Thursday, 24 January 2019

Introducing to the Financial Management - What You Need To Know

Introducing to the Financial Management - What You Need To Know

Finance is the most important subject you will ever encounter, it is at the core of everything you will do in business and management. It is very rigorous, challenging and practical. It's something that you use and will continue to use in your day-to-day life, both as an individual and the management professional.

What is Finance?

Finance is simple mathematics plus money, it's a systematic study of financial transactions of money. That means you need to have a very intricate knowledge of mathematics. The math involved in finance can range from very basic high school algebra and precalculus to extremely complex applications. 

However, for this introductory course, the financial and statistical calculations required are high school level algebra and precalculus

Read: The Basic Ideas of Finance - What You Need To Know

Let look at the Language of Finance

The basic language of finance is accounting. You will use many accounting terms like 

  • Assets and Liabilities
  • Stock and Bonds
  • Income and Expense

Therefore it's important that you have a fundamental knowledge of accounting in order to understand finance

Let look at the participants in the world of finance

In order to understand the world of finance, we need to know who participate in this word

There are four types of participates in an economy
No Economically viable business ideas = (Type 1: No money and no ideas)(Type 2: Money, but no idea)
Economically viable business ideas = (Type 3: No money, but ideas)(Type 4: Both money and idea)
Type 1: participants are those who have no extra money and no economically viable business ideas.

Type 2: participants are those who have extra money but do not have any economically viable business ideas

Type 3: participants are those who do not have extra money but have economically viable business ideas

Type 4: participants are those who have both extra money and economically viable business ideas

Out of the four participants, let us focus on type 2 and type 3.

Type 2: participants are those who have extra money but no economically viable business ideas

Type 3 participants are those who do not have extra money but have economically viable business ideas

Type 2:

Type 2 participants are generally those who are looking for good investment opportunities to invest their extra money, they could be individual investors or bigger entities

Individual investors may not have too much extra money separately but together when we aggregate many individual investors there will be huge sums of money available for investment.

Type 3:

Type 3 participants, on the other hand, maybe entrepreneurs startup firms or research and development departments of a corporation. This participants typically are looking for investors to invest money in their business ideas.

The financial market essentially provide the mechanism to exchanges this money and rewards between type 2 participants and type 3 participants

But sometimes all the profits and money's earned by type 3 participants do not reach typ2 participants. There are some parts of the profits that are held back to finance future expansions. These are called retained earnings

Some part of the profits are paid to the government in the form of taxes, now all these are basic cash flows of finance

Type 1 participants have neither money nor ideas. Hence they cannot participate in the financial markets

Type 4 participants have the extra money to invest in their own viable business ideas. So they do not need the financial markets in the manner type 2 and type 3 participants need them

Let's look at the 

Fundamental Challenges of Finance

There are two challenges of finance that will encounter in life or professional life

These challenges apply to all the four participants in an economy, they are

a. Valuation of assets, things, services, etc. 
b. Management of assets, things, services 

We will look at this topic in further details in the next article

In this article, we learn four important topics 

  1. What's Finance
  2. About The Language of Finance being Accounting
  3. Four different participants in an economy and how the Financial market helps them to interact with each other  
  4. Fundamental Challenges of Finance

Hopefully, you learn something new about financing

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