What is finance: from the family purse to the state treasury, the root of the word and a first step for beginners

Dilnoza and Sardor are a young family. Together their salaries come to 8 000 000 soum. At the end of every month it is the same story: "Where did the money go?" One day they tried a different approach: on the very day the salary arrived they moved 1 500 000 soum to a separate card and planned to live on the remaining 6 500 000 soum. A year later they had savings of 1 500 000 × 12 = 18 000 000 soum. Without knowing it, they had been practising finance.

What is finance?

Finance is the knowledge and practice of where to get money, how to allocate it and how to grow it. It is found at three levels:

• Family finance: income, expenses, savings, debt.
• Corporate finance: finding money to start the business, allocating it to raw materials, wages and equipment, and reinvesting the profit.
• Public finance: the budget, that is, the state's revenue and expenditure.

Telling finance apart from accounting is easy: accounting answers the question "what happened?" and records past events, while finance asks "what do we do now?" and plans the future. Each needs the other: drawing up a plan requires accurate figures.

Where does the word come from?

According to some dictionaries, the root of the Uzbek word «moliya» goes back to Arabic. For example, the Rekhta dictionary of Urdu gives «maaliyaat», a word from the same family, as a word of Arabic origin with the root m-a-l and explains it as "finance, assets, property, wealth". This root brings to mind the familiar Uzbek word «mol» (as in «mol-mulk», property).

The English word finance took a different and interesting path. According to the Online Etymology Dictionary, it comes from the Old French word finance, which in turn was formed from the verb finer "to end, to settle a debt". That is, at first it was about closing a debt, bringing a settlement to its end. The sense of managing money is recorded in English from 1770.

Two languages, two different pictures: one recalls wealth itself, the other settling a debt and closing the accounts. Finance stands right between these two activities.

Why it is needed: its function and purpose

The main purpose of finance: to make sure the money needed is there at the right time and at a reasonable cost, and to put idle money to profitable use. This breaks down into the following functions:

1. So that money does not run short. The simple rule from Dilnoza and Sardor's example, "save first, then spend", is the very first lesson of finance.
2. So as not to confuse profit with cash. Even if a business shows a profit, there may be no money in the till if customers have not paid.
3. To borrow correctly. A person who can calculate the real cost of a loan or credit does not overpay.
4. To plan the future. A home, education, new equipment: saving money step by step for a big goal requires a plan.

Who it works with and who contributed

A finance specialist works with the figures prepared by the accountant, deals with the bank on loans and deposits, and answers the manager's question "how much money is there and when will it be needed".

To learn how money and finance developed, here are the history articles: «Financial history: from barter to coins, what did the Lydian coin change?», «Financial history: how did paper money appear in China?» and «Financial history: how did VOC shares and the Amsterdam exchange come about?». The links are at the end of the page.

In the next lesson

In the second lesson we will get to know money itself, that is, the functions it performs.