When you hear finance, the first thing that comes to mind is money. While this is true, finance covers a wide range of topics. Before delving into these two types of finance, you need to first understand the concept of finance and what it entails.
Finance refers to the management, study and creation of money. It also involves investments of money to create profits in the near or later future. Finance also studies the behavior of all factors of money giving reasons behind certain financial decisions.
There are three main types of finance. They are:
- Public Finance
- Personal Finance and Corporate Finance
Table of Contents
The concept of public finance seeks to bring to light the role of government and its contribution to the economy of a country. It does this by first assessing the government’s revenue and expenditure, usually closely monitoring the financial movements of public sectors and authorities. When a sector spends more or less than it should, necessary adjustments are made to achieve financial stability.
It is the job of public finance economists to monitor and regulate public expenditure, debt, revenue and budgeting. These are key factors that determine the economic growth of a nation.
Personal finance simply refers to how an individual manages his or her own money. You know how difficult it is to manage your own money. Without the right knowledge and skills, you may end up mismanaging your finances no matter how much. Without the knowledge of personal finance, you may end up working your whole life without seeing the result of all that hard work.
For clarity, personal finance refers to how you manage your money individually or as a family. It includes, but is not limited to investment, income, debt, budgeting, spending, saving as well as retirement plans and insurance.
Corporate finance is a branch of finance that deals with capital. Corporate financiers seek sources of funding for corporations to help improve and increase the value of the firm. the value of all corporations lies in their financial resources. Corporate finance aims to optimize a firm’s capital structure by reducing the firm’s Weighted Average Cost per Capital.
Corporate finances are always on the lookout for a firm’s liability and equity. These two factors are monitored closely by corporate finance economists. They are key in determining how balanced a firm’s capital financing is.
Difference between Personal Finance and Corporate Finance
The difference between personal finance and corporate finance is the use of leverage. It refers to the borrowing of money to invest in the future. Leverage is used in corporate finance as an investment strategy to support businesses by helping them expand and access capital.
In using leverage, the concept of debt and equity such as proceeds from the sale of goods, returns from investments and retained earnings come to play. The ratio of debt to equity ( i.e debt divided by equity) shows how healthy your business is. The smaller the ratio, the safer your business for investors and vice versa.
Although getting leverage is risky, its advantages outweigh the risks. You get investments for your business which increases the value of your firm. all you need to do is carefully collect loans so you don’t incur too many losses.