What are the different types of finance?
Financial services is a complex operating environment and a behemoth of an industry: it constitutes at least 20% of the global economy, and its impact on economic growth is vast.
From an individual running a household to a small business to a multinational organisation, understanding how to manage finances – including what money to spend, where to spend it, and how to spend it – offers a strategic edge. Those with the ability to effectively analyse and apply financial information in a practical sense are more likely to make astute decisions regarding personal and business finance. As such, there is no shortage of demand for individuals with the skills and specialist expertise in different types of financing – including public, corporate and personal finance, the three main categories – to help bolster financial decision-making in all aspects of the industry.
What is public finance?
Public finance refers to all revenue and expenditure collected by, and for, the public. It involves the financial planning and management of public funds in order to develop, grow and nurture a country’s economy, and it plays a vital role in a nation’s economic status – both domestically, and internationally. Public finance affects each and every person within a country. It relates to government expenditure, national debt, taxation and tax system, budget procedures, stabilisation policy and more.
One of the main objectives of public finance is to fulfil the basic needs of a nation’s population and maintain a healthy national balance sheet – from generating employment to maintaining the value of national currency on the international market. Other key objectives include:
- Managing public needs, including governmental responsibilities such as the provision of shelter, food, healthcare, education and infrastructure
- Economic development, where effective management leads to national growth
- Removing inequality, via proper allocation of resources such as providing relief to those most in need and appropriate, mean-based taxation
- Maintaining price stability, which is necessary to control inflation.
There are different types of public finance: public revenue; public expenditure; public debt; and financial administration:
- Public revenue refers to any money that is sourced from the public via methods such as direct taxes, indirect taxes, fees, fines, maintenance charges and penalties.
- Public expenditure refers to spending on infrastructure, including transport systems, medical facilities, and schools and colleges.
- Public debt refers to debt accrued by a government in order to meet the needs of a country and its inhabitants and to keep the economy running. It occurs when public expenditure exceeds public revenue.
- Financial administration refers to the overarching management of public finances.
Typically, if and when a government decides to intervene, and take action, within a nation’s economy it should support economic efficiency, macroeconomic stabilisation, or income distribution.
What is corporate finance?
Corporate finance refers to the financial modelling, planning, development and control of an organisation’s capital structures, including management of its revenues, assets, debts and liabilities. It is often associated with corporate transactions that lead to the creation of such structures, as well as changes in ownership – such as mergers and acquisitions (M&A).
Ultimately, the aim of corporate finance is to increase value and profit for a business and its shareholders through optimal financial decisions. The main functional areas are: capital budgeting; capital structure; working capital management; and decisions regarding dividends.
ICAEW list numerous types of corporate finance activity, with examples including:
- M&A, demergers and takeovers, involving public or private companies
- Buy-outs and buy-ins of companies, divisions and subsidiaries, usually backed by private equity finance
- Financing and structuring of project finance and joint ventures
- Raising infrastructure finance and advising on public-private partnerships and privatisations
- Raising seed, start-up, development or expansion capital via angel investors, investment banks, venture capitalists and other lenders and sources of funding
- Equity issuance, such as listing companies on the stock exchange
What is personal finance?
Personal finance encompasses all the financial activities and decisions involved in an individual’s life or household. It is an ongoing process of planning and managing, comprising five main areas:
This refers to cash flow from income generation that is used by an individual to support themselves and any dependents. From this point, a person can choose to spend, save or invest the money. Income can be generated via different sources, including wages and salaries, bonuses, dividends and pensions.
Divided into cash or credit, spending – any activities related to the purchasing of goods, services or consumables – accounts for the majority of personal incomes. Common spending categories include rent and mortgage payments, groceries, payments to loans, overdrafts or credit cards, taxes, entertainment and travel. Effective management of money in this area is critical to healthy personal finances.
Saving – whether in cash-form, savings accounts, or money market securities – is setting aside excess money for future use. Another critical area of personal finance, savings support healthy cash-flow management, and an understanding of saving options and interest rates is incredibly valuable.
Most people seek professional advice before they invest – purchasing assets that are likely to generate financial return – as financial risks and rewards can be difficult to judge and there are numerous, and significant, differences between various investment options. Investment types can include real estate, bonds, company shares, stocks, commodities and collectibles.
Protecting money and investments is critical, and should form part of a personal finance plan. Both short-term and long-term protection – such as life insurance, wills and estate planning, and health insurance – help to guard against both unexpected and adverse circumstances, such as illness, redundancy and death.
Get to grips with different forms of finance and their uses
From public to corporate to personal finance, gain in-depth knowledge of finance options and fiscal workings with the University of the Commonwealth Caribbean’s online MBA Finance programme.
You will acquire expertise in all areas of finance, together with wider understanding of organisational leadership and operations, through flexible study and module options. Ideal for those pursuing senior leadership positions within the financial services industry, your business studies will include strategy and decision-making, human resource management, economics, accounting and marketing. Alongside this, specialist finance modules will cover financial analysis, portfolio management, international financial management, and capital markets and financial institutions.