Basic concept of finance
Finance
Basically,
Finance is the term of granting a funds or managing the funds for individual,
business and for the government. It defines distributing the money amount and
borrowing the money for lending of the funds. Financial management is defining
two activities at the same time. First one is, it is the study of identifying
the sources of managing the money or funds and the second one is the actual
process of the funds required by the business company or individual for their
needs.
In
the financial term there are mainly three types of finance are discussed. Which
is given below:
1. Personal
or Individual finance is the type of finance which a person
can manage from personal income or personal expenses. Personal finance depends
on the individual earrings, requirements, goals etc. For an example – Credit cards, Salary, Insurance
policies, Mortgages etc.
2. Corporate
or Business finance is the type of finance which are related
to running a company for growing their business activities. It is the method of
allocating funds and managing the money supply for increasing the worth of a
corporation asset. Business finance mainly focuses on risk and opportunities
and trying to increasing the asset value of a business. For an example- equity
share, creditors, debt etc.
3. Public
or Government finance deals with the country’s (states,
municipalities, provinces) income and expenditure. It considers only the
government’s finances. It includes long term investment decision related to
public sector. Public funds are generally collected from taxes, insurance
companies and loan from banks etc.
Objective of finance
There
are some objectives of finance are given below-
§ Main aim of any business company to earn
profit. A business organization main aim of earning profit in a shorter period.
Profit is that the measuring techniques to know the business position in
competitive market.
§ Wealth maximization always focuses on the
business expansion. For long term period a business company always try to give
a maximum benefit to the shareholders.
§ Proper Calculation of total financial
requirements is another financial objective within the sector. The authority
always tries to estimate the entire financial requirements of the corporate and
always concern about what's required to start out and run the corporate.
The main six principles of finance are
discussed in the below -
1. Risk
and Return- The principle mainly indicates that the
business authority always needs to be focused in the risk and return sector because
if company take high risk, they will get higher return or if they take low
risk, they will get low return.
2. Time
Value of cash- This principle is worried with the worth of
cash, that value of cash is decreased when time passes. So before investing or
taking funds, we've got to consider the rate of the economy and also the
required rate of return for maintain the company’s balance.
3. Cash
Flow- Cash inflow and cash outflow are basically calculated
in this principle. It also calculates the duration of time that’s why it
prefers earlier more benefits instead of later years benefits.
4. Profitability
and Liquidity- The principle Liquidity indicates the
marketability of the investment and what quantity easy to induce cash by
selling the investment. On the opposite hand, investors need to invest in a
very way that may make sure the maximization of profit with a lower level of
risk.
5. Diversity-
This
principle helps to reduce the danger by building an optimum portfolio. the
concept is to confirm this principle investors, need to invest in risk-free
investment and a few risky investments in order that ultimately risk will be
lower.
6. Hedging-
It
indicates us that we've got to require a loan from reliable sources, for
short-term fund requirement we've to finance from short-term sources and for
long-term fun requirement we've to manage fund from long-term sources.
Wealth
maximization
Wealth
maximization indicates the business expansion of a company. That means it is
try to increase the value of a business in order to increase the stockholder
equity. It is long-term earnings also it calculates the time value of money and
try to identify less risk of a business. For making the position stable every
business sector ultimate goal is wealth maximization.
Profit maximization
Profit Maximization main aim is to maximize the profit of an
organization. Under this principle’s investors try to take higher risk for high
return. Profitability always shows the economic stability of a firm. In the
competitive market, only those firm can compete who earn profit. It mainly
works for achieving the short-term goal and primarily it ignores accounting
analysis of a financial year. It does not calculate the time value of money and
always avoids the risk possibilities in the investment. Basically, it focuses
how a company can survive within a short-term period in the competitive
business environment.
Source of finance
Sources of financing are shown in the below
with diagram-
§ Commercial Paper is an unsecured promissory note. The
maturity time of commercial paper is not more than one year in the money
market. Basically, it is issued by business corporation for short term loan.
§ Asset-based Loan is given by on the basis of company asset. If
company will unable to pay the loan than the lender will take all the asset as
a loan amount. For an example- machines, inventory, building etc.
§ Letter of Credit is the document which is issued by
commercial bank on the basis of goods and services. Basically, to encourage the
foreign investment financial institutions provide this paper.
§ Financial Institutes gives the mid-term loan to the company and take the interest loan on the
basis of their capital, asset value as well as market position of their
business.
§ Lease Finance is the process of mid term financing where business owner of an asset
gives the right to another person to use the asset against periodical payment
basis.
§ Equity Financing includes preferred stocks and common stocks.
It is less risky in comparison of cash flow and dissolution the ownership of
the share capital
§ Corporate Bond is a special kind of bond which is issued by
any corporation to collect money effectively in an aim to expand its business
area.
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