Money is power but this power dissipates fast unless backed by good finance. Finance is the study of how money should be harnessed and grown in sustainable ways, and helps us achieve our goals in personal life as well as in business. However, personal finance and business finance are two different terrains with little similarities and large differences. Many small and medium business owners tend to lump them together, only to invite taxing problems and other complications.

As a small business owner, you are likely to face the cash flow and other financial challenges coming your way to keep things moving smoothly. Also, on the personal front, you have probably managed your personal finances for a long time. But if you’re tempted to use the same principles that you apply to your personal finance in your business problem, it’ll be wrong.

Your business must be treated as a separate entity with separate funds and financial strategies to reach its business goals. It’s not proper to use your business funds to meet your personal needs. Besides making your business financially weak this might create some audit issues and hinders credit and investment opportunities for your business.

On the other hand, you should avoid making personal guarantees for your company, as they put your personal assets at risk. Instead, you should learn how to manage debt and increase your company’s credit rating.

While both personal and business finances have some common objectives, such as reduction in spending, safe & profitable investment, maintaining a good credit score, etc. personal finance is often influenced by emotive and social factors. Let’s take a closer look at both types.

Why is personal finance important?

Why is personal finance important?

Personal finance is concerned about how you save and invest your money. For an employed person, there should be an emergency savings fund good enough to run their family for at least 10-12 months.

As a businessman, you must establish an even greater emergency fund. It might so happen that you have lost your most important client and have to take a pay cut. There could be a downturn in your business or an extended cash flow problem.

Having an emergency fund will provide you with more peace of mind, allowing you to make more confident business decisions. You’ll be able to focus more on running your business if you know your family is secure in the event of a financial disaster. Income, spending, saving, investing, and insurance are the main elements that govern personal finance.

Income

Income brings money, which is the very first phase of our personal financial roadmap. It’s a source of income that you’ll be able to use to support yourself and your family. It is the cornerstone of our accounting system.

Salary, bonuses, hourly wages, pensions, and dividends are all common sources of income. All of these sources of income generate cash, which can be used to consume, save, or invest.

Spending

All expenses incurred by an individual in relation to the purchase of goods and services, or any consumable that is not an investment, are termed as spending. There are two types of expenditure: cash and credit. The majority of people spend their money on a variety of things. Rent, taxes, food, entertainment, and other expenses are the most typical ways people spend their money.

The expenses diminish the amount of money available for saving and investing. There is a deficit if your spending exceeds your income. It’s just as crucial to manage spending as it is to generate revenue, and most people have more control over their discretionary expenses than their income. For effective personal finance management, appropriate spending habits are essential.

Saving

Savings refers to money stored aside for future consumption or spending. If there is a disparity between what people are paid and what they consume, the difference could be utilized to invest more money. Savings management is a crucial part of cash flow management. Physical cash, savings bank accounts, money market instruments, and so on are all options for your savings.

To manage their cash flow and the short-term difference between their income and expenses, most people hold at least some savings. Savings, on the other hand, might be considered as a negative because they produce little or no return when compared to investments.

Investing

Investing is purchasing assets that are expected to yield a profit, with the goal of receiving more money back over time than was initially invested. Investing entails risk, and not all investments produce a favorable return. This is where we can see the risk-reward relationship. Stocks, bonds, mutual funds, real estate, fixed deposits, commodities, and art are all common types of investments.

Investing is the most intricate aspect of personal finance, and it is also one of the areas where people seek expert help the most. The risk and reward of various investment instruments are vastly varied, and most people seek assistance in this part of their financial strategy.

Protection and Insurance

Personal protection is a broad term that refers to a variety of things that can be used to defend against an unexpected and harmful incident. Life insurance, health insurance, and estate planning are all common protection goods.

Another area of personal finance where people frequently seek expert assistance but actually is  difficult to make predictions is retirement planning. Thorough analyses of multiple things are required to effectively estimate an individual’s insurance and estate planning needs.

 

Personal finance vs Corporate finance infographic by virtualggc

Why is corporate Finance important?

The ways of managing a company’s finances are known as business or corporate finance, which also ensures that a company has sufficient operating capital and that its money is spent and invested properly, sensibly, and successfully.

It is said that finance is the heart of a business because it ensures firstly that a business functions without financial hitches such as cash shortages, and secondly that funds are safe and well invested for long-term advantages.

Cash flow is the lifeblood of any firm, and corporate finance assists you in making informed financial decisions about long-term funding plans and cash flow. The profitability of your organization will improve, and you will boost the potential to leverage additional chances, by knowing more about business finance, how to use the money you already have in your firm, and how to access even more capital when you need it.

The following are among the main types of corporate finance exercises that put the business on the growth track:

Capital investment

Capital investment is an essential exercise of a business for the purpose of achieving its long-term business goals and objectives. A company’s capital investment could be purchase of physical assets that might include real estate, manufacturing buildings, machinery, etc. or increase of operational capacity, gain a larger market share, and create more revenue.

The funds used for capital investment might come as standard bank loans, venture capital deals, or equity participations by the investors.

Capital Financing

This basic function decides the best ways to finance the capital investments using the company’s equity, debt, or a combination of the two. Shares of the company (equity) or issuing debt instruments in the market through investment banks can provide the long-term funding for substantial capital expenditures or investments.

There should be a balance between the two sources of finance (equity and debt) because too much debt can increase the danger of repayment default, while too much equity can dilute earnings and value for initial investors.

Your CFO’s ultimate goal is to optimize a company’s capital structure by lowering its Weighted Average Cost of Capital (WACC) to the lowest level achievable.

Paying out dividends or reinvesting the excess earnings

This involves business owners and board members to decide whether to keep a company’s excess earnings for future investments and operations, or to distribute them to shareholders in the form of dividends or share buybacks.

If the management believes they can achieve a higher rate of return on a capital investment than the company’s cost of capital, they should go for it. Otherwise, they should pay dividends or purchase back shares to return extra cash to owners.

Retained earnings that aren’t given to shareholders can be used to help a company grow. This is frequently the best source of capital because it does not require extra debt or diminish the value of equity by issuing additional shares.

Maintaining a healthy cash flow

A business actually moves on positive cash flow, which is the balance between the payment inflow and outflow. No matter how big or small the firm is, as long as the money pouring in is more than the money pouring out, it’s better.

To cope with the company’s cash flow, any organization needs a strong financial team, with daily updation of financial records. This is crucial in order for the company to be able to cover all of its business expenses and avoid any future issues. A developing company needs to know what its cash burn rate is and how to calculate it.

How cloud accounting is changing the face of corporate finance.

Virtual accounting or cloud accounting has made quick inroads into corporates in recent years because of the many pluses it provides in terms of speed, flexibility, accuracy, cost-effectiveness and more, compared to in-house accounting. It enables the management to take crucial  financial management decisions in time with the help of authentic and accurate financial reports. Here are some of the key advantages of using cloud accounting:

1. Live bank feeds
Cloud accounting platforms often offer live feeds to your bank accounts, making it easy to link your banking to your accounting. As a result, you can reconcile your bank account faster and get a more accurate view of your account balance.

2. Paying VAT or GST online
Paying your taxes is far quicker and simpler through a cloud accounting platform. The transactions will be recorded as you go, and you can export them into tax return templates and submit them electronically.

3. Working remotely
Cloud computing is the best way to leverage the benefits of remote or flexible working for your business. Management and finance can access all the key numbers from anywhere if they are granted access.

Following are the leading cloud accounting softwares to choose from:

  • Xero – Xero is a great option for small businesses that want simple accounting alongside detailed reports. There is also a huge global ecosystem of apps available for Xero.
  • QuickBooks Online – A platform that’s aimed squarely at small businesses, with all the accounting functionality of QuickBooks classic desktop version, plus a great app store.
  • Sage 50cloud and Sage 200cloud – Each combine the convenience of the cloud with the power of desktop accounting software.
  • KashFlow – A good choice for small businesses that want a straightforward platform that gets the job done. All the basics are there but with fewer options when it comes to apps.
  • Zoho Books – Unlike many cloud accounting providers, Zoho provides several other business softwares of its own to connect Zoho Books

In conclusion, understanding the nuances of personal finance and corporate finance is crucial in today’s financial landscape. At VirtualGGC, we believe in empowering individuals and businesses alike with the knowledge they need to thrive financially. That’s why our comprehensive Short term finance course covers a wide spectrum of topics, including personal finance and corporate finance. If you’re eager to deepen your understanding of finance, we invite you to explore our finance courses today. Whether you’re managing your own finances or seeking to excel in the corporate finance world, we have the knowledge and resources to support your financial journey. Visit our finance course page to learn more and take the first step towards financial expertise.”