Finance is a very important aspect of any business venture; besides, it is the core of any business organization today. While planning to start, grow, or expand your business, you must also study, plan, and understand what finance entails, its importance, and how to manage it appropriately to make a profit and ensure sustainability.
In this article, you will learn about finance, its various types, and management. You will also learn about the importance of finance.
Types of Finance
There are three main types of finance:
- Personal/private finance
- Corporate finance
- Public/government finance
#1. Personal Finance
Personal Finance as the name denotes is specific to an individual or a family. It includes how individuals or families acquire, budget, spend, invest, and save monetary resources over a period while considering different future life events and financial risks.
Therefore, Strategic management of these funds for profitable investments depends largely on the person’s earning potential, requirements, goals, time frame, etc.
Additionally, Personal investment may include investment in education, assets like cars, real estate, medical, life insurance policies, and other insurance, saving, and expense management.
Importance of Personal Finance
- protects against uncertain and unforeseen events
- prepares for a comfortable retirement plan
- simplifies and enhances wealth transfer across generations
- helps one manage taxes and policies
- prepares one for long-term expenses or purchases involving a huge amount
- aids investment and wealth accumulation goals
- making paying for a loan or debt obligation easy.
#2. Corporate Finance
This refers mainly to the financial activities related to running a corporation.
Typically, a department or division is established to oversee the company’s financial activities and functions. Hence, this runs from the sourcing and channelization/allocation of funds to a strategic increase in the value of the company by improving the financial position, building the capital structure of the company, and acquiring expenses.
Also, corporate finance focuses on maintaining a balance between risk and opportunity and increasing the asset value for the benefit of proper maximization by shareholders through short and long-term strategic financial planning and implementation.
Below are some of the important aspects of corporate finance.
- It aids capital budgeting
- Helps in identifying sources of funding in the form of equity, creditors, debts, shareholders’ funds, etc.
- It enables the employment of standard business valuation techniques or real options valuation
- To aid stock issuance while going public and listing on the Stock exchange
- It signifies the opportunity in stock or other assets acquisition and investment.
- Helps in identifying relevant objectives, opportunities, and constraints
- It enables risk management and tax considerations.
#3. Public/Government Finance
This type of finance deals with the study of the states, municipalities, and provinces’ expenditures, and income. In short, it deals with government-related finances.
It also considers only the government’s finances which include spending, taxing, budgeting, and debt-issuance policies that affect the government’s operation for the services it provides to the public. It is a part of fiscal policy.
Hence, the government helps prevent market failure by properly overseeing the allocation of resources, the distribution of income, and economic stability.
Besides, Government funds are majorly obtained from taxes, borrowing from banks or insurance companies and its financial activities could be classified into these three:
- Expenditure
- Revenues
- Debts
a. Public Expenditure
This means the expenses incurred by the government for its maintenance and in carrying out its social and fiscal responsibilities for its (taxpaying) citizens.
b. Public Revenues
This broadly includes all the funds, receipts, and income that the government acquires during any given period irrespective of their nature and source, which will include the loans raised by the government, taxation, fines, penalties, gifts, prices, fees etc, which in all also helps finance government spending.
c. Public Debts
This means the loans raised from different sources are also part of public finance and carry with them the repayment obligation to the individuals and the interest.
Importance of Finance
It is not a secret that whether you are running a service-based or product-based business, you need money to operate, no matter the nature of the business, you’ll need capital if you want to make a profit.
However you choose to finance your business be it with self-fund or external funding like grants, loans, and credit, whichever means, there’s no denying that finance is critical to the success of a business.
But why is finance important? Finance is important for the following reasons:
To generate profits
It is often said that ‘you use the money to make money, and this is true in any business because to start a business and maintain and sustain the business you would need money. Further, as you move up the timeline, purchasing materials, hiring professionals, marketing and testing, and developing new products every single step all rely on having adequate funds for investment.
Besides, If the business does not have sufficient funds, its growth will be hampered and in turn, be unable to generate a profit.
Check out some other ways to make more money in How To Make Money From Property
To organize and enable operations
Finance in a business aids its operations such as paying bills, investing in business activities like advertising, paying employees etc.
So, if a business generates large amounts of money every single day which must be used to enable its activities, It then means its income must be efficiently and effectively used to sustain the business and its cash flow. However, It should be remembered that an irregular flow of money can turn a business insolvent.
To facilitate expansion:
A successful business is a growing and expanding business. This also includes the development of new products/services and expansion into new markets. However, this growth and expansion require capital to purchase new materials and fund marketing activities.
So, without an effective financial structure in place, a business will be deficient to grow, leaving the business confined to offering the same products and services to the same markets. Also, Non-expansion of businesses are at risk of being left behind by competitors and eventually failing.
To sustain through an economic downturn:
The growth of the cycle of any business organization is usually a mix and merge of highs and lows which of course could be due to reasons like recessions, depression, booms, or failure. No business growth or progress is ever linear, there is always a bend in the graph, that is why one should be prepared for such challenges and economic downturns as this is the best way to set the business for success.
But to get this right, you will need to ensure that your business has sufficient finance to withstand such adverse economic conditions.
To achieve long-term goals:
It’s a great idea to divide your goal into short-term and long-term categories. Also, goals help the company to remain focused, measure its growth, and, to a very large extent, increase customer satisfaction and loyalty.
However, a business will struggle to achieve its goal without the necessary finance.
For example, if one of the goals is to expand the business and launch it into a couple of new cities, without the necessary finance, the goal will not be feasible.
Therefore, investing money into achieving business objectives will allow the organization to achieve its goals and improve future financial stability through the outlined growth plan, hence the importance of finance in a business.
Finance Management
Although some have the opinion that ‘money is the fuel of any business, it is also important to remember that appropriate handling of that money is critical for business sustainability or even day-to-day living and expenditures.
Therefore, the only way to successfully grow a business is to properly manage its money, allowing the business to reap the benefits of its finances.
Financial Management means applying general management principles to the financial resources and assets of the business enterprise.
It is also the strategic planning, organizing, directing, and controlling of the financial undertakings such as procurement and utilization of funds of the organization, while also playing an important part in fiscal management.
To know more about financial management, Check out What is management in business? Best management business jobs
Objectives of financial management
The objectives involved in financial management include;
- Ensuring an adequate supply of funds for the organization
- Make sure shareholders get good returns on their investment, which will be dependent upon the earning capacity, the market price of the share, and the expectations of the shareholders.
- ensuring optimum and efficient utilization of funds in the maximum possible way
- Creating and ensuring real and safe investment opportunities so that an adequate rate of return can be achieved.
- To plan a sound capital structure- so that a balance is maintained between debt and equity capital.
Functions of Finance Management
The finance management team of an organization is obligated to;
- calculate and estimate capital requirements
- form a capital structure
- invest appropriately the funds
- source for choice funds
- allocate the profits appropriately
- use the surplus (if any) profitably
- manage cash effectively
- control the finance of the body
Finance management is generally concerned with procurement, allocation, and control of financial resources within a concern.
Some importance of Finance management include;
- Helps the organization in financial strategizing and acquisition of funds
- Aids the organization to effectively and profitably utilize and allocate the funds received or acquired
- Supports the organization in making critical financial decisions
- Helps in improving the profitability of organizations
- Increases the overall value of organizations
- Provides, aids, and tries to maintain economic stability.
Conclusion
It is no secret that finance and business work hand-in-hand whether it is a for-profit or a non-profit organization, you need funds to kick start and maintain.
Therefore, finance in a business that has to do with the allocation of assets, liabilities, and funds over time has to be meticulously appropriated as finance management enables the organization to keep its operations running.
FAQs
What are finance instruments?
A financial instrument is the means by which you can obtain financial services.
It is a contract between two parties and involves monetary activities. It is also used for investment, lending, and borrowing purposes. Additionally, they are either classified as cash instruments or derivative instruments.
What is the difference between financial services and financial activities?
Financial services are the services that allow consumers and businesses to acquire financial goods. Like services offered by a payment system provider such as checks, credit and debit cards, and electronic funds transfers.
While, Financial activities are the initiatives and transactions that involve the inflow or outflow of money carried out by businesses, governments, and individuals.
What are the finance career options?
- Investment banking
- Wealth management
- Personal/Private banking
- Commercial banking
- Corporate finance
- Accounting
- Audit
- Financial planning
- Insurance
- Treasury etc.
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