Finance is a broad term that essentially refers to money management or channeling money for various purposes. It applies to people, businesses, governments, organizations, or other entities. Finance includes banking, debt, capital markets, investments, credit, assets and liabilities, financial systems, and the governance and study of money.
In a personal context, personal finance is managing, saving, and investing one’s money. In a business setting, it handles acquiring funds for the business, managing existing funds, and planning how to spend funds in the future. Finally, for the public, finance refers to managing the government’s activities related to budgeting, spending, deficits, and taxation.
- Finance is the process of managing every money-related activity of businesses, people, and governments
- Proper financing is necessary for an economy to function, deal with crises and grow.
- There are three main types of finances: personal, corporate, and public.
- Some key financial terms worth remembering include assets, liabilities, expenses, balance sheet, cash flow, net profit, etc.
- Top careers in finance can include an investment banker, hedge fund manager, financial planner, accountant, chief financial officer, commercial banker, etc.
Types of Finance
Finance can be divided into three main categories, and all three play a huge role in our personal lives. Personal finance is unique to us as individuals, corporate finance affects our job and the companies we consume from, and public finance changes the expenditure of our taxpayer Taxpayer A taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.dollars. We feel the effects of all three every single day.
Let’s take a look at the three types in detail.
Now you can Master Financial Modeling with Wallstreetmojo’s premium courses at special prices
Best Financial Modeling Courses by Wallstreetmojo
Financial Modeling Course
* 12+ Hours of Video
Financial Modeling & Valuation
* 25+ Hours of Video
* Certificate of Completion
* 12+ Hours of Video
#1 – Personal Finance
Personal financePersonal FinancePersonal Financing is a way of saving, investing, and growing an individual's money. It can be for an individual or a family as a whole and requires some level of financial literacy such as tax laws, investment opportunities, etc. relates to all activities for budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time., saving, investing, and strategizing given a person’s current financial constraints and abilities. Personal finance is very specific to each individual’s unique financial setting. But typically it depends on their annual earnings or salaries, living requirements and expenses, goals, and lifestyle preferences.
Individuals typically save for retirement, which makes saving and investing during their work-life a crucial component to have funds for retirement. Personal finance also includes any financial products a person elects for, such as banking, loans, credit cards, buying insurance, getting a mortgage, or opening a mutual fundMutual FundA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etc.
#2 – Corporate Finance
Corporate finance is all financial activities for a business. It is typically its department but can occasionally be rolled up into accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements., investments, or general management.
Financial activities for a business would include budgeting current capital, capital for future years, funding and refinancing projects, and assets to ensure that the company has the best deal possible in the current market. Corporate finance also includes finding ways to raise additional funds, which could be through bond Bond Bonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.issues, finance offerings, or new investors.
#3 – Public Finance
Public financePublic FinancePublic finance is the management of the country's public funds through revenue, expenditure, and reserves, and it generally includes the management of tax collection, expenditures, the annual national budget, deficits, and surpluses. is all government activity related to money and money management. This includes taxation, government spending, budgeting, and any debt Debt Debt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.issuance (both to the government and from the government).
Another huge component of public finance is money management and strategy to ensure the economy continues to stay afloat. In the U.S., the Federal Reserve System ( called “the Fed”) creates all monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc. to help the U.S. economy. It does this by managing inflation, reducing unemployment rates, and stabilizing interest rates in a changing economy and market. In addition, the Fed works to stabilize the economy and the financial system by supervising the largest private banks. They also provide various financial services to the U.S. government.
Purpose of Finance
The purpose of finance is to help individuals, businesses, and the government save, manage, raise, and efficiently use the money to the best of its ability. Without the proper management and utilization of monetary resources, the foundation of any entity or organization is doomed to unhinge. Therefore, a dedicated finance system is mandatory for any organization to optimize its goals.
Take the example of a typical business organization. They may have various departments like finance, H.R., accounting, sales, marketing, development or investments, and maybe a few other fields like administrative and customer service. Of all these different departments, finance may be the most important in that it works to ensure money is used efficiently and the best financial products are a part of the business plan. For example, suppose the sales team is working tirelessly to increase revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.. But the finance department does not make sure that the company is sticking to its budget or is investing the money into the proper departments or assets. The whole venture, therefore, has effectively become for nothing. And this will soon lead to chaos in the business functioning.
On a national level, the lack of proper financial insight can lead an economy to a crisis, thus affecting the livelihood of its citizens. The awareness of overseeing and protecting public finance has, therefore, increased in the last decade among countries.
Examples of Finance
Financial activities take place every single day. This includes buying and selling, taking out a loan, maintaining accounts, investing, moving money from one account to another, refinancing and asset, going publicGoing PublicGoing public is a corporate practice in which an unlisted, private company allows the public to purchase its old or new stock for the first time. with an IPO IPO An initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.offering, levying taxes, forgiving student debt, selling shares, repaying debt, creating budgets and forecasting budgets.
Key Finance Terms
Here are some key financial terms one should know:
- Assets: Assets refer to all resources a business has with an economic value. This includes current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. , fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. , tangible assetsTangible AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation. , intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. , operating assets , and non-operating assets.
- Liabilities: Liabilities Liabilities Liability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.refer to all financial obligations that an entity is responsible for, including debt. Current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. must be paid within the same year, whereas non-current liabilities are long-term (eg: leasesLeasesLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”, mortgages, and business loans).
- Balance Sheet: A balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. is a document that outlines all assets minus all liabilities to arrive at the entity’s total net worthNet WorthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus.. People do this to determine their personal net worth. (assets like income, investments, and property minus liabilities like mortgage and student loans)
- Accounts Receivable: Accounts Receivable Accounts Receivable Accounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. (A/R) is the amount all clients owe to a business, usually in invoices. This represents all the income.
- Cash Flow: Cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. is the overall movement of money into and out of your business each month and is compiled into a cash flow statement to determine the entity’s ability to pay its bills reliably.
- Profit and Loss: A business must intake more income than expenses to maintain profits. Otherwise, they will incur losses. The document aggregating and analyzing all profit and loss is an income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements..
- Net Profit: This is also referred to as net operating incomeNet Operating IncomeNet Operating Income (NOI) is a measure of profitability representing the amount earned from its core operations by deducting operating expenses from operating revenue. It excludes non-operating costs such as loss on sale of a capital asset, interest, tax expenses. or the bottom line and refers to the total amount a business has earned or lost at the end of each reporting period (usually one month).
- Time Value of Money: Time Value of MoneyTime Value Of MoneyThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment. is a concept that essentially means that a dollar today is worth more than a dollar tomorrow. Due to compounding Compounding Compounding is a method of investing in which the income generated by an investment is reinvested, and the new principal amount is increased by the amount of income reinvested. Depending on the time period of deposit, interest is added to the principal amount.interest, inflation, and the function of money in our economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society., the present valuePresent ValuePresent Value (PV) is the today's value of money you expect to get from future income. It is computed as the sum of future investment returns discounted at a certain rate of return expectation. of money today is always worth more than its future valueFuture ValueThe Future Value (FV) formula is a financial terminology used to calculate cash flow value at a futuristic date compared to the original receipt. The objective of the FV equation is to determine the future value of a prospective investment and whether the returns yield sufficient returns to factor in the time value of money..
Top Finance Careers
Here are a few top-earning finance career opportunities:
- Investment Banker
- Hedge Fund Manager
- Financial PlannerFinancial PlannerFinancial planners are experts in investment and financial management who help corporations, individuals, and businesses achieve their financial goals and objectives. The top four financial planner careers are budget analyst, insurance underwriter, financial analyst, and securities and commodities agent.
- Public Accountant
- Chief Financial Officer
- Commercial Banker
Frequently Asked Questions (FAQs)
Finance is important for the proper functioning and growth of any entity, including an individual, business, or nation. Finance helps an entity meet its goals with the optimal use of its resources and wise decisions. Conversely, a disregard for financial planning or money management can lead an entity to unpredictable difficulties that can cause severe negative impacts.
Accounting deals with the day-to-day financial activities of an entity or a system. Finance is the term used to refer to the entity’s overall plan or scheme to utilize its resources productively. Accounting gives one a glimpse about the entity’s short-term cash flow, while the other covers the broader aspects of budgeting, setting goals, and long-term plans.
There are plenty of careers related to finance that require skilled employees. Some top-paying professions are banking, financial advising, accounting, hedge fund managing, etc.
This has been a guide to what is Finance and its meaning. Here we explain types of Finance, their examples, and why is it important. You may also have a look at the following articles to learn more –