What is Finance?
Finance is defined as the providing of funding and management of money for individuals, businesses, and governments. The financial system includes the circulation of money, managing of investments, and lending of funds. In businesses, the finance team is responsible for ensuring the company has enough capitalCapitalCapital is anything that increases one’s ability to generate value. It can be used to increase value across a wide range of categories, such as financial,, that the appropriate investmentsCapital ExpenditureA capital expenditure (“CapEx” for short) is the payment with either cash or credit to purchase long term physical or fixed assets used in a are made, and that the company’s revenuesSales RevenueSales revenue is the income received by a company from its sales of goods or the provision of services. In accounting, the terms sales and and expenses are well managed. This guide will analyze each of the various types of finance.
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Types of Finance
There are three main types of finance:
- PersonalPersonal FinancePersonal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection.
- CorporateCorporate Finance OverviewCorporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value of (Business)
- PublicPublic FinancePublic finance is the management of a country's revenue, expenditures, and debt load through various government and quasi-government institutions. (Government)
#1 Personal Finance
From a personal perspective, finance is the management of one’s income, expenses, investments, and obligations. Individuals often work with a personal bankerPersonal Banker Job DescriptionPersonal bankers offer help in managing and overseeing the financial needs of a client's personal bank account. Personal Banker Job Description details include Aid customers in opening, managing and optimizing their bank accounts and other products, pursue leads and potential customers, investment advisor, accountant, mortgage broker, and other professionals to manage their financial situation.
Below are examples of the types of items people deal with on a personal financial level.
Examples:
- Bank accounts
- Credit cards
- Mortgages
- Lines of credit
- Employment incomeCompensationCompensation and salary guides for jobs in corporate finance, investment banking, equity research, FP&A, accounting, commercial banking, FMVA graduates,
- Personal spending and expenses
- Taxes
- Savings
- InvestmentsTrading & InvestingCFI's trading & investing guides are designed as self-study resources to learn to trade at your own pace. Browse hundreds of articles on trading, investing and important topics for financial analysts to know. Learn about assets classes, bond pricing, risk and return, stocks and stock markets, ETFs, momentum, technical (stocks, bonds, real estate, etc.)
#2 Corporate Finance (Business)
From a business perspective, corporate financeCorporate Finance OverviewCorporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value of is the management of a company’s funding, its sources of revenue, use of capital, and the management of its profit and loss (P&L) statement. The professionals at a business that have the responsibility for managing this area include accountants, financial analysts, managers, and executives such as the Chief Financial OfficerWhat Does a CFO DoWhat does a CFO do - the job of the CFO is to optimize a company's financial performance, including: reporting, liquidity, and return on investment. Within (CFO).
Examples:
- Debt
- Equity
- Cost of CapitalCost of CapitalCost of capital is the minimum rate of return that a business must earn before generating value. Before a business can turn a profit, it must at least generate sufficient income
- Capital Structure
- Return on Investment (ROI)Return on Investment (ROI)Return on Investment (ROI) is a performance measure used to evaluate the returns of an investment or compare efficiency of different investments.
- Assets
- Liabilities
- Balance SheetBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting.
- Revenues
- Expenses
- Profit
- Income StatementIncome StatementThe Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The profit or
- Cash Flow
- Dividends
- Cash Flow StatementCash Flow StatementA cash flow Statement contains information on how much cash a company generated and used during a given period.
#3 Public Finance (Government)
From a government perspective, finance includes the management of a country’s national budget, treasury department, the central bank, and other government agencies. It focuses on collecting tax revenue and spending that money on national services and programs such as roads, hospitals, and social security.
Examples:
- Income tax
- Sales tax
- Property tax
- InflationInflationInflation is an economic concept that refers to increases in the price level of goods over a set period of time. The rise in the price level signifies that the currency in a given economy loses purchasing power (i.e., less can be bought with the same amount of money).
- Infrastructure spending (roads, hospitals, etc.)
- Social security and insurance
- Supply of money
- International trade
- Employment
- Gross national product (GNP)Gross National ProductGross National Product (GNP) is a measure of the value of all goods and services produced by a country’s residents and businesses. It
- National debt
- National budget
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Finance Careers
CFI is on a mission to help anyone become a world-class financial analyst and have a meaningful career. Below is a list of some of the most career paths for professionals in the field.
Common professions include:
- Personal Banker
- Commercial Banker
- Investment BankerInvestment BankingInvestment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting and mergers and acquisitions (M&A) advisory services.
- Research Analyst
- AccountantAccounting Salary GuideIn this accounting salary guide, we give you the midpoint compensation figures for those employed both in public and private accounting. Accountants are responsible for examining financial statements to ensure accuracy and compliance with existing laws and regulations, handling tax-related tasks such as calculating the
- Treasurer
- Financial AnalystFinancial Analyst Job DescriptionThe financial analyst job description below gives a typical example of all the skills, education, and experience required to be hired for an analyst job at a bank, institution, or corporation. Perform financial forecasting, reporting, and operational metrics tracking, analyze financial data, create financial models
Other Types of Finance
In addition to the three main types of finance outlined above, there are some other areas that can be layered onto or woven throughout personal, business, or government finance.
Other types include:
- Behavioral – deals with the social and psychological impact human decision making has on investments. The effect humans have on investment decision making includes biases, errors in cognition, logic, fear, and greed. Learn more in CFI’s Behavioral Finance Course.
- Social – a philosophy of making and managing investments that have a social impact and social benefit on society (in addition to any economic benefit).
- Non-profit – while non-profits don’t have shareholders and don’t need to generate economic benefit, they still require the same types of financial management as for-profit companies.
Qualifications
Professionals in the financial industry often have a wide range of qualifications. Unlike law or medicine, there are generally no licensing requirement to work in the field (other than the Series 7 for investment advisors). Most professionals simply have a degree in business or a certification.
Common qualifications include:
- Bachelor of Commerce (BComMost Common BCom JobsHere we outline the most common career paths for B.Com (Bachelor's in Commerce) graduates straight out of university, and highlight the skills that are required to be a good fit for that path. The most common BCom jobs)
- Bachelor of Arts (Economics)
- Master of Business Administration (MBAIs an MBA worth it?If you're thinking of going to business school you may be asking, is an MBA worth it?. The answer (as in every MBA class) is: "it depends". Other than the workload of doing an MBA, there is almost no reason not to do an MBA if your boss is paying for it. They may use it as leverage against you and lock you in, but the ROI is incredible if it's free (obviously).)
- Certified Public Accountant (CPAAmerican Institute of CPAs (AICPA)The American Institute of CPAs (AICPA) is a non-profit organization of certified public accountants in the U.S. who creates and grades CPA examinations.)
- Financial Modeling & Valuation Analyst (FMVABecome a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today!)
Excel Modeling Skills
Across the entire industry, one of the most important and highly sought-after skill sets is financial modeling and the ability to create an Excel model that evaluates a certain situation. The screenshot below shows an example from one of CFI’s Excel modeling coursesFinancial Modeling.
Financial Modeling
Additional Resources
Thank you for reading this CFI guide. Hopefully, it has helped to solidify your understanding of the financial industry. CFI is the official global provider of the Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! designed to transform anyone into a world-class analyst.
To help you advance your career, these additional CFI resources will be helpful:
- What is investment banking?Investment BankingInvestment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting and mergers and acquisitions (M&A) advisory services.
- Interview questions and answersInterviewsAce your next interview! Check out CFI's interview guides with the most common questions and best answers for any corporate finance job position. Interview questions and answer for finance, accounting, investment banking, equity research, commercial banking, FP&A, more! Free guides and practice to ace your interview
- The analyst TrifectaThe Analyst Trifecta® GuideThe ultimate guide on how to be a world-class financial analyst. Do you want to be a world-class financial analyst? Are you looking to follow industry-leading best practices and stand out from the crowd? Our process, called The Analyst Trifecta® consists of analytics, presentation & soft skills
- Free Accounting BookAccounting BookCFI's Principles of Accounting book is free, available for anyone to download as a PDF. Read about bookkeeping, accounting principles, financial statements, with 66 pages of lessons and tutorials. From general transaction recording conventions to the full accounting cycle and finally to important accounts, the book