5 Basic Financial Concepts That Every Student Needs to Understand
Finance deals with the study of investments and is also defined as the science of money management. It explains the management, investment, banking, study and creation of money, credit, assets and liabilities that make financial systems. Finance is divided into three sub-categories — Public Finance, Corporate Finance and Personal Finance.
Public Finance involves government expenditures, debt issues, tax systems, budget procedures, stabilisation policy and instruments and other government concerns.
Corporate Finance includes managing liabilities, assets, debts and revenues for business.
Personal Finance describes all the financial activities and decisions of an individual, which include insurance, savings, budgeting, retirement and mortgage planning.
Here are some broader concepts which are important to understand as they help to clarify the inner workings of the finance market. By acquiring an understanding of these concepts, you can manage and control the finance operations more effectively and also make wiser choices throughout the course of your business venture.
Return vs. Risk
One of the oldest concepts of finance is a relation between risk and return. For the increase in the rate of return, you must take on more risk. The greatest benefits for business are often made by people who are willing to take a calculated amount of risk.
Cash is King
In the financial world, cash is the king. Revenue, net income and other terms of measurement for companies are not as important as the operating cash flow of the business. Cash can’t be operated by accounting procedures. It is the most liquid form of payment and shows only inflation and depreciation risk.
Time Value
Just like paying your bills can improve your cash flow, receiving money on time can also support the business finance. You can use the capital for firm’s benefit
Opportunity Cost
Opportunity cost refers to an advantage that an individual could have received, but gave up to take an additional course of action. It is an alternative given up when a choice is made.
Equity vs. Debt
If you want to obtain financing for your firm, then you will need to decide whether equity financing or debt financing is right option for you. With debt financing, you can borrow money that you have to repay in future, such as a bank loan. Whereas, with equity financing investors supply the required capital to the business.
The world of Finance includes more than just knowing how to determine if business is having profit or how to read a balance sheet. In the world of business, even with the best product and marketing strategy, a company can fail without proper financial planning.
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Summary: Read this article to know about five basic concepts of Finance that everyone should know about.
Author’s Bio: Henry Wilson is an academician who is currently working with Instant Assignment Help Australia. She has offered finance assignment help to many Australian-based scholars and guided them to achieve their academic goals.
