Differences Between Public and Private Finance: I trust we have all heard about the term ‘Finance‘ before, but what is the meaning of this term Finance? Finance literally means the money available to a Person, business or country and how this money is being managed. Finance could also be defined as the act of generating funds for an expenditure.
It basically involves Investing, Borrowing, Budgeting, Lending and Forecasting, and there are two major classifications of Finance, namely Public and Private Finance. In this Article we shall examine the meaning of these two classes of finance and the differences which exists between them.
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Definition of Private Finance
Private Finance is the economic study and financial management of the income, expenditure, borrowing, investments and savings of a private individual or a private business entity. Private Finance is tailored towards gaining profit and there are two major types of Private Finance, namely: Personal Finance and Business Finance.
Personal Finance means the financial activities of an individual such as Budgeting, Spending, Investments, Mortgages, Consumer Loans, Banking, and Insurance. Personal Finance is the financial planning at the lowest individual level, it involves meeting personal financial goals and it broadly refers to the financial management of an individual or a Family.
Business Finance literally means the process of acquiring and maintaining funds for your business. It may also refer to the funds which are available to business owners to meet the needs of their business. The major aim of a business Finance is to maximize profits and great funds for the owners and shareholders of the business. Notably, there are various types of business Finance such as: Debt Finance, Asset lending, Equity Finance, Capital raising, Angels Investor, Personal equity placement, loans, and Commercial mortgage.
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Definition of Public Finance
Public Finance is the branch of Finance and economics which deals with the Financial Management of the resources of a country, a Country’s revenue, expenditure and finances of Government Institutions. Public Finance is therefore basically the role of the Government in managing public funds and effectively controlling the economy of a country.
Public Finance involves: Tax (which is the major source of Governmental Revenue), Public expenditure (which refers to what the Government spends it’s money on. It could be Government purchases of goods and services for current use, Government purchases of goods and services with intent to create future benefits of Government expenditures involving the transfer of money), Budget (this refers to the estimated revenue and expenditure of the Government within a Year), National Debt (This occurs when the spending of the Government is way more than it’s revenue, then financial mechanisms like Loans, Borrowing money, issue bonds and the likes comes in).
Public Finance involves all these and more deeply the study of managing public funds in the economy of a country so as to aid the growth and development of that country.
Now that you understand the meaning of Private and Public Finance, I trust that the differences between then are quite self explanatory, but it doesn’t stop there as there is a wide spectrum of differences between the both of them. Let’s therefore consider all the differences which exists between Private and Public Finance.
Differences Between Private And Public Finance
1. Private Finance is the economic study of the financial activities of an individual, Family or business firm, while Public Finance is the economic study of the financial activities of the Government.
2. The ultimate aim of Private Finance is to maximize profit, whereas the ultimate aim of Public Finance is go maximize Social welfare.
3. Private finance is usually secretive as it is not usually made open unless under certain conditions, unlike Public Finance which is usually open. For instance: The Government budget which is a Public document open to all citizens of a country.
4. Private finance can be affected by Bankruptcy as an Individual can be declared Bankrupt, however in public finance, there is no issue of bankruptcy as irrespective of whether there is a huge financial crisis the Government can never be declared Bankrupt.
5. In Private Finance the nature of a budget differs greatly from what is obtainable in Public Finance. For instance, in Public Finance a Government budget is always for a year, but in private finance the duration of an individual may vary as there is no static timeframe.
Additionally, in Public Finance the budget if the Government just be approved and passed by the legislature, whereas in Private finance the budget if an individual or in a business firm is usually not under strict scrutiny nor is required to be approved by a controlling authority.
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6. Public Finance enjoys more elasticity than Private Finance, as in Public Finance the means of Government Revenue and expenditures are bountiful, unlike in Private Finance wherein the means of income of an individual are limited.
7. As exemplified earlier in this Article, Public Finance is characterized by the payment of Tax which serves as a major source of revenue for the government and the failure of an individual to pay their tax often results into Fine or other sanctions. However, in Private Finance this is not the case as there is no compulsion of the payment of Tax neither is there any penalty for failure to pay your tax.
8. In Private Finance any individual adjusts their spending and expenditure on the basis of their income, whereas in Public Finance, the Government adjusts income on the basis of the size of the expenditure. In other words, the Government estimates it’s expenditure before it proceeds to find out how to raise the required amount of it’s expenditure.
9. In Private Finance, the expenditure of an individual or a business firm is determined by their income, style, habit, taste, goal, or fashion. Whereas in Public Finance, the expenditure of a Government is determinable by the economic, Political and Social policies and objectives in the State.
10. Notably, in a private finance the nature of an individual budget is usually surplus, whereas in Public Finance, the nature of a Government budget is usually deficit as the Government expenditures and totally expenses usually exceeds the estimated Government Revenue.
11. In Public Finance, the expenditure of the Government could be influenced by political and other non- economic factors, however this is not the case in Private finance.
12. Private finance is characterized by an individual concerned about his present profit, wealth, welfare and health, but Public Finance is concerned with the economic and financial management of resources in a country for the benefits of both the present and future generations.
13. In Public Finance, the Government can navigate it’s way over emergencies through printing currencies to meet it’s requirement during such an emergency period, but in Private Finance that can never be the case as a Private individuals or business firms can never be opportune to print currencies In a country as that is illegal. Thus, the only option open to an individual during emergency period is Loan.
14. In Private Finance, collecting a loan is not always easy. You may only borrow from a financial institution of a friend and you can never borrow from yourself, whereas in Public Finance, the Government can borrow from itself.
15. Finally, in Public Finance the Government has lots of available resources to generate money such as leveraging on Natural resources in the country, printing currencies, borrowing from itself, imposing taxes on every citizen, passing laws which will be beneficial for this purpose, amongst others. However, this is not attainable in Private Finance as an Individual has limited resources to generate income.
These are the basic differences which exists between Public and Private Finance. Trust this Article was helpful? If yes, kindly share your opinion in the comment section below.
Edeh Samuel Chukwuemeka, ACMC, is a lawyer and a certified mediator/conciliator in Nigeria. He is also a developer with knowledge in various programming languages. Samuel is determined to leverage his skills in technology, SEO, and legal practice to revolutionize the legal profession worldwide by creating web and mobile applications that simplify legal research. Sam is also passionate about educating and providing valuable information to people.