Principles Of Business And Finance
Principles Of Business And Finance: Financing is the process of collecting funds to invest to ensures proper utilization. And for proper financing, it requires six (6) core principles of finance to ensure the maximization of benefit. The individual who is responsible for managing the fund is well known as a financial manager.
Principles of Finance
Principles act as a guideline for investment and financing decisions. Financial managers take operating, investment, and financing decisions in corporations for sustainability.
Here are six (6) important principles of finance:
- The Principle of Risk and Return
- Time Value of Money Principle
- Cash Flow Principle
- The Principle of Profitability and liquidity
- Principles of diversity and
- The Hedging Principle of Finance
Risk and Return: The principle of Risk and Return indicates that investors have to be conscious of both risk and return, because the higher the risk higher the rates of return, and the lower the risk, the lower the rates of return.
Time Value of Money: This principle is concerned with the value of money, that value of money is decreased when time passes. The value of $1 of the present time won’t be of the same value in a couple of years to come.
Cash Flow: This is about the cash inflow and outflow, more cash inflow in the earlier period is preferable than later cash flow by the investors.
Profitability and Liquidity: This principle is very important from the investor’s perspective since the investor has to ensure both profitability and liquidity. Liquidity indicates the marketability of the investment (how much easy to get cash by selling the investment).
Diversity: With this principle, it helps to minimize the risk by building an optimum portfolio. The idea of portfolio comes from the popular saying; “never put all your eggs in the same basket because if it falls then all of your eggs will break”. So it is always advisable to put the eggs by separating in a different basket so that your risk can be minimized. Diversification of investment ensures the minimization of risk.
Hedging: This principle teaches that it is advisable to take a loan from appropriate sources to undertake profitable projects either in the short or long term.
Conclusion: With the understanding of the above principles of business, you should be able to take financial decisions in your business.