The term “finance” comes from the Latin “financia”, which means payment. For the first time with the meaning of “money payment” it began to be widely used in the 13th and 15th centuries. in Italy, whose cities (Florence, Venice, Genoa) were at that time major centers of trade, monetary settlements and banking. In the future, the term “finance” became internationally widespread and began to be used as a concept associated with the system of monetary relations, the formation of monetary resources mobilized by the state to perform its functions.
In the conditions of commodity-money relations , any economic structure cannot function without a normally organized flow of funds between the state and production structures, the state and various segments of the population, between regions and individual states. Such cash flows reflect the processes of real life of society, establishing ties and relations between citizens and legal institutions (firms, joint-stock companies, agricultural producers, institutions culture, etc.). Through the financial mechanism, the state (government) implements all its functions of management, restriction, control and audit of functioning production and financial structures. In the course of performing these functions, finance is used as an indicator of the growth of the national economy, the growth of welfare, as well as a tool for eliminating negative aspects in economic growth. They stimulate the reduction of production costs and their competitiveness in the world market, form the structure of production, intersectoral and territorial proportions.
Consequently, finance as an economic category is an economic relationship regarding the distribution and use of funds of funds to meet public needs.
The formation of financial relations occurs simultaneously with the development of commodity-money relations in order to serve the needs of the state in the organization of economic and cultural life, the maintenance of the administrative apparatus, the army, health care, education, pension provision, etc.
It should be understood that financial relations are a narrower concept than monetary relations; they are an integral part of them. If monetary relations cover all economic relations related to the performance of the functions of money, then financial relations are associated with the movement of funds of funds of funds of production and non-production purposes.
Financial relations do not include monetary relations related to commodity and money circulation in retail trade; with payment for transport, household, utilities, entertainment and other services, with the movement of money when they are donated and inherited.
Of all the variety of monetary ties of society, the system of financial relations includes:
1) monetary relations developing between enterprises as economic entities. They consist in mutual payment obligations of suppliers and buyers, a system of penalties for their violation, material remuneration for the fulfillment of special requirements of the customer, etc .;
2) monetary relations developing between the state and enterprises. They cover the system of payments to the state budget, deductions to various funds and organizations of the sectoral and territorial levels;
3) monetary relations between enterprises and the banking system arising from the receipt and repayment of loans;
4) monetary relations developing within enterprises: first, between the enterprise as a whole and its structural subdivisions; secondly, between the company and the employee regarding remuneration;
5) monetary relations between state bodies of different levels of government regarding the distribution of differential rent, financing of environmental measures, etc .;
6) monetary relations between the state and the population regarding the receipt of payments and benefits from public consumption funds, etc.
Thus, the subjects of financial relations are the state, enterprises, organizations and employees of enterprises, citizens. And the object of financial relations are financial resources, which include net income, depreciation deductions for renovation, taxes and non-tax payments, financial reserves, part of the funds of public organizations, etc. Therefore, financial relations express the process of distribution and redistribution of the value of a social product and, on this basis, the formation of funds from participants in the reproduction process: entrepreneurs who invest in production and redistribution of the value of the social product. sell goods and services; the able-bodied population that owns the labour force; a state that invests natural resources regulates economic processes.
The essence and role of finance is manifested in their functions. Finance is designed to perform, first of all, two main functions: distributive and control. The distributive function is the primary and secondary distribution (redistribution) of net income. Primary distribution provides the process of expanded reproduction, secondary – the formation and replenishment of centralized monetary funds of the state necessary to perform the functions assigned to it. As a result, target monetary funds of the state, business entities and incomes of the population are formed and used. The monitoring function is manifested in the monitoring of the allocation and use of financial resources. It is implemented through financial information expressed in various financial indicators (profit, profitability, revenue, etc.). These indicators make it possible to monitor compliance with established norms and standards, the efficiency of economic processes at both the micro and macro levels.
At the same time, sometimes, in addition to the above-mentioned, the reproductive and stimulating functions of finance are distinguished. The reproductive function is that finance plays an important role in the process of production of goods and services, the circulation of fixed assets, the training of skilled labor. The increase in investment creates the prerequisites for the accumulation and expansion of fixed assets. The growth of social expenditures directed to education, health care, social security, insurance, creates conditions for the training and reproduction of a skilled labor force. The stimulating role of finance contributes to the expansion and improvement of production, full employment, the development of scientific and technical cooperation, and the introduction of innovations.
Finance performs these functions through the financial system, which is a set of financial relations and their corresponding financial institutions that organize the formation, distribution and use of monetary funds.
The main links of the financial system are:
budgets of different levels of government; social, property and personal insurance funds; foreign exchange reserves of the state; finances of enterprises, institutions, organizations and the population.
The financial system consists of centralized (public) and decentralized finance.
Centralized finances accumulated at the state level include budgets of various levels of government and extra-budgetary funds (pension fund, social insurance fund, state employment fund, federal and territorial compulsory health insurance funds), as well as credit.
Decentralized finance encompasses:
(a) Finances of enterprises which consist of:
the accumulation fund formed from the part of the profit remaining at the disposal of the enterprise; depreciation deductions directed to the renewal and replenishment of production assets; consumption fund; the contingency fund required to meet temporary cash requirements;
b) finances of organizations and institutions;
c) family budgets.
The main principles of building the financial system of the state are the principles of democratic centralism and fiscal federalism. The first is characteristic of the planned economy and consists in the concentration in the hands of the highest state power of the right to mobilize and use the prevailing part of the financial resources of the national economy. The principle of fiscal federalism means the distribution of functions between the individual links of the financial system. The government is called upon to ensure national goals (defense, space, external state relations). The source of their financing is the state budget. Local authorities finance schools, housing, public order, etc.
The measures of the state for the accumulation of financial resources, their distribution and use constitute a financial policy. It includes fiscal policy, i.e. the activities of the state in the field of regulation of public expenditures and taxation, and budgetary policy aimed at regulating the budget. Financial policy is carried out with the help of various financial instruments: subsidies, subsidies, transfers, taxes, customs duties.
The direction of financial policy depends on the economic condition of the country. The general trend today is to increase the role of the government in regulating the national economy through the financial system. This is due to the increase in expenditures on maintaining the level of income, on social security programs, etc.