Finance

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.

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 dollars. We feel the effects of all three every single day.

Let’s take a look at the three types in detail. 

#1 - Personal Finance

Personal finance relates to all activities for budgeting, 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 fund.

#2 - Corporate Finance

Corporate finance is all financial activities for a business. It is typically its department but can occasionally be rolled up into accounting, 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 issues, finance offerings, or new investors.

#3 - Public Finance

Public finance is all government activity related to money and money management. This includes taxation, government spending, budgeting, and any debt 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 policies 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. 

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 revenue. 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.

 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 public with an IPO offering, levying taxes, forgiving student debt, selling shares, repaying debt, creating budgets and forecasting budgets. 

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 assets, fixed assets, tangible assets, intangible assets, operating assets , and non-operating assets.

• Liabilities: Liabilities refer to all financial obligations that an entity is responsible for, including debt. Current liabilities must be paid within the same year, whereas non-current liabilities are long-term (eg: leases, mortgages, and business loans).

• Balance Sheet: A balance sheet is a document that outlines all assets minus all liabilities to arrive at the entity’s total net worth. 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 (A/R) is the amount all clients owe to a business, usually in invoices. This represents all the income.

• Cash Flow: Cash flow 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 statement.

• Net Profit: This is also referred to as net operating income 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 Money is a concept that essentially means that a dollar today is worth more than a dollar tomorrow. Due to compounding interest, inflation, and the function of money in our economy, the present value of money today is always worth more than its future value.

 Here are a few top-earning finance career opportunities:

• Investment Banker
• Hedge Fund Manager
• Financial Planner
• Public Accountant
• Chief Financial Officer
• Commercial Banker

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 –

• Finance Books
• Economics
• International Finance