The word ‘Finance’ refers to a specific field that relates to the investment of assets as well as liabilities frequently under uncertainty and often involving risk. To be precise, Finance is the art which is concerned with the management of money.
Market participants always aim to determine the asset’s price centred on their ‘risk level’ and on Rate of Return and Fundamental value respectively. Finance can be divided into 3 categories.
- Personal Finance
- Corporate Finance
- Public Finance
Matters in the arena of personal finance revolve around certain things.
- Protection against events in wider economy
- Safeguard against any unexpected personal event
- Transmission of family resources(wealth) thereby maintaining family traditions
- Effects concerning tax rules mainly tax penalties or subsidies
- Impacts of credit on monetary standing concerning individuals
- Development of a ‘savings plan’ or support relating to big acquisitions such as education, home etc.
- Planning a secure future thereby building up an environment where financial stability prevails
- Pursuing a ‘savings account’ or a ‘checking’ one
- Doing homework for prolonged term expenditures or retirement
Personal finance may include education expense, financing durable possessions such as cars or sponsoring any real estate, purchasing any insurance concerning ‘health’ and ‘property’ making investment and savings for the purpose of retirement. Personal finance can also include paying for any obligations concerning a debt or any loan. The Financial Planning Standards Boards have proposed 6 key areas relating to Personal finance.
- Financial Position:
It deals with understanding of the ‘personal resources’ that are available by reviewing the domestic cash flow and net worth. Net Worth refers to a balance sheet concerning any person, the calculation of which results in sum of all possessions (assets) minus all accountabilities on the part of that person.
The household flow of cash sums up all the expected income sources within 1 year thereby subtracting all probable expenses within the said year. From this study the fiscal planner can determine the degree concerning the accomplishment of personal objectives. Maintaining a ratio (proportion) of 2:1 (or greater) is determined as strong in measuring a company’s ability in covering the cost concerning its assets.
- Adequate Protection:
It is concerned with the analysis of protecting a household from unpredicted risks such as death, property, health, disability, liabilities and long-term care. Though some of this is self-insurable, most of these risks will require the essence of purchasing an insurance contract. Determining the insurance level that should be obtained on terms (cost effective terms), a piece of good knowledge on market concerning personal insurance is important.
Professionals, business owners, athletes and entertainers are always on the look for insurance specialists to seek protection. Since insurance enjoys benefits concerning tax, utilization of products relating to insurance investment can be critical to the overall planning of investment.
- Tax Planning:
Management of income taxes will question you when you will the same and how much. The lifetime burden of tax can be reduced by benefits like tax deduction plus credits offered by the government. Most of the current governments are accustomed to the usage of a progressive tax.
With the enhancing of one’s income, payment of a tax on a higher ‘marginal rate’ is mandatory. Taking advantage of countless tax breaks while making plans for personal finances can create a significant impact on saving your money(in the long term).
- Investment and Accumulation of goals:
Fiscal planning is actually making plans regarding how to accumulate money for life events and superior purchases. Gathering of assets include several reasons like education expenses payment, beginning a business, buying a house (or a car) and last but not the least is saving intended for retirement. Inflation is a major problem in achieving the above goals.
The financial planner will advise a blend of allocating asset and savings to be financed in a variety of investments on a regular basis. Managing these risks concerning the portfolio of investment is most of the time accomplished by ‘asset allocation’ which tends to diversify investment opportunity and risk thereby prescribing a percentage(of allocation) to be invested in cash, bonds, stocks and other alternative investment options. Again, the allocation must include the ‘personal risk profile’ of each and every investor.
- Retirement Planning:
It is the procedure which highlights the understanding regarding how much it costs leading a retirement life. The process also upholds a plan to allocate assets to meet any shortfall regarding income. Methods relating to retirement plan include using the benefit of structures (allowed by the government) in managing tax accountabilities.
This includes IRA structures or retirement strategies (sponsored by the employer) with annuities and products regarding LIC (i.e. Life Insurance). Most often, this specific field is ignored as most people comprehend this being something in distant upcoming life. No sooner one starts investing; the greater the probability one has, intended for being prepared in fact.
With every additional year signifying missed contributions, a tension is created leading you to contribute a greater figure leading up to the date of maturity regarding your age of retirement. Again if you have acquired much wealth at your youth, you may be able to make investments with stocks or mutual fund accordingly thereby relying on how much you will believe in yourself to maintain your life standard as retirement arrives.
Assigning a portfolio to one’s goal is necessary and it must be adjusted with changing of one’s needs and desires. This allocation is always suggested by the financial experts as it permits individuals in building capitals during their employed years and then keeping their gains safely ultimately thereby avoiding instability.
- Estate Planning:
This procedure includes planning of disposition of one’s possessions after demise. Avoiding the taxes (imposed by the federal government) at one’s decease means that more of one’s properties will be distributed to his or her heirs. Again you can leave your belongings to your family or friends or charities.
Corporate finance encompasses in its arena the sources concerning funding and the capital structure concerned with corporations. It deals with the actions taken on the part of managers regarding increasing the firm value to its shareholders and analysis with the tools needed to allocate financial resources.
Although it is differentiated from the managerial finance (on the principal ground) which deserves special means in studying financial management related to every firm, instead of only corporations, the key concept concerning the study of corporate finance lies in exploring the fiscal problems that are a barrier to varieties of firms in achieving their goals.
This arena of finance generally takes into account balancing risk with profitability, while making desperate attempts to maximize an entity’s assets, cash flow concerning the net income with its stock value involve 3 principal areas relating to allocation of capital resources.
The first one is Capital budgeting. It is essential on the part of management regarding what (projects, if any) it should choose to undertake. The discipline concerned with Capital budgeting may employ Standard Business Valuation techniques or even can extend its choice to Real Options Valuations.
The second one is Sources of Capital. It states how the above investments are to be financed or funded. The Capital regarding the investment procedure can be provided by means of various sources, for example, by shareholders in ‘equity’ form, creditors and frequently in ‘bond’ form. The last but not the least is the firm’s cash flow.
Working Capital or temporary funding is mostly provided on the part of a bank by an extension of ‘a line of credit.’ The balance betwixt (between) these elements deserves special mention, thereby forming the Capital structure associated with the Company.
The Third one is the Dividend Policy. The management requires on its part to determine whether any excess of cash is to be reserved for investment in the long run or operational necessities or to be spread (distributed) among shareholders (in what form). Working Capital Management relates to inventory and cash besides debtors management.
Corporate finance provides the scope for valuation of a business, investing of stock, or management relating to the investment. Investment means the acquisition of an asset with a hope that its value will increase over time, thereby giving back a higher ‘rate of return’ at the period of disbursing dividends. In Investment Management, choosing a portfolio requires the usage of fiscal analysis on one’s part so that one can determine what to invest when to invest, and how much amount to invest.
To accomplish the above task, the company requires performing several tasks.
- It has to identify pertinent objects plus constraints. To make it more clear, the company has to identify individual or institutional goals, risk opposition, and considerations of tax.
- Detect the applicable strategy thereby going through strategies and detecting which are active and which are passive
- The company must measure the performance of the portfolio.
Financial Management intersects with the accounting profession’s economic function. However, Financial Accounting upholds itself as the historical fiscal information whereas Financial Management is demarcated as the distribution of Capital resources to upsurge the value of a firm to its shareholders with an aim to upturn their rate of return on savings.
Financial Risk Management is a key element of Corporate Finance that upholds itself as the performance concerned with creating as well as protecting financial value thereby using fiscal instruments required to manage exposure to risk (particularly credit and market risk). It lays emphases on how and when to hedge using those instruments thus interacting Financial Engineering.
Akin to General Risk Management, Financial Risk Management necessitates detecting its sources, determining it and framing plans to address these, and can be qualitative as well as quantitive. In international banking precinct, ‘Basel Accords’ are normally adopted by those international banks which are active to track, broadcast and revealing operational, market and credit risks.
A unit whose income exceeds its expenses can offer or invest the extra income in assisting that excess income procedure in earning more income in the long run. An entity whose expenditure exceeds its income can promote its capital either by borrowing or by selling equity claims, thereby declining its expenses and enhancing its income. The lender can look for a debtor, i.e. a financial intermediary or can purchase bonds or notes in the bond marketplace.
The lender accepts interest; the borrower compensates a greater interest, and the fiscal intercessor earns the difference necessary for the loan arrangement. Aggregating the activities of many borrowers plus lenders a bank deserves importance in accepting deposits from moneylenders by paying interest on it. Personal finance is put into use by individuals. Public finance is preferred by the government whereas business, schools and non-profitable organizations rely on Corporate finance.
Finance is regarded as one of the vital aspects concerning Business Management and encompasses analysis relating to the usage and acquirement of funds (for the initiative).In Corporate finance, any company’s ‘capital structure’ is the outcome of the amalgamation of financing methods it uses in raising funds.
These approaches include ‘debt financing (bank loans and bond sales),’ ‘equity financing (sale of stock to investors, the original shareholders of a share). Ownership regarding any share provides the shareholder certain rights and powers (as per contract) including the right to accept professed dividends and to vote the substitution on significant matters. The owners of either government or corporate bonds and preferred or common stock may be Institutional Investors.
Public finance relates to independent states and sub-national units and associated public units or organizations. It includes a strategic perspective (long-term based) regarding investment verdicts that affect civic entities. Public finance mainly deals with the required expenditure’s identification concerning a civic sector unit and its revenue’s sources with the budgeting procedure and municipal bonds associated with projects concerned with public work.
Author Bio: Evelyn W. Minnick is a lady who can be said to be a genius in the field of teaching. She deserves special mention as an online teacher and mentor thereby teaching students of not only high school but also universities. Dealing with students (of various grades), she guides them in achieving their desired goals through her articles and notes.