How Do Finance Companies Differ From Other Business Firms?
Financial companies don't usually transact sales like other companies do. Instead, financial companies make money through a combination of commissions, interests, fees and other miscellaneous charges. Accounts receivable and accounts payable are usually paid in cash, although administrative fees, capital gains and fines might be less-liquid. Many accounting categories (GAAP) -mechanisms are used to determine the payment of these accounts receivables. Some of them, however, are more Liquid than others.
The most liquid financial companies are those that trade on U.S. exchanges and have a wide range of locations across the country. Most insurance companies, for example, are traded on the New York Stock Exchange. Insurance companies that are traded on other exchanges are less liquid because of the difficulty of selling shares to other institutions. The New York Stock Exchange, for instance, is among the largest and most liquid of all stock exchanges.
Another type of financial sector that is less liquid is the non-financial sector. Examples of this sector are real estate lenders, individual sellers, wholesale marketers and brokers. Real estate lenders and individual sellers might be traded on the Pink Sheets, although they would still fall into the above-mentioned financial companies. Wholesale marketers and brokers, on the other hand, are traded on the Over the Counter Bulletin Board (OTCBB). Because many of these companies trade OTC, their liquidity is difficult to determine.
The liquidity of banks is determined by their gross assets, which include both assets held internally and those held externally by the bank. The net worth of a bank is determined by net worth as opposed to net worth per asset, which takes into account current value of the company's tangible assets and liabilities. The three main types of banks are commercial banks, savings and loans, and mortgage banks. Most banks trade publicly on U.S. exchanges. In addition, there are 24 primary financial companies that are majority-owned by U.S. insurance companies.
A distinction between financial companies and other companies comes from differences in accounting practices. Financial companies earn their income from lending money to others, while other companies earn their income by earning interest or capital gains from their equity investments. Other financial companies earn their income primarily from borrowing money from another firm or from selling securities, such as government bonds or corporate bonds. A distinction also arises between financial companies that generate operating income and others that do not. Financial companies that earn interest from their equity investments also generate operating income.
Most financial companies have two basic business models - one with an investment-for-profit model and one with a non-profit or utility-for-purpose model. The investment-for-profit model is the more common and successful model in the United States, with the second most common and successful model being the utility-for-purpose model. Most financial companies fall into one of these categories. Commercial banks, for example, engage in both types of business models.
How do finance companies differ from other kinds of firms? The major difference between commercial banks and finance companies is in their balance sheet. A bank's balance sheet shows its net asset value, which includes both equity and fixed assets. A financial institution's balance sheet does not show its net worth, which would be the total value of all its debt and assets less its equity. Finance companies, by contrast, show their net worth only including their equity and fixed assets.
A distinction between financial companies and other kinds of firms arises in how they report financial information to shareholders. Publicly-traded companies report their financial results in a manner very similar to a typical publicly-held company. They use the equity and fixed capital assets as collateral to borrow funds and make loans. Financial institutions, on the other hand, trade debt and portfolios of debt for a variety of purposes, and therefore are not able to issue shares of stock.