Evolution of Finance
Evolution of Finance
After the Industrial Revolution of the 17th century, production technique becomes more complex and the production process attains its excellence through specialized and divided processes. To sustain in the market competition, finance-related concept and their use become essential. With the expansion of Accounting, in the 18th century, Finance was involved mainly in the evaluation and analysis of financial statements. With the development of the classical trend of microeconomics, finance was also involved in the own and specialized economics of business at the end of the 19th century. The trends of this financial evolution give us a meaningful idea about the nature and scope of finance.
Traditionally, financial managers’ main responsibility was account maintenance and making a future plan of action by analyzing it. Besides, report preparation to reflect the actual condition of the business and liquid fund management to build the business capacity of payment of the dues at the right time, are also added to the evolutionary process of finance. But with the expansion of civilization, the scope and technological development have changed the responsibilities of financial managers. The evolution of finance that happened in the last century in the USA, the main exercising field of finance, is later known as the trend of Evolution of Finance throughout the whole world. According to that, the stages of financial evolution can be present in the following way:
a) Pre-1930 Decade: This time a trend of unification began among the companies of the USA. Financial managers had to identify a framework about which company should be unified with which one, by examining the financial statements of the companies.
They took the responsibility of huge amount financing and of preparing financial statements for this unification.
b) 1930’s: The tendency of unification did not get success in the USA. Many of the companies unified in the past decade turned into bankrupt in the next decade. Moreover, high depression started in the USA. Many profitable companies also fell into a great loss. In that situation, how these losing companies can be reorganized to protect them from bankruptcy was a special responsibility of the financial managers. From that time, fund collection through share selling was started.
c) 1940’s: The necessity of liquidity was the main concentration at this time. Finance did that responsibility by ensuring well-planned cash flow by making a budget for cash flow.
e) 1950s: In this decade, finance was involved in evaluating the most suitable investment project by using different mathematical analyses. The main activity of finance then turned to profit maximization by increasing sales and decreasing expenditures through suitable long-term investments based on long-acting forecasting. This trend is considered the traditional trend of finance.
f) 1960’s: Modern finance started its journey from this time. Finance started giving priority to the capital market. Shareholders are the owners of a company, so maximization of the shareholders’ property or the market price of shares became the main objective of finance at this time. To achieve this objective, different activities relating to financial analysis were started. The concept of risk in finance makes us understand that risk increases with the increase in profit. So profit making may not be desirable all the time.
g) 1970’s: Era of computerized activities started in this decade. This not only changed production techniques but also brought changes in business finance. Finance is now Mathematics-based. Most of financial decisions are mainly based on complex mathematical calculations, and the tendency of making these calculations very effectively in computers got special popularity. For example, the concept of risk is now measured and managed more correctly. Traditional trends of capital structure are also more complex and mathematical. Among the scholars who deserve mention for enriching business finance with different theoretical analyses were Harry Markowitz, Murton Miller, and Modigliani. After that, in 1990’s these scholars got Nobel Prize as a reward for their contribution to the development of finance through mathematical analyses.
h) 1980’s: For the expansion of business and sustaining in the competitive market system, finance evolves in a new outlook by changing its previous roles. Efficient distribution of capital among alternative projects of the company and calculation & analysis of income of these projects was the main activity of finance.
i) The 1990s and the Beginning of Modern Finance: World Trade Organization revealed itself in this decade. Barriers to export and import started to decrease worldwide. This time finance achieved internationality. On one hand, investment decisions of finance consider where in the world production and selling of which product could achieve profit; on the other hand, the scope of finance also includes in its consideration which capital market of the world is of what type and from which sources fund collection will be profitable. As a result, finance is an applied field of solution in the financial management of a business organization which has developed in combination with accountancy, economics, and some other financial subjects.
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