Whether you are new to the workforce or work in Wall Street, single, married or near retirement, finance is vital to every individual. The understanding of fundamentals of finance and having a good handle on your money is important.
What is Finance?
All matters that deal with Money and the Market. Finance can also be defined as the art of money management. It is classified into following categories :
- Public Finance,
- Corporate Finance and
- Personal Finance
Finance is heavily dependent on the collection, maintenance and analysis of the Data on money flow, assets (what is owned) and liabilities (what is owed).
The Principles of Finance described below will focus on what the managers, investors, and government agencies do with this information :
1. Financial Statements and Financial Analysis Consider this situation: You are the manager of a small retail chain and your boss has given you the task of deciding whether to invest in a second store. You know that adding a second store means greater potential for growth. However, you also know that adding a new store will require spending cash. Facing this tough decision, how could you determine whether the company can “handle” such an investment?
The answer might lie in ratio analysis.
2. Time Value Of Money: Future Value, Present Value, And Interest Rates Suppose you have the option of receiving $100 dollars today vs. $200 in five years. Which option would you choose? How would you determine which is the better deal? Some of us would rather have less money today vs. wait for more money tomorrow. However, sometimes it pays to wait.
The concept of time value of money explains how to determine the value of money today vs. tomorrow by using finance tools to determine present and future values.
3. Capital Budgeting Techniques Shows how a financial manager makes capital investment decisions using financial tools.Say, for instance, you have been asked to give your friend your recommendation about buying or not buying a new iPhone 10.
As your friends’ go-to-finance person, it is your task to identify his cash flows that, in some way or another, affect the value of the investment (in this case the iPhone 10). You will know how to calculate “incremental” cash flows when evaluating a new project, which can also be considered as the difference in future cash flows under two scenarios: when a new investment project is being considered and when it is not.
4. Risk and Return Every investment decision carries a certain amount of risk. Therefore, the role of the financial manager is to understand how to calculate the “riskiness” of an investment so that he or she can make sound financial and business decisions.
5. Corporate Capital Structure, Cost Of Capital, And Taxes Things like when Y assets are being financed with 50% from a bank loan and 50% from investors’ money? Does it matter? Does that form of capital structure, where 50% of assets comes from debt and 50% from equity, influence how a company succeeds in business?