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.