Finance is a broad term that describes activities associated with banking, leverage or debt, credit, capital markets, money, and investments. Essentially, finance represents money management and the process of acquiring needed funds. Finance also encompasses the oversight, creation, and study of money, banking, credit, investments, assets, and liabilities that make up financial systems.
Types of Finance
The field of finance is divided into three main types:
Personal Finance
Personal finance is specific to an individual’s situation and activity. Therefore, related financial strategies depend largely on a person’s earnings, living requirements, goals, and desires. Financial planning involves analyzing the current financial position of individuals to formulate strategies for future needs within financial constraints. For example, individuals must save for retirement. That requires saving or investing enough money during their working lives to fund their long-term plans. This type of financial management decision falls under personal finance.
Personal finance involves planning, implementing, and managing financial activities that impact individuals. These activities can include earning an income, spending money, saving and investing, and borrowing. Personal finance covers a range of activities, including using or purchasing financial products such as credit cards, insurance, mortgages, and various types of investments.
Banking is also considered a component of personal finance because individuals use current and savings accounts as well as online or mobile payment services such as eSewa and Fonepay.
Corporate Finance
Corporate finance refers to the financial activities related to running a corporation. A division or department usually is set up to oversee those financial activities. For example, a large company may have to decide whether to raise additional funds through a loan or stock offering.
Startups may receive capital from angel investors or venture capitalists in exchange for a percentage of ownership. If a company thrives and decides to go public, it will issue shares on a stock exchange through an initial public offering (IPO) to raise cash. In other cases, to budget its capital properly and effectively, a company with growth goals may need to decide which projects to finance and which to put on hold.
Public Finance
Public finance includes taxing, spending, budgeting, and debt-issuance policies that affect how a government pays for the services it provides to the public. It is a part of fiscal policy.
The central, provincial and local governments help prevent market failure by overseeing the allocation of resources, the distribution of income, and economic stability. Regular funding is secured mostly through taxation. Borrowing from banks, insurance companies, and other nations also helps finance government spending.
In addition to managing money in day-to-day operations, a government body also has social and fiscal responsibilities. A government is expected to ensure adequate social programs for its taxpaying citizens. It must maintain a stable economy so that people can save and be assured that their money will be safe.
Importance of Financial Management
Undoubtedly, finance is one of the most important aspects of a business. With huge funds, daily cash flow and continuous transaction, managing and monitoring all of the above turn necessary. As a matter of fact, managing finance is influential when it comes to making decisions. For instance, if the organization has greater funds, a part can be used for investment purposes and similarly, if the organization has funds lesser than the threshold value, it is important to put unnecessary spending to a stop.
To be specific, financial management helps the organization determine what to spend, where to spend and when to spend. It gives a better view of the financial status of the organization, which further outlines the financial processing of the same.
The following are some of the main reasons why Financial Management is important for businesses:
Generate Money
To start a business, you would need money. It is obvious that to make the first step and launch your business, capital investment is required. Further, as you move up the timeline, getting materials, hiring professionals, marketing and testing, every single step would need financial management.
Organize Operations
Businesses generate enormous amounts of money every day. This money has to be used further to pay bills, delegate funds, invest in multiple engagements and monitor all. Managing the inflow and outflow of money within your organizations is important. Failing the above, it becomes tough to allocate funds efficiently and effectively. Not to forget that irregular flow of money can turn a business insolvent.
Manage Cash Flow
Having excessive funds is at fatal as having lesser ones. For an organization to be carried on with their day to day processing, it becomes imperative to manage the cash flow. In case you have higher funds and you aren’t using it as needed, it signifies wastage of resources. For an enterprise that has surplus cash, putting them to use and investing in significant engagements would yield better returns and help them expand their business.
Strategize Funding
Of course, you would want to allocate funds and use it to map the expenses that take place on a regular basis. However, spending any or every cash without proper planning is not wise. You need to keep track of the expenses, monitor the frequency and then decide how to spend and how much to spend. At times, it is important to cut down extra costs and reduce expenses. And this can only be done when you manage your financial undertakings effectively. It is advocated that companies must have sufficient funds to deal with situations of monetary crisis.
Outline Long Term Goals
Organizations work to grow and scale their business high. To do so, it is important to have significant future goals that the organization aims to accomplish in a span of five or ten years. Financial Management helps an organization achieve its goals without fail. Consider that you have planned to expand your organization to three new cities. While actually implementing the plan, you run out of money. This wouldn’t have happened had you managed your organization’s finance and then executed. Pre-planning and working on the available cash of the organization helps you eliminate the future possibilities of crisis while moving ahead to attain your goal.
To Sustain Economic Downturn
If you look at the growth graph of an organization, you will never find one that rises straight or is without any bends. The growth of the cycle of business organization is a mix and merge of highs and lows which of course could be due to various reasons. Recession, depression, boom or failure, all add up to the fall of a business. With sufficient finance and significant financial management, it becomes easier for the organization to walk down the business cycle. No matter how bad the situation is, they are always ready to face the problem and bear the consequences without being under the threat of shutting down. Failure-proof financial management plans help the organization thrive even know adverse economic conditions.
