Many people want to set up businesses. But to do that, they usually need some sort of finance.
That’s where business finance comes into the picture. But what’s the difference between this type of finance and regular personal finance? And why should you use the former and not the latter when setting up a company? We take a look here.
What is Business Finance?
Business finance is the process of planning, obtaining, and managing the funds needed to run a business. It’s about making quality decisions about how to allocate company funds to the most promising and enterprising projects. It involves debt, grant, and equity, and controlling profitability for growth.
Some companies classify accounting as a part of business finance. This process helps business owners and managers track their spending and cash flow, letting them make sensible decisions. It’s also helpful for communicating effectively with shareholders.
What Is Personal Finance?
Personal finance is something quite different. It involves planning and managing money outside of a business context. Usually, it takes things like setting financial goals, paying off debts, and creating a budget into consideration.
Getting personal finance right requires significant financial literacy. You need to understand the skills needed to make informed and effective financial decisions. You also need to understand scams and the pitfalls of investing. It isn’t always a straightforward matter and can be similarly complicated as a business in some circumstances, depending on how deeply you go into it.
How Do Business Finance and Personal Finance Differ?
Business finance and personal finance differ in several ways. Some of the main points of departure include:-
- Why do you want to use the financing in the first place? Business finance aims to maximize the value of the business for its owners and stakeholders, while personal finance aims to achieve your personal financial goals and improve your quality of life.
- How you’ll use the financing. Business finance covers all aspects of running a business, from start-up to expansion to exit, while personal finance has to do with your personal financial situation, from assets to liabilities
- Where the funding comes from. You might get business financing from a local bank with a great new website update, investors, or venture capitalists. Personal finance usually comes from a business you own, your personal income from your job, or savings in pensions or investment portfolios
- The risks involved. Business finance involves higher risks than personal finance because companies face more uncertainty and competition in the market. They also need to deal with regulations and legal matters, requiring insurance. Personal finance is usually lower risk because you can diversify your capital widely across multiple asset classes, and you can benefit from fixed-income assets.
- The skills needed. Lastly, personal and business finance differ significantly in terms of the skills you require. Business owners and managers need to have a strong understanding of accounting principles and practices, whereas someone who manages their own finances only needs rudimentary math ability, if that.
So, there you have it: the key differences between business and personal finance. Keep the two separate.