THE FINANCE

Casualty Insurance

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Casualty insurance, often equated to liability insurance, is used to describe an area of insurance not directly concerned with life insurance, health insurance, or property insurance. Strictly defining casualty insurance has become problematic in recent years with the rising popularity of multi-line insurance policies. It is mainly used to describe the liability coverage of an individual or organization's for negligent acts or omissions. However, the "elastic" term has also been used to describe property insurance for aviation insurance, boiler and machinery insurance, and glass and crime insurance. It may include marine insurance for shipwrecks or losses at sea or fidelity and surety insurance. It may also include earthquake, political risk insurance, terrorism insurance, fidelity and surety bonds.

One of the most common kinds of casualty insurance today is automobile insurance. In its most basic form, automobile insurance provides liability coverage in the event that a driver is found "at fault" in an accident. This can cover medical expenses of individuals involved in the accident as well as restitution or repair of damaged property, all of which would fall into the realm of casualty insurance coverage.

If coverage were extended to cover damage to one's own vehicle, or against theft, the policy would no longer be exclusively a casualty insurance policy.

The state of Illinois includes vehicle, liability, worker's compensation, glass, livestock, legal expenses, and miscellaneous insurance under its class of casualty insurance.

In 1956, in the preface to the fourth edition of Casualty Insurance Clarence A. Kulp wrote:

It has never been possible really to define casualty insurance. Broadly speaking, it may be defined as a list of individual insurances, usually written in a separate policy, in three broad categories: third party or liability, disability or accident and health, material damage. One of the results of comprehensive policy-writing .... is to raise the question of the usefulness of the traditional concept of casualty insurance ... some insurance men predict that the casualty insurance of the future will include liability and disability lines only.

Later in Chapter 2 the book states that insurance was traditionally classified under life, fire-marine, and casualty. Since multiple-line policies began to be written (insurance contracts covering several types of risks), the last two began to merge. Fire-marine and casualty were "portmanteau" terms. When the NAIC approved multiple underwriting in 1946, casualty insurance was defined as a blanket term for legal liability except marine, disability and medical care, and some damage to physical property.

Health insurance

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Health insurance policies issued by publicly-funded health programs, such as the UK's National Health Service will cover the cost of medical treatments. Dental insurance, like medical insurance, protects policyholders for dental costs. In the U.S. and Canada, dental insurance is often part of an employer's benefits package, along with health insurance.

Funeral insurance
Funeral insurance is a very old type of health insurance which is payed out upon death to cover funeral expenses of the insuree. The Greeks and Romans introduced funeral insurance circa 600 AD when they organized guilds called "benevolent societies" which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose.

Accident, sickness and unemployment insurance
Workers' compensation, or employers' liability insurance, is compulsory in some countries

Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.

Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. Insurance companies will often try to encourage the person back into employment in preference to and before declaring them unable to work at all and therefore totally disabled.

Disability overhead insurance allows business owners to cover the overhead expenses of their business while they are unable to work.

Total permanent disability insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance.

Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expenses incurred because of a job-related injury.

Home Insuance

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Home insurance provides coverage for damage or destruction of the policyholder's home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake, that require additional coverage. Maintenance-related issues are typically the homeowner's responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.

Auto Insurance

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Auto insurance protects the policyholder against financial loss in the event of an incident involving a vehicle they own, such as in a traffic collision.

Coverage typically includes:
   1. Property coverage, for damage to or theft of the car;
   2. Liability coverage, for the legal responsibility to others for bodily injury or property damage;
   3. Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral
      expenses.

Most countries, such as the United Kingdom, require drivers to buy some, but not all, of these coverages. When a car is used as collateral for a loan the lender usually requires specific coverage.

Types of insurance

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Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as perils. An insurance policy will set out in detail which perils are covered by the policy and which are not. Below are non-exhaustive lists of the many different types of insurance that exist. A single policy may cover risks in one or more of the categories set out below. For example, vehicle insurance would typically cover both the property risk (theft or damage to the vehicle) and the liability risk (legal claims arising from an accident). A home insurance policy in the U.S. typically includes coverage for damage to the home and the owner's belongings, certain legal claims against the owner, and even a small amount of coverage for medical expenses of guests who are injured on the owner's property.

Business insurance can take a number of different forms, such as the various kinds of professional liability insurance, also called professional indemnity (PI), which are discussed below under that name; and the business owner's policy (BOP), which packages into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners' insurance packages the coverages that a homeowner needs.

Effect of Insurance

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Insurance can have various effects on society through the way that it changes who bears the cost of losses and damage. On one hand it can increase fraud, on the other it can help societies and individuals prepare for catastrophes and mitigate the effects of catastrophes on both households and societies.

Insurance can influence the probability of losses through moral hazard, insurance fraud, and preventive steps by the insurance company. Insurance scholars have typically used morale hazard to refer to the increased loss due to unintentional carelessness and moral hazard to refer to increased risk due to intentional carelessness or indifference. Insurers attempt to address carelessness through inspections, policy provisions requiring certain types of maintenance, and possible discounts for loss mitigation efforts. While in theory insurers could encourage investment in loss reduction, some commentators have argued that in practice insurers had historically not aggressively pursued loss control measures - particularly to prevent disaster losses such as hurricanes - because of concerns over rate reductions and legal battles. However, since about 1996 insurers began to take a more active role in loss mitigation, such as through building codes.

Insurance

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In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Economics

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Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".[1] Current economic models emerged from the broader field of political economy in the late 19th century. A primary stimulus for the development of modern economics was the desire to use an empirical approach more akin to the physical sciences.

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime, education, the family, health, law, politics, religion, social institutions, war, and science. The expanding domain of economics in the social sciences has been described as economic imperialism.

Common distinctions are drawn between various dimensions of economics. The primary textbook distinction is between microeconomics, which examines the behavior of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers), and macroeconomics, which addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy. Other distinctions include: between positive economics (describing "what is") and normative economics (advocating "what ought to be"); between economic theory and applied economics; between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus"); and between rational and behavioral economics.

Risk management

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Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events[1] or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary. Several risk management standards have been developed including the Project Management Institute, the National Institute of Science and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.

The strategies to manage risk include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk.

Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk even though the confidence in estimates and decisions increase.

Management of fixed assets

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Depreciation
Depreciation is the allocation of the cost of an asset over its useful life as determined at the time of purchase. It is calculated yearly to enforce the matching principle

Insurance
Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certain eventuality.

Uninsured risks

Bad debt
Changes in fashion
Time lapses between ordering and delivery
New machinery or technology
Different prices at different places

Requirements of an insurance contract
    * Insurable interest
          o The insured must derive a real financial gain from that which he is insuring, or stand to lose if it is
             destroyed or lost.
          o The item must belong to the insured.
          o One person may take out insurance on the life of another if the second party owes the first money.
          o Must be some person or item which can, legally, be insured.
          o The insured must have a legal claim to that which he is insuring.
    * Good faith
          o Uberrimae fidei refers to absolute honesty and must characterise the dealings of both the insurer and the insured.

Shared Services
There is currently a move towards converging and consolidating Finance provisions into shared services within an organization. Rather than an organization having a number of separate Finance departments performing the same tasks from different locations a more centralized version can be created.

Finance of public entities
Public finance describes finance as related to sovereign states and sub-national entities (states/provinces, counties, municipalities, etc.) and related public entities (e.g. school districts) or agencies. It is concerned with:

    * Identification of required expenditure of a public sector entity
    * Source(s) of that entity's revenue
    * The budgeting process
    * Debt issuance (municipal bonds) for public works projects

Financial economics
Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.

It studies:
    * Valuation - Determination of the fair value of an asset
          o How risky is the asset? (identification of the asset-appropriate discount rate)
          o What cash flows will it produce? (discounting of relevant cash flows)
          o How does the market price compare to similar assets? (relative valuation)
          o Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)

    * Financial markets and instruments
          o Commodities - topics
          o Stocks - topics
          o Bonds - topics
          o Money market instruments- topics
          o Derivatives - topics

    * Financial institutions and regulation

Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships.

Financial mathematics
Financial mathematics is a main branch of applied mathematics concerned with the financial markets. Financial mathematics is the study of financial data with the tools of mathematics, mainly statistics. Such data can be movements of securities—stocks and bonds etc.—and their relations. Another large subfield is insurance mathematics. This is also known as quantitative finance, practitioners as Quantitative analysts.

Experimental finance
Experimental finance aims to establish different market settings and environments to observe experimentally and provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to discover new principles on which such theory can be extended. Research may proceed by conducting trading simulations or by establishing and studying the behaviour of people in artificial competitive market-like settings.

Behavioral finance
Behavioral Finance studies how the psychology of investors or managers affects financial decisions and markets. Behavioral finance has grown over the last few decades to become central to finance.

Behavioral finance includes such topics as:
   1. Empirical studies that demonstrate significant deviations from classical theories.
   2. Models of how psychology affects trading and prices
   3. Forecasting based on these methods.
   4. Studies of experimental asset markets and use of models to forecast experiments.

A strand of behavioral finance has been dubbed Quantitative Behavioral Finance, which uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation. Some of this endeavor has been led by Gunduz Caginalp (Professor of Mathematics and Editor of Journal of Behavioral Finance during 2001-2004) and collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran). Studies by Jeff Madura, Ray Sturm and others have demonstrated significant behavioral effects in stocks and exchange traded funds. Among other topics, quantitative behavioral finance studies behavioral effects together with the non-classical assumption of the finiteness of assets.

Intangible Asset Finance
Intangible asset finance is the area of finance that deals with intangible assets such as patents, trademarks, goodwill, reputation, etc.

STOCK

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Purpose of stock control

Ensures that enough stock is on hand to satisfy demand.
Protects and monitors theft.
Safeguards against having to stockpile.
Allows for control over selling and cost price.

Stockpiling
This refers to the purchase of stock at the right time, at the right price and in the right quantities.
There are several advantages to the stockpiling, the following are some of the examples:

Losses due to price fluctuations and stock loss kept to a minimum
Ensures that goods reach customers timeously; better service
Saves space and storage cost
Investment of working capital kept to minimum
No loss in production due to delays

There are several disadvantages to the stockpiling, the following are some of the examples:

Obsolescence
Danger of fire and theft
Initial working capital investment is very large
Losses due to price fluctuation

Rate of stock turnover
This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.

Determining optimum stock levels

Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness.
Minimum stock level refers to the point below which the stock level may not go.
Standard order refers to the amount of stock generally ordered.
Order level refers to the stock level which calls for an order to be made.

Cash
Reasons for keeping cash

Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
The transaction motive refers to the money kept available to pay expenses.
The precautionary motive refers to the money kept aside for unforeseen expenses.
The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.

Advantages of sufficient cash

Current liabilities may be catered for meeting the current obligations of the company
Cash discounts are given for cash payments.
Production is kept moving
Surplus cash may be invested on a short-term basis.
The business is able to pay its accounts in a timely manner, allowing for easily obtained credit.
Liquidity
Quick upfront pay.

Management of current assets

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Credit policy

Credit gives the consumer the opportunity to buy, purchase or acquire goods and services, and pay for them at a later date. This has its advantages and disadvantages as follows:

Advantages of credit trade
Usually results in more customers than cash trade.

Can charge more for goods to cover the risk of bad debt.
Gain goodwill and loyalty of customers.
People can buy goods and pay for them at a later date.
Farmers can buy seeds and implements, and pay for them only after the harvest.
Stimulates agricultural and industrial production and commerce.
Can be used as a promotional tool.
Increase the sales.
Modest rates to be filled.
can be a marketing tool

Disadvantages of credit trade

Risk of bad debt.
High administration expenses.
People can buy more than they can afford.
More working capital needed.
Risk of Bankruptcy.

Forms of credit

Suppliers credit:
Credit on ordinary open account
Installment sales
Bills of exchangeCredit cards
Contractor's credit
Factoring of debtors
Cash credit
Cpf credits
Exchange of product

Factors which influence credit conditions

Nature of the business's activities
Financial position
Product durability
Length of production process
Competition and competitors' credit conditions
Country's economic position
Conditions at financial institutions
Discount for early payment
Debtor's type of business and financial position

Credit collection
Overdue accounts

Attach a notice of overdue account to statement.
Send a letter asking for settlement of debt.
Send a second or third letter if first is ineffectual.
Threaten legal actions.

Effective credit control

Increases sales
Reduces bad debts
Increases profits
Builds customer loyalty
Builds confidence of financial industry
Increase company capitalisation
Increase the customer relationship

Sources of information on creditworthiness

Business references
Bank references
Credit agencies
Chambers of commerce
Employers
Credit application forms

Duties of the credit department

Legal action
Taking necessary steps to ensure settlement of account
Knowing the credit policy and procedures for credit control
Setting credit limits
Ensuring that statements of account are sent out
Ensuring that thorough checks are carried out on credit customers
Keeping records of all amounts owingEnsuring that debts are settled promptly
Timely reporting to the upper level of management for better management.

CAPITAL

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Financial capital
Capital, in the financial sense, is the money that gives the business the power to buy goods to be used in the production of other goods or the offering of a service.

The desirability of budgeting
Budget is a document which documents the plan of the business. This may include the objective of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment. Also budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a vision to the company; short term is an annual budget which is drawn to control and operate in that particular year.

Capital budget
This concerns proposed fixed asset requirements and how these expenditures will be financed. Capital budgets are often adjusted annually and should be part of a longer-term Capital Improvements Plan.

Cash budget
Working capital requirements of a business should be monitored at all times to ensure that there are sufficient funds available to meet short-term expenses.

The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget has the following six main sections:

Beginning Cash Balance - contains the last period's closing cash balance.
Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales)
Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortization, etc.)
Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists.
Financing - discloses the planned borrowings and repayments, including interest.
Ending Cash balance - simply reveals the planned ending cash balance.

Corporate finance

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Corporate finance

Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance (Small and Medium Enterprises). It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.

Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these elements forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management – in choosing a portfolio – one has to decide what, how much and when to invest. To do this, a company must:

Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
Identify the appropriate strategy: active v. passive – hedging strategy
Measure the portfolio performance

Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.

Personal finance

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Personal finance

Questions in personal finance revolve around

How much money will be needed by an individual (or by a family), and when?
How can people protect themselves against unforeseen personal events, as well as those in the external economy?
How can family assets best be transferred across generations (bequests and inheritance)?
How does tax policy (tax subsidies or penalties) affect personal financial decisions?
How does credit affect an individual's financial standing?
How can one plan for a secure financial future in an environment of economic instability?

Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.

Personal financial decisions may also involve paying for a loan, or debt obligations.

Overview of techniques and sectors of the financial industry

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An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary earns the difference for arranging the loan.

A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity.

Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance) and by a wide variety of other organizations, including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting.

Finance is one of the most important aspects of business management and includes decisions related to the use and acquisition of funds for the enterprise.

In corporate finance, a company's capital structure is the total mix of financing methods it uses to raise funds. One method is debt financing, which includes bank loans and bond sales. Another method is equity financing - the sale of stock by a company to investors. Possession of stock gives the investor ownership in the company in proportion to the number of shares the investor owns. In return for the stock, the company receives cash, which it may use to expand its business or to reduce its debt.[5] Investors, in both bonds and stock, may be institutional investors - financial institutions such as investment banks and pension funds - or private individuals, called private investors or retail investors.

Finance

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Finance is the science of funds management. The general areas of finance are business finance, personal finance, and public finance. Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money, and risk and how they are interrelated. It also deals with how money is spent and budgeted.

One aspect of finance is through individuals and business organizations, which deposit money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans.

Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt instruments sold to investors for organizations such as companies, governments or charities. The investor can then hold the debt and collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly traded corporations.[dubious – discuss]

Central banks, such as the Federal Reserve System banks in the United States and Bank of England in the United Kingdom, are strong players in public finance, acting as lenders of last resort as well as strong influences on monetary and credit conditions in the economy.

THE FINANCE

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Finance is the science of funds management.