The Principle of Business and Finance
A principle is an instrument, which definitely can help to manage our actions and to make the decisions. The systematization of business and the funds invested in it is fundamental for a successful and productive result. Thus, the principle of business and finance can facilitate the task and optimize our work in these areas. Of course, you can read all the textbooks about principles of business, marketing, and finance, but we prepared this article to make your job a bit easier.
What is finance?
Finance is a broad term that includes the study and understanding the system of money, formation and distribution of funds, and other important financial principles and instruments. Simply put, finance is all about money and its management.
How can we apply finance in business?
Business is a system that needs constant capital management. You will probably need to study the principles of business finance to start new projects, as well as the succeeding tasks: rent or purchase of property, obtaining of the necessary equipment, selection of high quality and working advertising. Definetely, all types of businesses involves the calculation of the cash flow resulting from the real financial condition of the company, outlined by the plan of transactions and projects by using the financial management principles and applications.
What about three areas of business finance?
Surely, you have heard about three main areas that reflect principles of business finance. We can distinguish financial management, financial markets and institutions, and investments.
Financial management is the study of methods by which there is an inflow of funds, income that provided for long-term investments, and capital regulation. For these purposes, each firm have a manager who, in addition to the above duties, analyze the company’s strategies and monitor the achievement of the set goals, based on financial principles.
Financial markets and institutions — as you may notice, this section consists of two terms.
Financial market is a mechanism for the redistribution of assets, cash, liabilities between buyers and sellers. The value of each asset taken is determined at the auction using supply and demand.
Financial institution is any organization, such as a bank, building society, or financial company, that collects funds from individuals, organizations, or government agencies and invests or lends them.
Investment studies the ways individuals use for portfolio management and financial planning.
What is the basic principle of finance?
As you have noticed, the basic principle of finance is an ability to control daily transactions, and to invest within the budget. In other words, aware of the financial management principles and applications, you can considerably improve the state of your business.
How can I study finance?
In addition to a long and deep study of finance in educational institutions, there are a couple of other ways if you suddenly decide to do it by yourself. You can find short courses that can even be taken online, but of course the proven and most effective way is to read books, articles and everything related to this topic. Again, you can easily purchase a textbook on the principles of finance, business, and marketing and start diving into the topic right away. It can also be helpful to speak with professional financiers and learn about their experience.
6 Principles of Business and Finance
Afterall, we want to mention 6 principles of business and finance, which will undoubtedly be useful to everyone, and especially enterpreneurs:
1. Risk and return
Risk and return principle implies that the risk-to-return ratio should be checked on a regular basis. It is the most important concept for any investor, which says that the return is directly proportional to the risk. As the risk level increases, the income indicator rises after it, and vice versa. To make sure that the data is effective, direct and relative measurements should be made.
2. Time value of money
Time value of money principle is based on a well-known fact that a specific price for money corresponds to a certain period. This concept means that the value of an amount of money received today differs from the value of the same amount of money received at any time in the future. Therefore, before deciding to invest or accept funds, you need to calculate the level of economic inflation so that the losses from it can be offset by profitability.
3. Cash flow
Cash flow is the difference between an organization’s cash incomes and outcomes. Competent cash flow management can reduce capital requirements, accelerate its turnover, and identify financial reserves within the enterprise and then reduce the volume of external loans. This have been achieved by the main goal-ensuring constant solvency at all stages of the planning period and forecasting the company’s cash flows over time in the context of individual types of economic activities. The cash flow is always considered for a certain period of time. Furthermore, it is expected that getting more money in the early stages is preferable, as it is closely related to the previous principle.
4. Profitability and liquidity principle
This principle of business and finance is major. Profitability and liquidity are two very important financial indicators that require special attention. Profitability is the degree to which a company makes a profit, and liquidity is the ability to quickly convert assets into cash without losses. The higher the share of assets that can be quickly converted into cash, the higher the liquidity of the company
5. Diversity Principle
Diversity means that by directing your capital to various investments, the probability of success increases, and the risk significantly decreases. Investors form a portfolio of financial instruments with different levels and types of risk: if something went wrong in one place, you can win in another. However, the goal of diversity is to maximize the reward-to-risk ratio, not to eliminate risk altogether. Here we can also mention the favorite proverb of financial experts: “don’t put all your eggs in one basket”.
6. Hedging Principle
The last principle of business and finance is hedging, which means reimbursing losses from one transaction with the profitability of another. By hedging, investors insure against possible losses, minimize them in the event of adverse cases. The basic principle is that an unfavorable change in the price of the hedged asset is offset by the profit received on another financial instrument.
As a result, even a person who does not intend to specialize in the financial sector needs to have certain knowledge that financiers use, which will allow him to communicate with these specialists and involve them in solving their problems. For a start-up business, this is of great importance.
In the end, it is necessary to notice that by applying all of the information given above will significantly increase your ability to manage your business due to basic knowledge of finance.
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