Finance can be defined as the science of money management, and now you can be in charge of that in your Finance internship.
Finance is closely related to accounting, but it deals with the allocation of assets and liabilities over time under certainty and uncertainty conditions. Finance is also looking at the risk level of price assets and their expected rate of return. Finance can be broken into three different sub-categories: personal finance, corporate finance and public finance.
Personal finance may involve education, financing durable goods, insurance, investing and saving for retirement. Personal finance involves:
- Protection against unforeseen personal events, as well as events in the wider economy
- Transference of family across generations (bequests and inheritance)
- Effects of tax policies (tax subsidies and/or penalties) on management of personal finances
- Effects of credit on individual financial standing
- Planning a secure financial future in an environment of economic instability
Personal finance may also involve paying for a loan, or debt obligations. The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:
- Financial position: Is focusing on the personal resources available by examining net worth and household cash flow.
- Adequate protection: An analysis of unforeseen risks to protect a household from.
- Tax planning: Is how you plan to pay your taxes the best way.
- Investment and accumulation goals: Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement. Managing portfolio risks is most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity.
- Retirement planning: Retirement plan include taking advantage of government allowed structures to manage tax liability including: individual (IRA) structures, or employer sponsored retirement plans.
- Estate planning: Plan the disposition of one’s assets after death. One can leave one’s assets to family, friends or charitable groups.
Corporate finance is the area of finance dealing with the sources of funding and the capital structure of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources. Corporate finance includes within its scope business valuation, stock investing, or investment management. In investment management – in choosing a portfolio – one has to use financial analysis to determine what, how much and when to invest. To do this, a company must:
- Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
- Identify the appropriate strategy: active versus passive hedging strategy
- Measure the portfolio performance
Corporate finance generally involves balancing risk and profitability, while attempting to maximize an entity’s wealth and the value of its stock, and generically entails three primary areas of capital resource allocation:
- Capital budgeting: Management must choose which “projects” (if any) to undertake. The discipline of capital budgeting may employ standard business valuation techniques or even extend to real options valuation.
- Sources of capital: Relates to how these investments are to be funded, such as by shareholders, in the form of equity, creditors, often in the form of bonds, and the firm’s operations (cash flow). Short-term funding or working capital is mostly provided by banks extending a line of credit. The balance between these elements forms the company’s capital structure.
- Dividend policy: Requires management to determine whether any unappropriated profit (excess cash) is to be retained for future investment / operational requirements, or instead to be distributed to shareholders, and if so in what form. Short term financial management is often termed “working capital management”, and relates to cash-, inventory- and debtors management.
Public finance is allocated in the country and relate to states, provinces, counties, municipalities, etc. and also public entities (e.g. school districts) or agencies. It is concerned with:
- Identification of required expenditure of a public sector entity
- Source(s) of that entity’s revenue
- The budgeting process
- Debt issuance (municipal bonds) for public works projects
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