Finance is defined as the provision of money at the time It is required. In other words, Finance is the procurement of funds and their effective utilization.
Functions of Finance
The Investment Decisions
Capital investment is the allocation of capital to investment proposals whose benefits are to be realized in the future.
The assets which can be acquired fall into two groups –
- Long term assets – which yield a return over a period of time in future.
- Short term assets – those assets which in normal course of business are convertible into cash without any loss in value, usually within a year.
The decisions regarding long-term assets are known as capital budgeting and regarding short-term assets as working capital management.
Financing Decisions
It relates to the choice of the proportion of sources to finance the selected investment proposals. Thus, financing decisions cover mainly capital structure decisions.
Dividend Policy Decisions
The dividend should be analyzed in relation to the financing decision of a firm. Two alternatives are available in dealing with the profits of the firm – they can be distributed to the shareholders in the form of dividends or they can be retained in the business itself. The final decision will depend upon the preference of the shareholders and investment opportunities available before the firm.
What is Public Finance?
Professor Dalton defined public finance as being connected with the income and expenditure of public authorities, with the adjustment of one to another. Tax revenue and non-tax revenue are the two sources of income.
Scope of Public Finance
- Public revenue
- Public expenditure
- Public debt
- Budgetary policy
- Fiscal policy
- Public revenue: It refers to the income or earnings of the government of any country. Public revenue consists of tax and non-tax revenue.
- Public expenditure: It deals with various types of expenditures required for the proper functioning of the government.
- Public debt: When the planned expenditure of the government of a country exceeds its total revenue, the government has to borrow money from various organizations and individuals. This is called public debt.
- Budgetary policy: It deals with the type of financial statement made by the government with respect to its anticipated revenue and expenditure during any particular year. If the government expenditure exceeds its revenue, there arises a deficit in the budget.
- Fiscal policy: The fiscal policy affects the revenue and expenditure of the government. Fiscal policy instruments are government expenditure, imposition of taxes, subsidy provision and public debt.
Difference Between Public and Private Finance
| Private Finance | Public Finance |
|---|---|
| In private finance, individuals adjust their spending patterns according to their income level. | In Public finance, the government determines the size of expenditure that has to be spent on different segments and adjusts income to expenditure. |
| Private individuals try to maximize their profits. | Public authorities are motivated by the welfare of society. |
| An individual spends less than his income to maintain a surplus budget. | The government prefers to have a deficit budget, especially while financing economic development. |
| Private finance transactions are maintained secretly. | Public finance transactions are open to everyone in society. |
Significant Role of Public Finance
- Public finance plays a dynamic role in the economy. It is very significant for the allocation of productive resources to maximize the national output.
- The public sector makes certain provisions for social wants such as defence, railways, park, law and order. Apart from the process of revenue and expenditure of the government,
- It is used to allocate the total resources of the community among private and social goods.
Measures to secure equal distribution of income and wealth
- Progressive taxation of direct taxes ensures equality in the distribution of income and wealth.
- Government expenditure on welfare projects for the poor.
- Levying high taxes on goods mostly purchased by the rich income groups and providing subsidies on the goods purchased by the poor income groups.
Relation of Public Finance with Other Social Sciences
- Public finance is considered a branch of economics. In the economy, public finance involves raising and spending of funds by government authorities. The principles of economics are considered in the formulation of policies for public revenue and public expenditure. Hence, public finance and economics are interrelated.
- It is the study of finances of the government or public bodies. It has no existence without political finance.
- Policy of public finance is always formulated by looking into its history. Statistical data of the past guide the government and helps it to follow the right track.
- While determining the taxation policy, the government ensures that the burden of tax does not fall on the poor sections of society.
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