emergency funds can also be used as future savings.

Being financially independent is certainly a dream of many people. Where in that period a person has succeeded in fulfilling all financial goals in life. Starting from the preparation of retirement funds, emergency funds, insurance, and others. With the fulfillment of these needs, it is certain that we are included in the group of people who are already financially independent.