nms

6 Principles of Finance Every one Need to Know

Principles of Finance

Principles act as a guideline for the investment and financing decision. Financial managers take operating, investment and financing decisions, some of this related to short term and some long term. The 6 Principles of Finance Every one Need to Know whether it is for individual or organization.

Before discussing principles of finance let’s have some idea about finance, is the process of collecting funds and ensures proper utilization of funds. Many people say that finance is the management of funds and those are responsible for managing this fund are financial managers.

There are six basic principles of finance everyone need to know

    1. Principles of risk and return
    1. Time value of money
    1. Cash flow principle
    1. Profitability and liquidity
    1. Principles of diversity
  1. Hedging principle

six principles of finance Principles of Finance

The Principle of Risk & Return

This principle indicates that investors have to conscious both risk and return, because higher the risk higher the rates of return and lower the risk, lower the rates of return. For business financing, we have to compare the return with risk. To ensure optimum rates of return investors need to measure risk and return by both direct measurement and relative measurement.

Time Value of Money

This principle is concerned with the value of money, that value of money is decreased when time pass. The value of dollar 1 of the present time is more than the value of dollar 1 after some time or years. So before investing or taking fund, we have to think about the inflation rate of the economy and required rate of return must be more than the inflation rate so that return can compensate the loss incurred by the inflation.

Cash Flow Principle

This principle mainly talk about the cash inflow and outflow, more cash inflow in the earlier period is preferable than later cash flow by the investors. This principle also follows the time value principle that’s why it prefers earlier more benefit rather than later years benefits.

Profitability & Liquidity Principle

This principle is very important from the investor’s perspective because the investor has to ensure both profitability and liquidity. Liquidity indicates the marketability of the investment i.e. how much easy to get cash by selling the investment. On the other hand, investors have to invest in a way that can ensure the maximization of profit with a moderate or lower level of risk.

Principles of Diversity

This principle helps to minimize the risk by building an optimum portfolio. Never put all your eggs in the same basket because if it falls then all of your eggs will break, so put eggs by separating in a different basket so that your risk can be minimized. To ensure this principle investors have to invest in risk-free investment and some risky investment so that ultimately risk can be lower. Diversification of investment ensures minimization of risk.

Hedging Principle

Hedging principle indicates us that we have to take a loan from appropriate sources, for short-term fund requirement we have to finance from short-term sources and for long-term fun requirement we have to manage fund from long-term sources. For fixed asset financing is to be done from long-term sources.

Written by

Md. Nahian Mahmud Shaikat

MBA: IBA-JU

Financial Analyst

Email: [email protected]

Facebook: Nahian Mahmud Shaikat

Individual Investor Life Cycle

Individual Investor Life Cycle

Individual investor life cycle indicates the investment behavior of investor over the different age of their life. The investment decision is based on the age, financial condition, future plans and risk characteristics of an individual.

Investor mainly invests in getting a return which can compensate the sacrifice of present for more future earnings and security. As a financial plan investor can adopt different insurance policies or reserve cash for future. Although investor has to take risk of reserving cash or investing the cash they are ready to take some risk according to their risk-taking behavior.

Phases of Individual Investor Life Cycle

Four Phases of Individual Investor Life Cycle

An investor passes through four different phases in life

  • Accumulation Phase
  • Consolidation Phase
  • Spending Phase
  • Gifting Phase

Accumulation Phase

Investor early or middle to their career tries to accumulate fund so that individual can have money to spend in the later phase of their life. Some people accumulate the fund to buy house, car or other important assets and some people accumulate for their children’s education cost, life peaceful life after retirement.

Funds invested in the early phase of life gives an investor a huge amount of fund which is compounding over the years

Consolidation Phase

Consolidation phase is the midpoint of their career, in this phase, they earn more, spends more and pay off all their debts. In this phase moderately high risk taken by the investor but for capital reservation some investor prefer lower risk investor. Individual invest in the capital market and investment securities.

Spending Phase

This phase starts when an individual retires from the job. Their overall portfolio is to be less risky than the consolidation phase; they prefer low risky investment or risk-free investment. People prefer fixed income securities like a bond, debenture, treasury bills etc. In this phase, they need some risky investor if they have extra money so that future inflation can be adjusted.

Gifting Phase

If individuals believe that they have enough extra funds to meet their current and future expenses then they go for gifting money to their friends, family members or establish charitable trusts. These can reduce their income taxes and they also keep some fun for future uncertainties.

Over the different phase, investor behaves differently and invest in their preferred sector according to their risk-taking behavior.

Written by

Md. Nahian Mahmud Shaikat

Financial Analyst

Some Important Textile Unit Conversion Factor

Some Important Textile Unit Conversion Factor

During textile calculation we are in need of different unit conversion problem. Here I am presenting some important conversion factor which can be helpful for you.

 

1 meter = 1.09 yard
So, 1 yard = 1/1.09 meter
= 0.91 meter
1 Yard = 3 feet
1 Yard = 36 inch
1 Meter =1000 millimeter
1 Meter =100 Centimeter
1 Meter =1.09 Yard
1 Meter = 39.37 inch
1 Kilogram =1000 gram
1 Kilogram =2.204 pound
1 inch = 2.54 cm
1 inch = 0.3937 cm
1 inch =25.4 Millimeter
1 Centimeter = 10 Millimeter
So, 1 cm =1/2.54 inch
1 cm = 0.3937 inch
1 Decimeter = 10 Centimeter
1 Feet =0.3048 Meter
1 Feet =12 Inch
1 Mile =5280 Feet
1 Mile =1.6094 Kilometer
1 Pound 16 ounce
1 pound =453.6 gram
1 pound =7000 grain
So, 1 pound = 453.6/1000 kg
= 0.453 kg
So, 1 kg = 1/0.453 pound
= 2.2046 pound
1 Gram =0.0353 Ounce
1 Hank =840 yard
1 Lee =120 yard
1 ounce =28.35 gram
1 Acre = 43560 Square feet
1 Liter =1000 Milliliter
=1000 CC (Cubic centimeter)
1 Metric ton =1000 Kilogram
1 Metric ton =2204.62 Pound
1 oz = 28.35 gram
Some important textile unit conversion factor

Important Factor

The Portfolio Management Process

The Portfolio Management Process

Before discussing the portfolio management process lets have some idea of a portfolio, basically, portfolio management process is the set of securities or combination of investment securities.

The process of managing a group of investment or portfolio is never stopping, it is a continuous process. An investor needs to develop plan and policies to form a portfolio, monitor the performance and review portfolio from time to time.

The Portfolio Management Process

The portfolio management process is followed by four common steps, these are:

  1. The first step of portfolio management is the formulation of policy statement either individually or get assistance from others. This policy statement is the roadmap of how much an investor is willing to take a risk.
  2. In the second step, a manager should study the current financial and economic condition to forecast the future economic return or condition. An economy is dynamic which is continuously changing over the time because of the direct or indirect impact of the micro and macroeconomic variables.
  3. The third step of the portfolio management process is the formation of a portfolio according to the policy statement and risk-taking behavior of the investor. The portfolio should be formed by using both a risk-free asset and risky asset so that ultimately risk can be minimized.
  4. The final step of the portfolio management is the continuous monitoring by the portfolio managers so that any investment correction can be done as required. Mainly investment should be concentrated with capital gain and profit via a dividend.

These above four-steps basically used for managing the portfolio by the investor or by the portfolio manager.

***If you like our articles then please do not forget to comment. Your feedback will help us to share a new article as per your interest.

Written by

Md. Nahian Mahmud Shaikat

Student of MBA

Institute of Business Administration (IBA)

Jahangirnagar University

Email: [email protected]

Phone: +8801914262602

Will Profit Maximization Always Result in Stock Price Maximization

Will Profit Maximization Always Result in Stock Price Maximization

Some people may ask will profit maximization always result in stock price maximization? Profit maximization does not always result in stock price maximization, because profit maximization can only ensure higher earnings per share not the increased value of a stock. Profit can be manipulated by the managerial actions, like reducing operating costs through hampering the normal flow of actions.

Will Profit Maximization Always Result in Stock Price Maximization

Stock Price Maximization

Example:

Suppose managers want to show a higher profit this year, to do this they reducing operating expenses by not entertaining repair and maintenance of machines. So the cost of repair and maintenance saved. This definitely increases the profit of the organization but in the next year, the company has to spend higher operating cost for repair and maintenance which will ultimately reduce the profit.

Here manager’s action increases the profit of the firm but it will not maximize the price of stock because there is no increase in operating efficiency.

So it is clear that more earning per share does not ensure price maximization of stock in the market.

 Actually, wealth maximization can create a positive effect which helps to maximize the price of the stock.

Written by

Md. Nahian Mahmud Shaikat

Student of MBA

Institute of Business Administration (IBA)

Jahangirnagar University

Email: [email protected]

Phone: +8801914262602

Maximize the Value of a Corporation

Maximize the Value of a Corporation

A question may arise to our mind that What does it mean to maximize the value of a corporation?

To understand and answer this type of question one thing is enough that, maximizing the value of a corporation indicates the value maximization of the wealth of a company. We can say the value of a corporation is maximized when the price of a stock is increased. Value maximization is preferable for the owner because it ensures not only the capital gain by selling stock in the market but also get profit through a dividend. It is management’s responsibility to ensure the value maximization.

Maximize the Value of a Corporation

Maximize the Value

For example:

In 2013 the stock price of a company or corporation was Tk 120 but in 2014 the price increase to Tk 210 in the secondary market. This indicates that company successfully utilizes its resources which actually increased the value or price of the stock.

We know that maximization of the value of a corporation is reflected by the increased value of a stock. Above example shows that there is an increase in the price of the stock, so we can say that value of a corporation is increased.

What is Finance

What is Finance?

Finance is all about taking decisions of money i.e. how money or fund will be collected and ensure the use in a productive sector effectively. Before 1960 it refers only the collection of funds but after that, the idea was changed. It is not only limited to a collection of funds/money but also ensure the proper utilization of funds. It is the responsibility of manager who is dealing with the funds.

finance

Finance is lifeblood of every corporation because we cannot do any business activity without the help of finance. Some people say that the overall activities related to planning, organizing, raising, conservation, using and controlling funds is known as finance.

Personal and corporate finance are two broad areas where an effective financial decision may bring thousands of dollar. So everyone should know its basic principles and why it is necessary to learn financial concepts. Financial analyst are those person who is responsible for identifying most worthy source of financing and take a good financial decision. Time value of money is one of the core principle of finance which is overlooked by many uneducated investors. Every financial decision is related with cost. A better decision is the reason of being successful.

According to Harvard & Upton, it is that administrative area which is concerned with the arrangement of cash and credit effectively.

You may find three interrelated areas

  • Money & Capital Market
  • Investments
  • Financial Market

So concluding with the idea, it is not the only collection of fund where the funding cost is lower and then utilizes it to ensure the maximum rate of return for the investors. Managing funds is not an easy task but it is management’s responsibility to manage the funds which can ensure higher profitability and the substantial growth of a company.

Written by

Md. Nahian Mahmud Shaikat