Important Types Of Finance

What is Finance?

First of all, small businesses need to understand that finance is more than just money. Although money is a legal tender used for transaction settlements, finance refers to asset allocation and management of monetary resources.

Finance cuts back on multiple activities, such as developing a cash flow forecast for your business, keeping money in a high-interest savings account, and creating budgets and financial models.

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Types of Finance

Finance is broadly categorized into:

  1. Personal Finance

  2. Public Finance

  3. Corporate or Business Finance

Personal Finance

Personal finance refers to the management of an individual's monetary resources across five key areas: income, savings, investment, expenditure, and asset protection. The goal is to make intelligent investment decisions and build a safety net that keeps the individual without restrictions or bad debts.

Business owners need to develop a strategic personal finance plan to protect them from unforeseen situations. For example, savings for your retirement help you create enough structures and avoid running out of money. Personal finance cuts across generations of wealth transfer, tax management, compliance, credit cards, asset management, hedge funds, and debt servicing.

Personal finance is always tailored to one's specific needs, whether short, medium, or long-term.

This means that two people may not necessarily have the same financial plan because of their different goals, earning potential, income, and time frames. For example, paying a loan may be your short-term goal when setting up pension funds, or a real estate investment may be another person's short-term priority.

Public Finance

Like individuals, governments also need to devote their resources to various sectors of the economy. How federal, state, and local institutions track the revenue of all the services they provide to the public and control the expenses of public finance.

One of the most important functions of the government is to distribute revenue through multiple activities such as making money through trade, taxes and loans, lending, infrastructure development and recurring expenses. By overseeing revenue generation and allocation, government agencies ensure a sustainable economy and prevent market failure.

Other aspects of public finance include tax management, debt issue, budgeting, international trade, and inflation control. These factors have a direct and lasting impact on business and personal finances.

Corporate or Business Finance

Corporate finance covers all the financial activities associated with running a business. You can think of it in acquisitions and investments, funding, capital budgeting, risk management, and tax management required for business growth in financial markets.

Companies need to maintain a balance between cash flows, risks and investment opportunities in order to increase their value and strengthen their capital structure.

A good example of corporate finance is choosing between equity financing and debt financing for a business to raise capital. Equity financing is an activity that ensures funding through stock exchanges and issues, while debt finance is a loan that has to be repaid along with interest on the agreed date.

Companies need to develop an income generation plan that determines medium and long-term business profits.

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