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Finance

Financial stability is more of a need than a choice, and most of us want ourselves or our business to be financially stable, but how? Financial stability is solely dependent on one’s Finance but to answer the question of how to achieve it? We need to know: WHAT REALLY IS FINANCE? Professor Jiang Wang responded to this question as follows “It is really about how to make the best economic decisions or how to best utilize the limited resources we have to meet our economic needs.”

So basically, Finance is the management of money which includes borrowing, lending, investing, and all other transactions related to the business. It also develops a sense that a certain amount of money is not worth the same in the future; for example, if you invest Rs100,000 in a business and after one month it gives a profit of Rs10,000, so is this a good business? At first glance, most people will say “Yes,” as common sense tells us that is a 10% gain in profit. Still, according to Finance, you cannot compare the worth of money at two different points in time as they depend on a lot of things like the net change in the value of a dollar, and all of it is subjective. One way to do it is to compare it with bank interest. Let’s say a bank interest gives 2% of turnover in 2 months then if we compare it to the business above, it will show that it is worth investing in. Finance has many different branches, each of which serves a different purpose. Here are its most essential branches:

  • Personal Finance 
  • Government Finance  
  • Corporate Finance
  • Behavioral Finance
  • Social Finance

Personal Finance:

It basically revolves around the budget of a single person or a family, which mainly includes their earnings, expenses, future plans, and basic needs. This field is a recent development in the world of Finance, although some forms were being taught in schools and universities under the name of “Home Economics”. Government Finance: This is also known as public Finance as it mostly depends on the public and is for the public. In this, the government manages the financial stability of its country and prevents it from crashing by different measures like implementing tariffs on imports or raising taxes. This also includes the cost of resources for a future project and the allocation of income in different provinces. Sri Lanka’s Government recently ran out of Finance to run the country, and its basic reason is their government was not able to run government finance properly in challenging situations.

Corporate Finance: 

Corporate means business and they receive Finance in different ways. It can be either by investments in their company or a bank’s loan. Proper financing of a business can help it to grow exponentially. It is basically the backbone of the business. Its main concern is to maximize the value of shareholders by planning and using different strategies. It is also known as investment banking. Corporate Finance has three main areas; Working Capital: It manages short-term expenses of business like taking a loan to buy inventory. Capital Budgeting: It is the long-term budget of the company, and all the future plans are based on this. Capital Structure: It is how the company will finance itself for the long term, like how much is to be allocated to a certain project.

Behavioral Finance: 

In the past, it was really easy to predict economic events using theoretical evidence and judging the behavior of the economic world, but now it’s not that easy due to the influx of many different currencies, like cryptocurrency, and the scaling of multinational companies like how they can affect the economy of a country. This does not mean that conventional theories are totally useless and are not to be studied. However, they still are important, just not that precise (I would explain more of this in Economics vs. Finance topic below). Behavior finance is mostly dependent on the cognitive psychology to explain the anomalies in the financial world like currently, fuel prices are at their all-time highest price, and its cause can be explained by cognitive psychology that it is due to the increase in demand after covid lockdowns. Moreover, another reason is that Russia is a major exporter of fuel, and due to the Russia Ukraine war, it is not able to export it usually, which has caused a lot of disarrays.

Daniel Kahneman and Amos Tversky are the fathers of behavioral Finance. Richard Thaler later joined them. They together combined the concepts of Finance, economics, and cognitive psychology to create concepts to be used in the modern world, like how the bias of a certain country can affect your economy Social Finance: It basically is the study of investments done in a social organization including non-profit organizations. Instead of donation, these investments reward the investor through equity or a financial benefit and also provides a social gain in the society. Its modern form includes micro financing, which is investing in small businesses like startups to help the business grow.

Economics vs. Finance

If you do not have a business background, then you might be confusing Finance with economics; although they are connected but they have some small differences. The major difference is that economics is theoretical, meanwhile Finance has more of a practical approach which means you can learn economics through books and the internet, but for Finance, you need to have a business. Economics has two branches, macroeconomics and microeconomics, where macroeconomics is all about how a country performs, while Finance can be specific to an individual or a company. On the other hand, microfinance teaches how a certain condition or decision can affect a business or a person, while Finance is the management of the business.

List of Careers in Finance 

  1. Wealth management 
  2. Corporate Finance 
  3. Mortgages / lending 
  4. Accounting 
  5. Financial planning 
  6. Treasury 
  7. Audit 
  8. Equity research 
  9. Insurance 
  10. Commercial banking
  11. Personal banking (or private banking) 
  12. Investment banking

Some courses for more information:

Free Corporate Finance Fundamentals Course 
(Link: https://corporatefinanceinstitute.com/course/corporate-finance-fundamentals/)

Types of Financial Models 
(Link: https://corporatefinanceinstitute.com/resources/knowledge/modeling/types-of-financial-models/)

Interactive Career Map 
(Link: https://corporatefinanceinstitute.com/resources/careers/map/)

Salary Guides for Finance and Business
(Link: https://corporatefinanceinstitute.com/resources/careers/compensation/)