These three are the types of finance. Considering the different financial sizes of the three, they can also be referred to as the levels of finance; from a personal level to a corporate, and then public level. But what about finance?
Finance as a term has varied definitions, but most center around the management of money. Others though, include aspects like creation and circulation of money. In real sense this is the case with many versions of finance. As a course, finance encompasses cash flows, capital returns (dividends etc.), financial statements (balance sheet, profit/loss, income statements etc.), behavioral finance, interest rates and yields. Professionals in the finance industry mostly venture into commercial banking, investment (banking), insurance, corporate finance, treasury (public finance), audit services, and wealth management.
The entire finance realm and course revolves around personal, corporate, and public finance:
Refers to ‘management’ of money at a personal level. Encompasses income, expenses, savings, investment, and protection.
- Income – All forms of rewards derived from labor, businesses, investments, and assets. The various forms of reward are wages, salary, commission, profits, interest, rent, pensions, dividends, and bonuses. Income plays the primary role of settling financial obligations, even though the income itself may not be in the form of immediate cash.
- Spending – In spending, the money now leaves an individual’s ownership. Spending ensures a healthy financial living while at the same time wants are satisfied. Controlled spending is achieved by an order of priority, based on principles like the pyramid of wants. Budgeting is also done to achieve controlled spending.
- Saving – In the event that the income available is not exhausted by the spending, there results a surplus. This surplus is preserved for other reasons among them emergency funds, house savings, school fee, and anticipated medical fees.
- Investing – Individuals possessing surplus funds can elect to invest the money in diversified means. Some may buy securities, others put the money in productive bank accounts, while others may venture into businesses directly.
- Protection – After getting income, human beings now seek to protect their wealth and life at the same time. This is where the individual enrolls in an insurance program. Common insurance policies are life assurance, motor vehicle cover, theft and burglary, and health insurance..
Corporate finance is a higher level of finance management. This level of finance is defined as the management of a corporation’s investments, returns, and resources in a way that achieves profitability for the shareholder(s). Some of the aspects of personal finance are carried on to corporate finance, only on a larger scale. The realm of corporate finance entails capital investments, capital financing, and managing returns.
1. Capital Investments
This is the management of a corporation’s resources by investing them in a controlled manner so as not to risk losses. After shareholders pour in their equity capital, they will expect those resources to yield the most achievable profit margins. At the same time, the shareholders will want assurances that their monies will not drain down the pipe. Capital, therefore, must be managed with a very reduced risk margin. Also, capital from other sources such as lenders has to be accounted for fully. This is achieved by corporate financing.
2. Capital Financing
Corporate finance also entails development of strategies to source capital for the financial needs of the company, and to achieve other objectives like expanding the corporation, or dealing with competition and market shocks. Available capital financing channels include:
- Loans – a popular strategy for capital financing, loans are debt obligations used for capital financing, and come with a maturity date upon which the obligation should be settled. The lender, however, does not have a claim to the returns of the capital invested, and can only have access to the borrower’s assets incase of a default.
- Equity issuance – Capital is raised by issuing shares in a public or private forum. The investors/shareholders have a claim to the corporation’s assets and any returns that come out of their investments, all in accordance with the amount of shares held by the investor.
- Bonds issuance – instead of selling out significant rights of the company, the company may opt to issue bonds directly to investors. Issuing bonds is a brilliant strategy for financing, as the interest rates are lower than direct loans from banks. The strategy is also perfect for short-term needs without the need to sell out a part of the company. For investors, bonds have certain returns unlike equity shares. Its agreed upon with the issuer.
3. Returns Management
Corporate finance also entails the management of returns gained from the business of the corporation. A corporation has two choices when it comes to managing returns; plough back to investments, or share dividends with investors. Even as a management choice has to be made between these two, most times the approach usually merges the two, and the only decision to be made is the amount to be shared as dividends and the percentage to be plowed back to investments.
This is the major arm of finance that is in the purview of government and constituent authorities like legislature and central bank. Public finance is the management of a jurisdiction’s resources to achieve the following objectives:
- Economic development
- Emancipation from income inequality
- Price stability
- Favorable balance of payment
Public finance achieves the above objectives through several functions such as:
- Public revenue collection – favorable strategies around taxation, penalties, and fees.
- Allocation of public revenue – Accountable sharing of revenues across the government and its stakeholders to achieve economic equality. Public budgeting falls under this scope.
- Public debt management – consideration of different economic and political factors to acquire alternative finances through debt issuance to cope with budget deficits and emergency needs.
- Managing public assets – accountable management of a jurisdiction’s public assets to achieve the satisfaction of public needs. Public assets include infrastructure and facilities such as ports, airports, roads, railways, buildings, waterways, schools, commercial companies and other assets under the ownership of the government.
Public finance has become a critical scope of overall finance because the performance and condition of personal and corporate finance is regulated, directly and indirectly, by the government and public finance organs such as the central bank.