Classification of Finance
Classification of Finance
The financial process is as important for a business organization as so important for a nonprofit organization too. Every organization is involved in a financial process. The financial process takes different forms for different organizations. Now we will discuss the classification of this finance. Though our main concentration is business finance, we will also get a brief idea of the financial processes of some other organizations also.
a) Family Finance
In family finance, the sources and amount of income of the family are identified and how this income can be utilized for the overall welfare of the family members is determined. Among numerous necessary expenditures, the most important expenditures are fulfilled on a priority basis. If family income is not sufficient, the loan can be taken from relatives, familiar persons, or friends. Regular expenditures are determined by considering the regular income. Bank loans can be arranged for fixed assets like television, freeze, car, building construction, etc. But, as the collected fund is limited, it needs proper utilization. If the collected money is in excess, the remaining amount can be saved for future use.
b) Public Finance
Every government has its own financial management. In the case of a government, how much in what areas will be the probable yearly expenditures of the government, and how that money can be arranged from which sources are discussed in public finance. Government has to spend a lot of money for the overall development of the country in various sectors like- roads, bridges, government educational institutions, government hospitals, law and order, defense, social infrastructure, etc. The government collects money to bear these expenses from different sources like- income tax, tat, gif tax, import custom, export custom, saving certificates, prize bonds, treasury bills, etc. In public finance, first, the amount of expenditure is determined and then the fund is collected according to the needs. The main objective of public finance is social welfare. Public finance is usually non-profitable. Expenditure may be greater than income in public finance. There exist a number of business organizations under government ownership, which may be less profitable also, for example, chemical industries under BCIC.
Again, a large amount of money is required for big projects like Jamuna Bridge, if the total amount of money is collected from the government budget. On many occasions, financial crises may occur to the government due to public expenditure for social and state security. For that reason, many times the government collects foreign loans from organizations like ADB (Asian Development Bank), World Bank, IDB (Islamic Development Bank), etc.
But at the time of sanctioning the loan, such organizations impose different types of conditions, which may not be consistent with the need for the country’s development and image protection. Considering these conditions, the government wants to collect funds from other sources. Nowadays, big projects are financed worldwide and also in our country through public-private cooperation. This type of arrangement is called PPP (Public Private Partnership).
c) International Finance
In international finance, the export and import sectors are discussed and analyzed. Bangladesh is mainly an import-oriented country. Every year a huge amount of foodstuff, raw materials, machinery, medicine, petroleum, etc. are imported from different countries. On the other hand, jute and jute products, readymade garments, agricultural products, etc. are being exported. Trade deficiency of large amounts occurs as the volume of imports is greater than the volume of export. Remittances sent by foreign dwellers play a vital role to compensate for this deficiency. International finance covers discussion about export and import sectors and the way of management to compensate for the trade deficiency.
d) Finance of Non-Profit Organization
In our society, there are some institutions or organizations which are involved in the welfare of mankind, or providing services for the poor and distressed people. To run this type of business, money or products or services similar to money are required and it is necessary to utilize that money efficiently. In this connection, the role that finance plays is the identification of the sources of finance or wealth similar to money and ensuring its proper utilization for the purpose of achieving service-oriented objectives. As an example it could be mentioned: an orphanage is not a profit-making institution, but it also has a need for finance. These types of institutions collect money through different grants. This collected money is spent on various development activities for the orphans. So source identification and proper utilization of funds to achieve its motto is the main objective of finance of non-profit organizations.
e) Business Finance
The most important type of finance is business finance. An organization formed with the purpose of earning profit through the risk of profit and loss is called a business organization. So, business finance is the process used to collect fund and invest it for business purposes. Business organizations are classified into three types:
Sole Proprietorship Business, Partnership Business, and Joint Capital Business organizations. The general feature of these three types of organizations is fund collection and fund management. For fund collection, own capital and loan are used as sources. Business finance is the main theme of this lesson.
The most famous business organizations in Bangladesh are usually formed as sole proprietorship businesses and partnership businesses. Varieties of small and cottage industries, hotel & restaurant businesses, grocery shops, saloons, boutique shops, etc. are of these kinds of business. In a sole proprietorship business, if profit is earned the owner enjoys it alone, and if any loss occurs the owner’s personal properties also be used to repair the loss.
In a partnership business, the risk is distributed among all partners, so the partners are to be prepared to use personal properties to bear the loss in business (if any). In these types of businesses – sole proprietorship or partnership – sources of finance are the owner’s own capital, profit, loan from relatives, and loan arranged on interest from bank or village money lenders. So, earning profit from investing own funds by proper utilization of money is the main objective of these types of business organizations.
The financial process of a joint stock company is different. Government approval is required to form such a company. Before giving approval, the government evaluates and analyses the minimum amount of capital, directors’ identity, business objectives, and various documents. After getting approval, a company divides its expected big amount of total capital into small portions of equal amounts and sells these as shares in the share market. For example, 1 lac shares of 1000 taka may be sold to the public when the business has a capital of 100 million taka. As each share costs only 1000 taka, small investors from remote places in the country also can purchase shares. Shareholders are the owners of the company and if the company is profitable they usually get dividends on a regular basis. Shareholders can convert their shares into cash by selling those in the share market like Dhaka Stock Exchange. Other than shares, a joint stock business can raise funds by taking loans from the public through selling bonds and debentures to them. In that case, the company has to pay interest on a regular basis at a certain rate to the debenture holders. Because they are not the owners of the company like the shareholders.
f) Bank and Financial Institutions
In any country, economic activities usually revolve centering banks and financial institutions. Sonali Bank, Janata Bank, Rupali Bank, Prime Bank, Shahjalal Islami Bank – These types of government and privately owned banks are profit-oriented organizations but their financial process is usually slightly different from business organizations.
These banks collect small amounts of fund from the people, create a deposit for different terms with this fund, and provides a fixed rate of interest to the depositors. Again, banks provide loans to entrepreneurs in different businesses from this fund. Loans can also be taken for personal purposes. Banks impose interest on certain rates against these loans. But the rate at which a bank receives interest on granted loans is greater than the rate of interest the bank pays to the depositors. This difference between these two rates of interest is the profit of banks. In the banking chapter, we will learn in detail about these institutions. Besides commercial banks, some financial organizations also play an important role in the country’s economic activities. In the Bangladesh context, some examples of these types of organizations are the Investment Corporation of Bangladesh (ICB), Bangladesh House Building Finance Corporation, Bangladesh Agricultural Bank, etc. These financial institutions play their own special roles in the development of different sectors of the economy of Bangladesh.
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