The study and creation of monetary assets, wealth management, and investment are all included under the umbrella word “finance.”
A wide range of topics are covered by finance, including how individuals, families, businesses, and governments manage their money. Everything from the decisions taken by businesses to the ones made by public bodies and even ordinary people is affected.
Regardless of whether we like it or not, we all have a role to play in the financial sector. Whether you opt to save, invest, budget your money, or even buy essentials of life like food and shelter, you are engaging in financial activities. A financial decision is made whenever money is involved.
In addition, regardless of one’s academic field, knowing how to manage one’s own funds is an important life skill.
Because it will save you and your business a lot of unneeded financial stress and help you build wealth over time, understanding how finance works is essential.
Although scientists have recently recognized more categories such as behavioral and social finance, the three main divisions of finance remain.
Corporations make decisions that affect their assets, liabilities, income, expenses, and debt and equity instruments in order to achieve their corporate objective. This is what corporate finance is all about
Taxation, public budgeting, structural policies, and other instruments are used to control the financial system in public finance.
For example, savings, investing, budget planning and expenditure control all fall under personal finance’s purview.
- Corporate finance
- Public finance
- Personal finance
1. Corporate finance
Corporate finance is the study of how companies raise money, use that money to operate their operations, and then make wise investments with that money.
Debt financing, equity, short and long-term financing instruments; investment and dividend decisions such as where and when should they invest, should they give out excess profit to stakeholders or reinvest back into the business? These are some of the questions addressed by this branch of finance. A company’s statement of financial status summarizes all of its financial decisions for that period.
Corporate finance’s ultimate goal is heavily influenced by the organization’s mission. The primary goal of traditional corporate finance is to increase the firm’s value, however there are a number of underlying assumptions.
Profit maximization was first supposed to be the only goal of business, leading to the mistaken conclusion that all businesses are profit-driven. The idea of shareholder wealth maximization, on the other hand, asserts that companies are more concerned with safeguarding the interests of their shareholders.
As a company’s ultimate purpose, it should have a capital ownership structure that incorporates regular dividend declarations.
However, in fact, a company has more than just stockholders and other owners to please. The traditional theory of corporate finance does not take into account the interests of stakeholders such as employees, rivals, and the public.
There is a contradiction between the interests of the shareholders and those of these interest groups currently.
For example, a manager’s compensation is more important to him than the company’s stock price. As a result of this, he may make some short-term investment decisions that will help him earn a higher wage while ignoring long-term consequences.
A firm must also meet the needs of the community in which it operates. When it comes to corporate finance, this is something that hasn’t been considered. The same is true for business rivals and customers.
These issues led to the development of a new theory of corporate finance that incorporates the interests of other stakeholders.
2. Public finance
The management of a country’s debt, the use of government funds, the collecting of tax revenues, and the distribution of those funds are all included in public finance.
In other words, it’s about how the government spends public funds, oversees resource distribution, and keeps the economy stable.
Structural economic policies must be devised by the government in order to boost the economy and keep inflation under control. Additionally, the government is in responsible of producing jobs, providing fundamental resources for the common man like a strong road network, making financial decisions like external loan-seeking, public investments, and making economics laws.
For instance, the National Bureau of Statistics estimates that Nigeria’s GDP would rise by 1.5% by the end of 2021. As a result of a stringent policy implemented by the government, this occurred. Consequently, it demonstrates the extent to which the government is in charge of managing the economy.
3. Personal finance
People’s personal finances include how they manage their income, budget expenditures, and make individual investment decisions. It is important to remember that personal finances have two legs: income and expenses. Expenditures include everything from food and medical care to clothing and transportation. Income refers to the amount of money coming into a person’s bank account.
When it comes to personal finance management, effective budgeting is often the first step. This is because budgeting allows you to take control of your spending rather than letting it happen as it may.
Savings are taken into account before any spending are, under a rigid budget plan. Due to human nature, we tend to have endless needs and compelling desires, which might make saving for the future less successful than putting it off until the end.
As a result, it is best to begin by removing savings before allocating expenses.
What’s next after Saving?
For the most part, Nigerians save with the intention of later spending what they’ve saved. It doesn’t make sense to spend all of your savings on the same items you’ve been avoiding.
Savings, in the long run, become an investment, according to economic theory. After you’ve saved up some money, the next step is to invest it in reputable companies and enterprises that provide a steady return on your investment.
You’d be able to see your money grow exponentially this way. Your fortune would skyrocket in no time at all. Those that are rich know this to be true.
Difference between economics and Finance?
It’s common for people to confuse finance with accounting and economics, even though they’re both closely related. At its inception, Finance is said to have been a distinct branch of economics.
As a social science, the study of economics is concerned with the interaction between human beings and the means of production and the distribution of scarce resources in the face of unlimited desires. Financial management, investment, and wealth development are all part of the larger field of finance.
Macroeconomics and Microeconomics are the two main divisions of economics. As we’ve seen above, there are three distinct areas of finance: corporate, public, and personal.
Economics focuses more on the scarcity of resources and the optimization of production tools to meet human beings’ insatiable appetites than any other discipline.
Deflation/inflation, regular national output, taxes, and budgeting tools are all discussed as well as market output and commodity prices based on supply and demand. Governmental economic policies are also discussed.
People, businesses, and governments all make financial decisions in regards to how much money they spend and how much money they put away.
Investments with low risk, capital markets, statistical analysis and debt and equity financing are some of the instruments of finance.