What Does Finance mean? The 3 Types, and Importance

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What does finance mean

Overview of Finance

When we think of finance, we talk about situations and conditions that have to do with monetary issues.

We think of finance as comprising a wide range of activities such as generating and managing income, making investments, budgeting before spending, saving, and lots more.

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Due to its broad scope, it becomes impossible to directly allocate finance to a specific sector.

Thus, we have various departments carrying out the activities of finance.  We have the government, firms or organizations, schools, health, businesses, and individuals. All these departments include finance in their daily activities.

However, notwithstanding the various departments, the three most outstanding category remains public finance, corporate finance and personal finance.

This sub-division of finance touches the various departments and other areas of financial activities. It also explains other areas that need attention.

Understanding Finance and What It Means?

Different Authors and publishers have defined finance in different ways but still arrive at the same meaning.

According to Tim Vipond an author in corporate finance institute: Finance is the management of money and includes activities such as investing borrowing, lending, budgeting, saving, and forecasting.  He also went further to testify that there are three main types of finance.

Another definition: according to Wikipedia.org finance is a study that figures out how people, businesses and groups make and use money. 

Generally, anyone can define finance according to how importance, and the roles it plays in every sector. From the definitions above we can clearly state that finance is the activity of managing some certain amount of money either by individuals, group or households, government or corporate bodies.

The management involves generating revenue, (through investments and loans). Again, putting them to productive use through expenditure and maintaining stable financial growth.

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Types of finance

Financial activities usually take place at various levels of the financial system the sub-division of finance. There are three types of finance which include Personal finance, corporate finance, and public finance.

What is personal finance?

Personal finance deals with the management of individual or household monetary activities. It involves saving for emergencies and future goals including retirement. Investing to acquire more revenue, and budgeting for expenses. It further includes making informed decisions to obtain a loan, and managing debts to achieve financial objectives.

Going further on personal finance, according to financial planning standard board FPSB.org a few directives were given for the individual to be aware of. This could help for security when making decisions towards financial plans they include:

1. When making large purchases such as funding education or home, they need to build a savings plan. A savings plan is a personal or household account specifically built for long-term or short-term financial goals.

2. In times of economic instability, there is a need to secure a financial future by establishing various investments.

3. Planning for insurance protection is important, should there be inevitable it further involves taking the right policy.

4. To bear in mind the adherence to policies on tax and other penalties that might affect personal financial management.

5. Develop a savings account scheme. It is like regular savings where you make your day-to-day deposit. You can as well withdraw at any point in time.

6. Individuals or households need to consider retirement plans, for future financial security.

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What corporate finance mean?

Corporate finance is a sub-section of finance that deals with the activities of making financial decisions aimed at developing the worth of an organization.

Its activities include raising the capital structure of the firm to acquire businesses, and promoting every activity that helps increase organizations value. Finally to promote and uplift the worth of shareholders in the organization.

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More importantly, it looks towards ideas that could help maximize the firm’s objective in the long run. This relates in terms of stocks, shares, and profit to shareholders while doing this recognizes its stand on risk.

Corporate finance as well develops funds to ensure maximization through investment made on a different project. This could help settle the liabilities of the organization or firm. It also monitors and manages various risk

Some activities help in managing corporate finance including capital structure, capital budgeting, and Dividend policy.

Capital budgeting

This implies making wise decisions on the right project to embark on that will generate revenue while planning for investment.

Capital structure

This is using various long-term funds of equity and debt for the finance of the organization’s operations

Dividend policy

A dividend policy is a strategy guiding the procedures of how the company pays out its dividend to shareholders.

What does Public Finance mean?

Public finance seeks to direct its activities on the role of the government in the economy. It deals with the management of a country’s income and expenditure as well as loans given out and debts to repay.

Public finance is divided into components, which deal with revenue, expenditure, tax, budget, deficit, surplus, and national debt.

The importance of finance   

The importance of finance cannot be treated specifically because of its wide scope. Hence we attributed the importance to the various scopes that come under finance. While it concerns all activities that deal with money. It, therefore, relates to the three types of finance.

The individual, corporate, and public derive the benefit that accrues from finance. For this reason, when we talk of the importance, we simply relate it to a particular scope, either to personal, corporate, or public but in general we could list these as the important:

1. The three sectors of finance need money to carry out day-to-day activities that need funding.

2. For the individual or household, every expense needs monetary attention

3. An individual or organization’s goal needs to be accomplished with the aid of finance.

4. The three sub-divisions strive to acquire financial knowledge because they understand that finance is important

5. Every country’s government needs finance for the development of its economy. The individual and corporate body are not left out.

6. The availability of finance in every sector makes it very important for the protection of lives and property

7. Finance is very important for any organization and individual as it becomes its core objective for existence

8. Individuals and businesses need to accrue more profit through investing in profitable projects and this calls for finance

9. Finance helps the businesses and individuals to better understand their needs and how to channel budgets and expenditures.

10. Finance has a great role to play in understanding the direction of human needs in the country’s economy.

Bottom line

All the sub-divisions of finance carry out financial activities, for this reason, no sector can boast of working anonymously.

All the departments and sectors utilize the same method to carry out financial activities. They all invest, save, budget, and make expenses, they further seek a way to generate more revenue to keep the activity moving.

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