The Components of Finance

The Components of Finance

Finance is a broad term encompassing various things regarding the study, development, and management of funds and investments. It deals with how the surplus value of funds is used, how they are invested, how they are taxed, and how the whole system functions in the society as a whole. Finance can be subdivided into different areas and disciplines, such as: personal finances, business finances, public finance, and accounting. Finance students will study all these different areas and subdisciplines in order to have a complete and comprehensive understanding of how finance operates. Finance graduates will be ready to apply the knowledge they acquire in any area where they are employed.

Private Finance: Personal finance deals with managing money that a person receives from salary, inheritance, gifts, or from any other source. Interests on bank accounts and savings accounts are included in personal finance. Commercial and investment banking is another type of area of private finance. In commercial banking, investors trade assets, property, and securities for a profit. The techniques that are used for the process of earning profits are called financial processes; the goals of the investors may vary depending on the specific circumstances of the investment.

Corporate Finance: Corporations engage in financial activities in order to increase their value. They do this by creating new enterprise value, by securing long-term profits, or by minimizing their expenses and trading excesses. In order to perform all of these actions, corporations must engage in financial activities, and the types of financial activities performed by corporations depend on the nature of the corporation. Examples of these types of financial activities include: buying real estate, developing land, constructing bridges, purchasing oil refineries, investing in productive assets, selling products, acquiring other companies, manufacturing, and hiring workers. All of these activities create potential value for corporate finance.

Public Finance: Finance is often part and parcel of public policy. Public policies can either be directed by the state or by individual cities, counties, or nations. Public policies that affect private citizens include taxes, social programs, and borrowing. Many aspects of public finance are controlled by municipal governments through various means. Examples of such sources of finance are: borrowing from banks, borrowing from the federal government, borrowing from businesses, borrowing from other governmental agencies, collecting debts, and selling property.

Personal Finance: Individuals usually control personal finances through their ability to earn income, manage their investments, spend, and save. Finance is not only about money, but it also includes credit, bank accounts, and insurance. Finance is part and parcel of the modern economy. One example of an individual financial activity is buying a house or a car. Many individuals use their credit cards to make purchases; therefore, the terms of credit cards, interest rates, and grace periods are crucial components of personal finance.

All three components of finance are interrelated and play an important role in determining the financial health and future of a business, an individual, and a country. The three elements of finance are: asset, liabilities, and cash flow. These three elements are usually used to create financial statements that convey the information needed to determine the health and value of a specific enterprise or portfolio of enterprises. It is very important that managers of companies develop, implement, and evaluate their company’s financial systems in order to ensure that the information provided in the financial statements and risk management reports (the latter two are often separately developed and utilized) are accurate and up-to-date.