Whether you are an individual who is not associated with any business or Stock Market or making money for your daily needs only, it is essential to know the actual meaning of Finance as it affects your everyday life. As finance is a broad term which contains study of money, investments, assets or liabilities. Study of finance is very important as it is important in shaping economies and is very useful in business as to ensure that resources are distributed efficiently and utilized carefully. So, here arises the question of what Finance is.
Meaning of Finance
Finance is a broad term used for managing funds and acquiring money. It includes making money, managing money by individual or any business, assets, liability, Debt or Credit, money market and investments and is not limited to businesses or investments.
Finance can be divided into three significant Categories:
- PERSONAL FINANCE
- CORPORATE FINANCE
- PUBLIC FINANCE
Let us Discuss what each category Represents:
- Personal Finance
Personal Finance points towards a person’s financial management based on income, needs, and dreams. It involves management of funds and financial decision by individual or family such as budgeting, saving, investing and management of personal debt. Taking financial planning into consideration, a person can plan how much they need to spend on their lives so their needs can be fulfilled. Personal Finance ensures a safe retirement along with fulfilling their needs such as Home, education, etc.
Personal Finance also includes banks as we deposit our money in them, Loans, Credit or Debit cards or any liability. To understand these terms further, we have given some simple explanation below:
Budgeting: Deciding on what should be done with the income, it is done by creating a plan to allocate a part of income to various expenses, saving and investment.
Retirement Planning: it includes preparation of retirement through various means like NPS or any other pension scheme that would be helpful for us to survive after retirement.
Debt Management: It is important to manage your debts properly to maintain a healthy financial status. If not maintained properly it may affect you for a long span. Debt management includes managing credit cards, loans etc.
Saving and Investments: Saving is a big part of financial management as it is very important to decide what portion of your salary are you willing to save for your future needs. If confused, you may use 50-30-20 Rule. According to this rule you need to break you money in the written portion that would be 50%, 30% and 20%. First portion goes into needs, second one will occupy your wants and the rest would be used up for saving and investing. This is just a method and you may use your money for saving and investment as per your needs and expenditure.
- Corporate Finance
The financial activities that fall under a business are called Corporate Finance. It includes funds raised by corporates, their Loans, IPOs and fund management for the company’s growth. It is important for any company to understand Finance in terms of growth, remain profitable and expand, and ensure that they are spending enough capital in all aspects to grow as it is primary goal of any corporate finance to ensure liquidity, profitability and sustainable growth.
Businesses finance may include acquiring another company while making them profitable, analysis of financial statements and financial risk management, and buying blue chip bonds and other investments. It includes extensive financial planning. Let us now see some key highlights of corporate finance:
Capital Budgeting: In corporate, when the budget is finalized to invest for maximum profit. It involves budget for investment such as expanding, acquiring or launch of new services or products.
Capital Structure: Capital structure consists two major factors which are Debt and equity and to run a business effectively, businesses need to determine the optimal mix of the two. Debt finance can be helpful to business in terms of securing a budget and Tax benefits whereas Equity(Issuing of shares etc) also helps in maintaining a good finance status for businesses but also dilutes ownership. Hence to run a business smoothly, there needs to be a balance between Debt and Equity.
Working Capital management: Operating short-term finances that help in smooth business operations. It includes cash flow management, receivable account, payable account that would be helpful in distress free money management.
Financial Risk Management: Through Risk management corporates need to tackle risks like market fluctuation, currency changes and changing market via means of strategies like diversification and maintaining proper cash flow etc.
- Public Finance
When the government manages the finances, it is called public Finance. The government collects taxes, creates Budgets, and manages public debt and budget spending in different sectors. It all counts in Public Finance. You may understand a country’s financial management similar to a company’s financial management, where a budget is created while making the economy grow alongside the country’s development.
Public Finance includes National Debt, National budget and government spending, Expenditures, Tax Collection and Debt management. Public finance helps government in controlling and managing unemployment, allocation of resources and distribution of wealth equally among the needs.
Public Revenue: Public Revenue includes money made by people through taxes, such as direct tax or indirect tax. Direct tax is collected through individual or Corporate directly in form of taxes and Indirect Taxes are indirectly implemented on goods.
Public Expenditure: As it involves the term Expenditure, Public expenditure refers to spending by government on different sectors to support economic growth of the country. Public expenditure is further divided into Revenue Expenditure and Capital Expenditure.
Where Revenue expenditure refers to Daily operation cost such as salaries etch whereas Capital Expenditure involves investment into infrastructure.
Public Debt: when a loan is taken by government for the welfare of the country. In case of Debt borrowed internally through a business or an individual falls under Internal Debt and if the debt is from international organisations or Foreign Governments, it is tagged as External Debt.
Finance is not something only related to investments. It also includes your financial management. It would help if you understood the value of daily Finance to improve your life. By understanding interest, making a budget while saving for your house, and managing inflation and risk, one can improve one’s life. It is also essential to avoid unnecessary debt to avoid any financial strain.
