As the definition says, finance is the result of monetary relations in certain socio-economic conditions. For their occurrence, as a separate sphere of economic relations, it is necessary to provide such conditions under which a whole complex of various factors will arise and coincide in time at a particular historical stage, including:
- formation, as well as recognition of the ownership right of certain individuals to any services, goods, land, natural and other resources;
- the formed system of legal norms in the field of property relations;
- the emergence of socially different groups of citizens;
- strengthening the state as a party expressing the interests of the whole society, as well as acquiring the status of an owner.
What are they formed from?
All the above conditions arise only if there is one general prerequisite - a sufficiently large level of production, an increase in efficiency, an increase in the income level of the population, and also if they exceed the boundaries that are required to ensure biological survival. The creation, distribution, and subsequent use of cash income is the main condition on which they are based as a definition. Finance is the money of a certain person. Moreover, financial interests include the needs of these owners.
In order for them to appear, they also require an appropriate level of development of the monetary economy, continuous turnover of funds in large quantities, as well as the creation and competent use of their main functions. All this is included in the main definition. Finance is the movement of monetary profit, and such relations in any case affect property. It must be correctly understood that this includes not only monetary, but also property relations, and the subject is always a certain owner. It is in the process of distribution and use of the monetary profit that is in his ownership that each participant has the opportunity to realize their interests and their determination. Finance is an instrument of every legal entity or individual, with the help of which it achieves its goals.
Resources
No serious political or economic decisions can be implemented unless a detailed assessment of the amount of cash profit that is required for this has been previously carried out. At the same time, every person who understands what finance is is well aware that the distribution and accumulation of funds takes on a targeted character and forms a concept such as “financial resources”. Representing cash incomes that are accumulated and distributed for specific purposes, they are used for a wide variety of economic, political, social, cultural, scientific and many other purposes.
Based on what finance is, resources are accumulated revenues that are designed to meet specific needs. They provide services for each individual stage of the movement of funds, from their formation to use. Since finances are determined by the way cash flows, the pattern of its movement has a direct effect on it. In the overwhelming majority of cases, the circulation of income includes three stages:
- primary;
- secondary (redistribution);
- final (use).
Thus, finance is directly related to how cash is generated, distributed and used.
Primary
The formation of primary income is carried out through the sale and further distribution of profits received from any services or marketable products. Since the production procedure in the overwhelming majority of cases is continuous, a certain part of the revenue is required at the implementation stage in order to ensure this same continuity.
The financial market provides for the formation of primary income due to the conduct of expanded production of goods, which is serviced by cash.
Distribution
Represents the creation of primary income based on gross revenue. Moreover, there is also a secondary distribution, which can be carried out in several steps and is multiple in nature.
Any production processes that are served by the financial market end with the primary cash allocation procedure, without which there is simply no way to ensure further economic development. In this case, the distribution of cash income is in any case served by finances. The allocation of appropriate resources for further expansion of production can take several basic forms:
- depreciation of various equipment;
- payment of available material costs;
- rental payment;
- credit interest;
- remuneration of all employees who take part in the production process.
After the primary distribution of cash incomes has been carried out, the redistribution procedure is started, that is, secondary incomes begin to form. First of all, this includes taxes, as well as contributions to social, insurance, cultural and many other organizations.
Implementation
The last stage of income distribution is their implementation, and they themselves are called final. The financial service allows not to realize a certain part of the final income, but instead direct it to any savings and accumulations. It should be noted that the distribution process is influenced not only by the finances themselves, but also by the cost of production.
Since the procedure for the sale in cash of any services, goods or anything else is carried out at set prices, their dynamics has a direct impact on these procedures. The stronger the change in price in any direction, the more money profit begins to fluctuate, and such shifts especially sharply occur in the face of inflation.
The components of finance as elements of monetary profit can come in many different forms. For the existing sector of the economy, resources represent a certain part of the profit, for the family - the aggregate income of all its members, and for the state budget - the total amount of its income.
How is distribution and redistribution carried out?
There are a huge number of business entities, which together with the population spend finances and offer resources. It is quite natural that potential consumers of such funds do not have the opportunity to independently determine business relations with individual business entities or with each individual citizen. In this regard, the problem arises of how to combine disparate savings into large volumes of financial resources, which can subsequently be offered for use by some large potential investor.
To solve such issues, the use of finance is entrusted to specialized intermediaries, which may be banks, mutual and investment funds, various companies, associations and many other structures that accumulate free resources and subsequently pay a certain percentage on them.
Attracted resources by intermediaries are provided as loans or may be invested in various securities. The formation of the finances of such organizations (their income) is the difference between the interest paid on attracted money and that received on granted.
The direct owner of the cash savings has the right to transfer the funds he has to any investment companies or banks, or he can directly buy certain bonds and shares belonging to industrial corporations. But at the same time, you need to correctly understand that even in the second case, you will have to deal with intermediaries in the form of brokers and dealers who are professional participants in the financial market. Dealers are engaged in conducting transactions on their own, that is, they work exclusively on their own behalf, while brokers represent the interests of their customers, spending their finances and money.
Instruments
The modern financial market provides potential investors with ample opportunities in terms of investing funds through the purchase of monetary obligations of a large number of business entities, and such obligations are commonly called “financial instruments”. In particular, this includes bonds, stocks, certificates of deposit, bills of exchange, futures contracts and many other securities.
Due to the wide variety of available instruments, the influence of finance allows their owners to diversify their own investment portfolio, that is, to distribute savings over the obligations of various organizations and banking structures. At the same time, one must correctly understand that such obligations will have different returns, but at the same time, they will differ in varying degrees of risk. If a certain company ultimately goes bankrupt, then investments in others will be saved, therefore portfolio diversification is always carried out according to the principle “you cannot put everything in one basket”.
Relations
Financial relations are directly related to the distribution, redistribution and further use of cash. It should be noted that their main phenomenon arises in the process of distribution of primary incomes.
Financial relations, which are formed in connection with monetary and directly serve the circulation of funds, apply to almost all legal and physical persons. The main participants are:
- all manufacturers, regardless of the specific field in which they operate;
- state and population;
- specialized credit and financial institutions and banking institutions;
- non-profit and budget organizations.
In the process of its development, financial relations also create credit, after which they begin to exist, interacting closely with them.
Functions
Finances are social relations in the field of formation, distribution and further use of cash funds, which is their main essence.
Financial relations are formed in specific socio-economic conditions created as a result of the development of civilization. The main conditions for their appearance are:
- the formation and strengthening of state principles in the daily life of society;
- the constant development of the exchange of various products of labor and the emergence of cash;
- creation of private ownership of various products of labor;
- development of the institution of law and customs.
The main functions of finance are control, distribution and stimulating.
Distribution
This function is the most important, since it maximally reveals their essence. It consists in the fact that the price created in the economic system should be distributed in full accordance with the basic needs of the state and society, and the financial instrument is the tool used to achieve this goal. On the one hand, their formation is carried out at the expense of the income received, but on the other, the costs of budgetary and extra-budgetary funds provide the formation of secondary incomes, which ensures the distribution and further redistribution of GNP through financial systems.
The content of this procedure is the movement of profit, since it is it that goes through all these processes. In this regard, the primary and secondary distribution are distinguished.
Basically, it is customary to distinguish three main stages of income movement, in accordance with which primary, secondary and final profits are formed.
Primary incomes are created through the distribution of revenue from the sale of goods. The amount of profit received is divided into a fund through which the material costs incurred in the production process are reimbursed, as well as the salary of employees and the profit of the owner are provided. Thus, the main incomes are generated that the owner of production factors receives, but this also includes indirect taxes established by the current legislation.
At the second stage, direct taxes and insurance payments for social insurance are paid out of primary incomes, and assistance is provided to disabled people. At the same time, from newly formed funds of funds, including also budgets of various levels of government and various extrabudgetary funds, payments are made that represent expenses of intangible employees, teachers, doctors, employees, notaries, military and many other other structures.