The Evolution of Finance

Tuesday, August 24, 2021 - 14:00
AIM Blog - The Evolution of Finance

When does the practice of finance begin? A harder and more subjective question to answer than you would think.

Before the invention of currency when all societies worked on a barter system, would the ownership and maintenance of goods that could potentially be traded count as primitive personal financial management?

When the first banks are created around 5,000 years ago, before the Great Pyramid of Giza was built, is that the beginning of finance?

Concepts of lending, debt, and interest soon followed, with the first laws governing these practices being enshrined in the Code of Hammurabi in the 18th century BCE: does this mark the beginning of finance?

Metal coinage is at least as old as the 7th century BCE. With this advent, people had to collectively agree upon and believe in a shared value of gold or silver for commerce to work, so can we say that this is when finance begins?

Or is finance a practice that requires representative money as we have today to exist?

Fiscal responsibility; financial institutions; legislation and compliancy; and the universal fiction that a coloured piece of paper is as valuable, if not more, than something with an objective usefulness, such as a sandwich. Each of these innovations might not mark the exact beginning of finance, but they are all present in financial management today and inform its practice greatly.

What is truly surprising, considering humanity’s long-held obsession with wealth, is that financial management as a distinct field of study only emerged in the last century. Since then, three broad phases of financial management have been identified:

  • The Traditional Phase (ca. 1920-1940)
  • The Transitional Phase (ca. 1940-1950)
  • The Modern Phase (ca. 1950 to date)

The focus during this first phase was on the arrangement, formation, and issuance of funds, how businesses expanded, merged, and liquidated, and the instruments, procedures, and legal aspects of financial events.

The shorter transitional phase had a similar focus but put more emphasis on the financial problems faced by managers on a day-to-day basis, and thus was more concerned with working capital management.

The current phase we are in was driven by the infusion of economic theories and the application of quantitative analysis methods into financial management. As a result, we have broadened the scope to the point that departments dedicated to finance became far more common and better managed. Similarly, the role of the financial manager has become better defined.

The field of finance, like most, has been significantly altered by digitalisation, with experts required to demonstrate their analytical skills and quickly respond to emerging demands in data-driven environments. This deluge of data provides the opportunity to better optimise financial practices, but it equally adds further complexity and challenges, such as the rise of new revenue models, specifically subscription-as-a-service (SAAS).

The role of finance has always extended beyond simply budgeting and reporting, but it continues to expand towards a more strategic level, and finance professionals will need to integrate modern methods and technology more and more into their traditional processes to stay relevant.

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