When you hear or see the word finance, what comes to your mind first? Let me guess, money, business, accounting, investment, capital, assets, liabilities, etc. Well, the truth is, you’re not wrong. Finance is very vast, but it still encompasses all of these terms and more. In this article we will describe the finance in business along with types and importance.
This article covers everything you need to know about finance, which is not limited to definitions, types, importance and financial management.
Below is a proper definition of finance to help you understand it better.
Definition of Finance
People finance is the study of how money works, how to deal with money-related risks that will eventually lead to better forecasting and the right way to invest it.
We can also define finance as the management of funds, transactions with money and how money can be acquired.
Here are some basic terms;
- Net profit
Types of finance
All institutions need funding needs and are directly involved with money, which is why it has three types of Finance.
There are three basic categories of finance;
- Personal finances
- public finances
- cooperate finance
#1 Personal Finance
Like the definition of Finance, Personal Finance involves the management of private funds, that is, families and individuals. It means financial analysis of the current financial situation of an individual or family. This analysis will include knowing the financial goals of the individual or family. And then look at the financial decisions they’ve made in the past, which include budgets, savings, spending, insurance, investments.
For example, suppose Williams decides to create a family budget to help reduce expenses, it means that there will be proper financial management in the family.
However, personal finance strategies depend on what the individual or family earns and their long-term goal. One interesting thing about this type of funding is that everyone is directly involved. This is where financial literacy comes in handy.
#2 Public Finance
Public Finance involves the government’s role in Finance. The way the government manages revenue and expenditure. Public finances cover all the financial decisions made by the government and why they made them.
For example, if a country decides to practice a closed economy, it means that finance professionals have previously analyzed the financial benefits of a closed economy and how it can have more positive impacts on the country.
Furthermore, if farmers subsidize the federal government , it would be because financial analysts have carried out a thorough analysis, including the long-term results of granting that subsidy. One good thing about public finances is that it holds government accountable for how revenues and funds are managed.
Some basic terms in Public Finance;
- national debt
- national budget
#3 Corporate Finance (Business)
Corporate Finance is the type of Finance that deals with the funding and sources of capital for a corporation. It has to do with all the financial activities involved in running a corporation. Most often, it is a department that provides for all the financial activities of a company. They make decisions ranging from how to invest, how much to invest, to how shareholders receive dividends.
Corporate Finance’s main objective is to maximize shareholder value. This can be done by implementing financial strategies that were initially planned.
Financial management is essential for all organizations. It is the process of strategically planning the management of an organization’s financial resources. This Fund control and monitoring process aims to allow the organization to achieve its goals and objectives.
However, in financial management, general management principles are applied. Any business with proper finance management will run efficiently. This means that organizations without proper financial management will face a series of problems that will eventually lead to their doom if not properly corrected.
Financial management objectives
- To ensure that investments are made at an appropriate rate and in the right venture.
- Overseeing financial matters to ensure shareholders get their returns, which means making a reasonable profit.
- Maintain sufficient cash flow.
- Regulating prices and trying to reduce the cost as best as possible.
- To ensure funds are used wisely and all finds are accounted for correctly.
Importance of Finance
The importance of Finance cannot be underestimated. No institution can function properly without Finance, yes! that how important it is. Finances can make or break an institution. Imagine a family that does not know how much it earns versus how much it spends, a country without investments or a company without proper accounting and financial management. Just imagining it alone seems impossible.
I’m going to break this down into three different categories, almost based on the types of finances above. Importance of Finance in;
- Families and Individuals.
- The business.
Families and Individuals
- To meet financial needs.
Financial security should be the goal of every family. However, without proper planning and management this cannot happen. A family that raises a budget family invests right, protects its wealth through insurance, and even has a retirement plan that created financial security. This family is financially secure and can meet the needs of its members.
- scale of preference
It helps families and individuals to become aware of consumption habits. They can make their wish list and know what they need more than others. A preference scale will help them not spend more than they plan to.
- Increases financial understanding g
Have you ever felt like you didn’t understand how your earnings were spent? How you feel robbed when you’re sure you did the theft. Proper financial management can help you avoid all these feelings. This holds you accountable for yourself. It may not be something you understand in a day, but with time and effort, you can improve day by day.
- Manage debts correctly
Being in debt is not a problem, but the ability to manage debt is where the problem begins. Financial knowledge will help you make proper analysis and informed decisions about your debt. How you handle debt says a lot about what our financial future will look like. Finances play a significant role in individual and family life.
business and companies
1. Fund generation
Funds and deals sound almost the same. Because the business needs funds to function. The process of making an equity investment in a company is finance. Another crucial part that Finance plays in generating income for a business is how to put together the business strategy to generate income.
Mr. Peters just launched his business and as far as he hasn’t started getting returns. finance has already played a huge role. From the marketing strategy to the type of people he would employ, to the type of raw materials he bought and the cause he holds them. All these steps went through the strategic planning of financial or literate professionals.
2. Manage cash flow
Managing cash flow in a business is a big deal because it can make or break that business. Therefore, proper financial skill is always required for this. Proper revenue accounting includes how workers are paid, how much to reinvest. Finances influence every decision about how money enters and leaves the business to generate more returns. This means that proper financial management can take care of cash flow in a business.
- Helps to well sustain the economic downturn
In every business, there is always a time when economic activities will have a general downturn. No business is 100% smooth every year. But the ability to manage that downturn and bounce back is where finance plays its big role in business again. Financial literacy will help you understand the economic crisis correctly and the implications it has on your business. This is the first step in solving the problem because you know when you need the help of a professional or the type of business consultant you need.
- Helps a company set more realistic goals
Every business has a long and short term goal. These goals are not something defined by random motivation or desires. In order to set realistic goals, there must be a good overview of the business, both past and present, this will help not only to set goals but to set realistic and achievable goals. Keeping records of everything that happens in the sector makes the goals set based on data and not random plans.
in the government
- Economic growth
A high rate of sustainable economic growth is the goal of almost all countries. However, for this to be achieved, the government needs to use some financial tools. These tools will increase aggregate demand and supply, which directly leads to economic growth. Some of these tools include taxes, subsidies, public spending and public debt. etc.
- Price stability
Inflation and deflation are one of the main determinants of price instability in a country. So, in the event of inflation or deflation in an economy, the government uses financial strategies to reduce the money in circulation, and this will reduce the rate of inflation.
If “country A” has inflation, the government will decide to raise interest rates, which will decrease the demand for a loan and, in turn, reduce the amount of money in circulation.
1-Proper allocation of resources
Government resource allocation requires some level of financial expertise. The government monitors resources (human and financial) so it knows the type of production to tax and which to subsidize. Meanwhile, a country’s financial management needs experts to make informed and effective decisions like this.
2–Import and export regulations
When a country’s imports become greater than exports, the government tries to regulate it using some financial strategies. Most of the time, they raise the import tax to discourage importing. Likewise, lower the export tax to encourage imports.
In conclusion, now you understand that the importance of Finance goes through all types of Finance, which directly affects all intuitions (everyone). Finances are an essential part of practical life; this is an indisputable fact.
We hope that you have understood the finance in business along with its types and importance.