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14 Importance of Learning Finance

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14 Importance of Learning Finance

You know finance is not only receiving money from different sources but also proper utilization of money or financial resources. Here utilization means investing money in accordance with risk-taking behavior where the return is maximum. The main objective of financing is to ensure the right amount of money at the right time. For better economic and financial decision making you have to have basic knowledge of finance and financing. Every day we take financial decision although we are not aware of, we are actually doing financing like a corporate finance manager. If you want to take a better financial decision then you must know the core financing principles. Here in this article, I will clarify the 14 importance of learning finance both for the individuals, corporate finance manager, and organization.

14 Importance of Learning Finance

The reason I want to discuss the importance of learning finance is to motivate you to learn finance and apply it in your daily life which will help you to become a better decision maker.

How to Learn Finance and where to learn Finance?

It is not easy to learn finance if you are not aware enough to think it deeply and understand the scenarios and logic behind the financing principles. I personally follow different strategies to learn finance as much as I can. As an individual, you have a lot of scopes to learn finance and it can be:

  1. Academic Learning of Finance
  • You can do graduation or post-graduation in finance and also get CFA degree if you have passion enough.
  1. Professional Training
  • Institutional Training
  • On the Job Training
  • Online Training Course
  1. Self-Learning
  • Reading Books
  • Study Research Paper, Journal, articles
  • Watch online lectures or tutorials

List of 14 Importance of Learning Finance

The importance of learning finance is given below which are listed from the different perspective. Hopefully, this will add value to your learning phase.

  1. Proper Understanding of Time Value of Money
  2. Take Better Financing Decision
  3. Aware of Valuation of Financial Resources
  4. Understand the Requirement of Evaluation of Investment Opportunities
  5. Able to Analyze Each and Every Opportunity Cost
  6. Put Your Efforts for Maximization of Wealth
  7. Acquire Maximum Return of Your Investment
  8. Increase Your Analytical Skills
  9. Manage Your Personal and Professional Life in a Better Way
  10. Understand the Requirement of Forming a Portfolio
  11. Deep Analysis of Sources of Fund
  12. Understand the Investors Life Cycle to Choose Right Investment Time
  13. Understand Key Success Factors of Financing
  14. Know How to Get Your Cost of Capital and Analyze it

Take Better Financing Decision

The most important thing is to take a better financing decision as every financing decision both for borrowing and lending is related to cost and benefit. A better financing decision will bring financial success which is expected by every individual.

Proper Understanding of Time Value of Money

If you actually want to know finance then you must know the concept of time value of money that with the time passes the value of your money is decreased. So, to ensure value maximization you are to invest in a way which increases the net present value of your wealth.

Aware of Valuation of Financial Resources

As an investor of both money and capital market, please make sure that you do proper valuation otherwise you may lose your valuable financial resources. That’s why every investor needs to be aware of valuation of financial resources or instruments.

The requirement of Evaluation of Investment Opportunities

The proper understanding of requirement of evaluation of investment opportunities will induce you to do capital budgeting (NPV, IRR, PBP, MIRR, PI etc.). Both for long-term and short-term investment opportunities need to be evaluated, especially for long-term investment opportunities.

Able to Analyze Each and Every Opportunity Cost

Every decision whatever we are taking in our daily life we forgo other opportunities, so it is required to do an evaluation of opportunity cost and invest where your opportunity cost is lower. The investment decision is actually dependent on the behavior of investors.

Acquire Maximum Return of Your Investment

You need to learn finance because investors always intention are to ensure maximize their return on their investment. Here, the maximum return will increase the value of your asset.

Put Your Efforts for Maximization of Wealth

A financially sound person always tries to put all of his/her efforts for maximization of wealth. Maximization of wealth will bring more profit for you or for your organization.

Deep Analysis of Sources of Fund

Whenever you plan for the collection of funds you may find several short terms or long-term sources. If you have adequate knowledge of financing then you will be able to do a deep analysis of sources of funds. But one thing is you must know financing concepts and how it works.

Know How to Get Your Cost of Capital and Analyze it

Whatever the amount of capital, is not free of cost. Every capital has cost, so before taking an investment decision you have to calculate and analyze the cost of capital but before that, you must know the finance. That’s why there is huge importance in learning financing.

Understand the Requirement of Forming a Portfolio

After knowing finance properly, you must know what is portfolio and why we form a portfolio. A portfolio is a set of a different mixture of investment where both risk-free and risky investment is there, the main purpose is to decrease the overall risk of investment. If you learn finance then you must know how to form portfolio both for individuals and organizations.

Manage Your Personal and Professional Life in a Better Way

If you want to become financially sound person then you must know finance and after that, you will be able to manage your personal and professional life in a better way. Your financial strength will be increased by the right financing decision.

Understand the Investors Life Cycle to Choose Right Investment Time

Be aware of an investor life cycle and choose when to invest and when to save your valuable money. Your money is your asset, it is your decision whether you want to grow it by investing it at the right time.

Understand Key Success Factors of Financing

Behind every successful finance manager, a secret is there, the secret is understanding the key success factors and application of the factors at the right time in the right place.

Increase Your Analytical Skills

Ultimately by knowing finance deeply, you will be able to increase your analytical skills. You will be able to take good financing decision which will give you financial freedom, maximize your wealth and increase your spending power.

If you have any confusion about anything related to the importance of learning finance then please let me know, I will try to clarify it further.

Written by

Md. Nahian Mahmud Shaikat

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Determinants of Required Rates of Return

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Required Rates of return is one of the key factors which influence an investment decision. Actually, Determinants of Required Rates of Return helps to calculate the required rates of return on an investment. Sometimes the required rates of return are considered as the cost of capital/expected rates of return which basically used as a discounting or compounding factor. By using this factor, we actually calculate the present and future value of cash flows.

Determinants of Required Rates of Return

Here, determining factors are getting more important because this help to find out what should be our minimum required rates of return on investment. But the question is what are the determinants of required rates of return?

Determinants of Required Rates of Return

There are three broad determinants of Required Rates of Return and these are as follows:

  1. Time Value of Money
  2. Expected Rate of Inflation for a particular economy
  3. Involvement of Risk on Investment

Time Value of Money

  • The present value of money
  • Future value of money

Expected Rate of Inflation (Decline in Purchasing Power of Money)

Every economy may have inflation which is alright up to a considerable percent but exceeding inflation is not good for the economy. At the time of calculating expected rates of return, we must consider inflation. Higher the inflation, higher the required rates of return. It is a central bank and government responsibility to adopt an effective economic policy by which an accepted rate of inflation can be there for an economy. Investment selection process is influenced by the required rate of inflation.

Involvement of Risk with Investment

You know, there is nothing where risk is not involved. And it is money we talk about is more sensitive towards risk. Risk can vary from industry to industry, company to company, person to person. But the common thing is higher the risk higher the rates of return person expect from an investment. Although you may find there is a variation of risk-taking behavior among the individuals which is influenced by the personal trait of an individual. Risk can be broadly categorized into two head; one is systematic and other is an unsystematic risk.

  • Systematic Risk: Directly involved with the system which arises from the macroeconomic factors and it is not possible to minimize this type of risk through diversification of investment.
  • Unsystematic Risk: Unsystematic is a type of risk which is possible to minimize through diversification of investment. With this risk, there is a correlation between risk and diversification.

The determination process is involved with complicated work because the process is depending on how market change over time and how investors behave with it.

Market change because of the following reasons

  • A wide range of available investment alternatives
  • Return on specific assets change dramatically
  • Change in interest rate over the time period

It does not necessarily need to be the same required rates of return for all the people. The rate will vary according to the economic factors and the personal risk-taking behavior of an individual. So it will be better for you if you identify the influencing factors and then calculate your required rates of return on investment.

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What does a Financial Analyst do

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What does a Financial Analyst do?

If you have the plan to become a financial analyst, then you must know the responsibilities and Functions of Financial Analyst that is to know about what does a financial analyst do. So that you can prepare yourself accordingly. Several times many people ask me that what is finance and what does a financial analyst do. For them, I have listed 5 questions with the answer to help them understand.

  1. Who are the financial analysts?
  2. What are the responsibilities and functions of a financial analyst? Or what does a financial analyst do?
  3. Is there any Demand of Financial Analyst?
  4. What are the Educational Qualifications Required to become a financial analyst?
  5. Why your company should have at least one financial analyst?

Who are the Financial Analysts?

Financial Analysts are the individuals responsible to do financial analysis. But their responsibilities and functions are not limited to only financial analysis. They do economic analysis, business process analysis, market analysis, and many other things. A person who is involved with analysis of financial matters is considered as a financial analyst. Financial Analysts are the key to the financial decision-makers and their business decision is based on the extensive financial analysis.

What does a Financial Analyst do

What does a Financial Analyst Do?

Answering this question will also answer the question of what are the responsibilities and functions of a financial analyst and how they perform. Actually, financial analysts do

  1. Conduct Financial Analysis
  2. Capital Budgeting and decision making
  3. Ratio Analysis
  4. Identifying Cost of Capital
  5. Determine Optimal Capital Structure
  6. Dividend Policy Analysis
  7. Analysis of Financial Statements
  8. Financial Forecasting
  9. Cost-Benefit Analysis
  10. Portfolio Analysis
  11. Economic Analysis
  12. Market Analysis (Capital Market Analysis)
  13. Business Process Analysis
  14. Conduct a Feasibility Study

Responsibilities and Functions of Financial Analyst

Conduct Financial Analysis

The main job of a financial analyst is to do financial analysis, where the analyst can work for an individual, company or any other business organization. Financial analysis is a broad category of analysis where many types of analysis are included. As per the instruction and the requirement of the management, the analyst does their work. As a part of financial analysis job, analysts actually do the followings:

  • Capital Budgeting: Investment opportunities for long-term are analyzed by the financial analyst so that the organization can select the most beneficial investment where NPV, IRR indicates a positive outcome.
  • Ratio Analysis: Ratio analysis is basically done for evaluating the company’s performance, asset, and liability position. Based on the analysis of financial analyst, top management take required important decision for their organization.
  • Evaluate Cost of Capital: Financial analyst first calculates the cost of capital and then decide which financing decision is optimal for minimizing the cost of capital. Lower the cost of capital means lower cost of collected funds and which helps to higher the return.
  • Optimal Capital Structure: A Financial analyst also works for determining what should be the optimal capital structure for a particular company and how they can get the benefit of an optimal amount of capital.
  • Effective Dividend Policy: An effective dividend policy can improve the company’s financial position and a financial analyst do required analysis and suggest what type of dividend policy that a company may go for.
  • Analysis of Financial Statements: You know financial statements are the key statements where we can evaluate both the performance and financial position of a company. It is financial analyst responsibility to analyze financial statement and report to the management.

Financial Forecasting

It is one of the core functions and responsibilities of a financial analyst. Because financial forecasting will guide a company where to move in the future. And forecasting basically done with the existing data, so proper analysis of data is done by the financial analyst. An effective and efficient financial analyst work as a key factor in minimizing future loss and maximizing benefits.

Cost-Benefit Analysis

A business always needs to choose from different options. And from the available options, it is financial analyst responsibility to conduct a cost-benefit analysis. From the result of cost-benefit analysis make or buy decision can be made and invest or not invest in a particular sector is also decide.

Portfolio Analysis

If a business is dealing with multiple businesses then he/she needs to analyze all of his/her business and its products so that they can decide which combination will give then minimum risk with maximum return. Analysis of the portfolio is also conducted by the financial analyst because analyst knows how to analyze a portfolio.

Economic Analysis

Here economic analysis includes both micro and macroeconomic analysis where different factors are continuously monitored and analyzed so that if there is any change in influencing factors then a financial analysis can inform and suggest to take a required decision.

Market Analysis

A financial analysis also works with market analysis, the reason behind is to monitor market share, competitors situation so that it would be possible to make a strategic move to become successful in a particular industry.

Business Process Analysis

Business process analysis is one of the critical jobs of any person. Although everyone can not analyze business process because here critical thinking and proper understanding are required. I believe that a financial analyst can work for business process analysis as because he used to involve with the key analysis of the business.

Conduct a Feasibility Study

An experienced financial analyst can do the feasibility study for any industry because he has the capabilities, compassion to conduct a comprehensive feasibility study and make a report where all the functions of financial analyst are applicable for doing a feasibility study.

Is there any Demand of Financial Analyst?

Yes, there is a huge demand for financial analyst in different industries. You may find, the demand of financial analyst is most for the investment bank, capital market, financial institution, bank, non-bank financial institutions etc. that is for company/organization who do a business of money or financial assets, a financial analyst is must for them. Nowadays every company tries to keep at least one financial analyst for their organization. So there is no question that there is an increase in demand for a financial analyst. Companies recruiting financial analyst because they are helpful for identifying different success factors.

What are the Educational Qualifications Required to become a financial analyst?

To become a financial analyst, first of all, you required to have at least one finance degree, it can be graduation. It is not necessary to have post graduation as in your graduation you will have enough scope of learning core concepts of finance and financial analysis. You may find that many people are working as a financial analyst but they do not have any finance degree. They actually do their graduation in a business major in accounting but they have the minimum level of knowledge of financial analysis. But if you have a finance degree then it will give you an extra edge to perform financial analysis efficiently.

Educational Qualifications of Financial Analyst

  1. At least one Bachelor Degree (BBA) concentration in Finance, Finance & Banking, Accounting,
  2. Post Graduation (MBA) Major in Finance (will add value)
  3. CFA – Chartered Financial Analyst (will add value); CFA is the most attractive degree accepted worldwide for the financial analyst
  4. CIMA – Chartered Institute of Management Accountants (will add value)

Why your company should have at least one financial analyst?

Your company should have at least one financial analyst because a financial analyst can help you to make the right investment decision. He can help you to do your business in the most cost-effective way which will bring you maximum profit for your company. Every time he will analyze cost-benefit analysis of your business process and business alternatives. You know business is all about making money, so if you want to make a maximum return from your investment and take right financial decision then you must have a good financial analyst who will guide you all the time and works as a supporting partner of whom you can trust.

Finally, financial analysts do so many things for a company and they are capable of doing. But it is a management choice how they utilize a financial analyst for taking the right decision for their company. The challenging job for the recruiter to recruit best suitable financial analyst from the competitive market.

What does a Financial Analyst do pdf

Written by

Md. Nahian Mahmud Shaikat

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Importance of Capital Budgeting

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First of all, let’s have some discussion about capital budgeting so that you can understand what capital budgeting is and why there is the importance of capital budgeting for financial decision making.

Capital Budgeting

Capital budgeting is the process of evaluating investment alternatives. Here investment alternatives are the long-term investment opportunities available to invest. Caution must be taken when capital budgeting because it is long-term in nature, an involvement of a large amount of money, and use of monetary resources.

The process of Capital Budgeting

At the time of Capital Budgeting, a simple decision-making process is followed by the finance manager. The process is as follows:

  1. Identify available project which may have future prospects.
  2. Calculate the amount of fund required to be invested (Outflow) for different projects
  3. Calculate all expected benefit will receive within the project tenure
  4. Conducting cost-benefit analysis
  5. Compile all the results of the analysis
  6. Evaluate each of the alternatives
  7. For single project selection, select best one from the alternatives and for multiple projects, select the most beneficial project.
  8. Finally, start with the selected project/ projects to implement.

Importance of Capital Budgeting

Now come to the point why managers give too much emphasis on capital budgeting, actually managers concern about capital budgeting because capital investment can bring both profit and loss. Managers actually want to see whether the project will be beneficial for the company or not. If it is beneficial then the project can be implemented by investing a large amount of money, otherwise not. And the tools help to identify the right project is capital budgeting tools.

Importance of Capital Budgeting

Importance of Capital Budgeting in Corporate Finance

  1. Investment of a Large Amount of Money
  2. Long-Term Investment
  3. The probability of Incurring Enormous Loss
  4. Evaluation of Available Investment Alternatives
  5. Selection of Right Investment
  6. Proper Utilization of Funds

Investment of a Large Amount of Money

A proper analysis must be done before investing a large amount of money because our valuable money may be spent out for wrong investment. Capital budgeting is one of the popular tools to evaluate investment alternatives of a large amount of money.

Long-Term Investment

In case of long-term investment, precautions must be taken because from the long-term investment we expect long-term benefit and money will be stuck for a longer period. There is less flexibility of movement of money form long-term investment. That’s why the importance of capital budgeting is increasing day by day.

The probability of Incurring Enormous Loss

You know the future is always uncertain and for a large amount of investment, there is a probability of incurring an enormous amount of loss if you chose a wrong investment opportunity. So, you must do capital budgeting first then chose an investment opportunity where you will get an optimal amount of return.

Evaluation of Available Investment Alternatives

Basically, we do capital budgeting for the purpose of evaluating all available investment alternatives so that we can invest for right amount in right place. Remember that before evaluation you must take valid data otherwise you would not get a proper result of the analysis.

Selection of Right Investment

After analyzing all the things related to investment using capital budgeting techniques a corporate finance manager can select a right investment for his firm, which has a good potentiality of bringing benefit for the organization.

Proper Utilization of Fund

As because you choose the right investment for your company, you may assume that you are utilizing the valuable fund of your organization.

The success of Business Depends on Capital Budgeting

We use different tools of Capital budgeting to make the financial choice for large investment. The process of capital budgeting not only helps us to evaluate but also to choose the right investment. That’s why I personally consider capital budgeting as one of the success factors of the business. An effective analysis will give you proper guidelines for the right investment. And the right investment will generate the best possible revenue for your business, which is the key considerations of the success of your business. That’s why we give importance to capital budgeting for investment decision making.

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What are the Three Forms of Market Efficiency

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What are the Three Forms of Market Efficiency?

Whenever you talk about you may find three form of efficiency exists in the market. So, what are the three forms of market efficiency? The answer is:

  1. Weak form of Efficiency
  2. Semi-Strong form of Efficiency
  3. Strong form of efficiency

What are the Three Forms of Market Efficiency

Weak Form of Efficiency in the Market

In case of weak form of efficiency, the current price of securities is fully affected by all the past information in the market, for this reason, you will not get any additional benefit if you work with historical data that is your decision is based on past information. Price should change time to time with the change of previously available information.

Example of Weak form of Efficiency

Suppose the share price of Lanka Bangla Finance rises last seven days but we can not be sure that whether the price of the stock will increase in future or not because the price is already adjusted with the past information.

Semi-Strong Form of Efficiency in the Market

Another capital market hypothesis is semi-strong form of efficiency, where current price of securities is fully affected by the all past information and all publicly available information. If this form of efficiency exists in the market then you will not get any additional return in case of relying on the past price movement and information came from print or online media.

For testing whether there is semi-strong form of efficiency exists or not, you can test by two measures; one is checking how past information how it was adjusted with the price changes and the second one is how professional managers were performed in the market for making extra profit. Actually, in this world of capitalism, most of the capital market exists semi-strong form of efficiency.

Example of Semi-Strong Form of Efficiency

Suppose IDLC finance announce that first week of the next month they will introduce a new financial product. After the announcement, the price of their stock in the market rises sharply. This means a publicly available information creates an impact on the price of the stock but there is no influence of insider information. If this is the case then we can say that there is semi-strong form of efficiency exists in the market.

Strong Form of Efficiency in the Market

In a capital market strong form of efficiency exists when there is a reflection in the price of securities by the all publicly and privately available information. Here publicly information available through news briefing published a journal, research paper, market update or any other. And privately information is inside information can come from the insiders of the organization. But in the real world, there is no market where the strong form of efficiency exists.

Example of Strong Form of Efficiency

Suppose Union Capital is doing well in the financial industry and they officially declare that they will provide dividend at 30% of par value of their share and also management is thinking that within next few months they will add a new business line with the existing product line. The thing is the information of dividend declaration is publicly available information and the introduction of a new product line is private information which is not yet publicly available. But if a scenario is there where the price of a stock is changed by the all these private and public information and known to the general public then that market will be considered as a strong form of efficient market.

Difference among weak form, semi-strong and strong form of efficiency

The main difference among different form of market efficiency is an availability of publicly and privately available information and past information (historical data). Because these actually supposed to influence the market price of securities. The main thing is how market behaves with the addition of new publicly and privately available information related to the market.

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Opportunity Cost of an Investment

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Opportunity Cost of an Investment

Every investment decision should take care because the opportunity cost of an investment is involved in every financial decision. Here the first question may arise, what is an opportunity cost? Opportunity cost is the cost of selecting best from the available alternatives. Opportunity cost starts generating when we decide to invest our valuable money for a particular thing by sacrifice our other opportunities.

Opportunity Cost of an Investment

Do you think, the opportunity cost is calculated for organizational investment decision making purpose only? No, the opportunity cost is calculated and evaluated or must be calculated both for individuals and organizations/ corporations. Question may arise why? The reason is investment decision is taken to make a profit from the investment by ensuring optimal use of the financial resources. Every financial decision is cost worthy and our intention is to always become gainer. So, investment is to be in a right platform, with a right amount that may provide us maximum return with minimum opportunity cost. Although investment decision also depends on the investment behavior of the investor.

Things you need to Do Before Calculating Opportunity Cost of an Investment

  1. Identifying all the investment alternatives
  2. Collect each and every information those are related with these investment alternatives
  3. What will be the investment cost of all these opportunities?
  4. Acquire knowledge of time value of money and its implications on valuation
  5. Identify potentiality of each and every investment alternatives

Importance of Evaluation of Opportunity Cost of an Investment

Evaluation of opportunity will help to through:

  1. Identifying and selecting best investment opportunity
  2. Calculate Opportunity cost of an investment and any other related opportunities
  3. The result of evaluation will guide you to pick an investment alternative where opportunity cost is minimum.

Example of Opportunity Cost of an Investment

Suppose you have two investment opportunities. Either you can deposit your money into a bank or you can invest for your own business to become an entrepreneur. Both will give you benefit, but you need to choose only one from these two.  If you choose bank deposit option, then your opportunity cost of this investment is to be the rate of earnings from another investment opportunity that is invested in your business. On the other hand, if you choose your business investment opportunity then your opportunity cost will be the earnings opportunity of bank interest rate.

You have 1 million Tk in your hand. Either you can invest this money into a bank by depositing into a fixed deposit at 10% interest rate, or you can invest the same amount to start your own coffee shop, where you will earn more than 15% annually. But you know, the return from business always uncertain where higher the risk, higher the expected rate of return. That’s why you expect more return from business. On the other hand, if you can avoid the investment opportunity in business and accept the opportunity of bank deposit, where there is nearly zero percent risk is involved.

So, in these examples, the expected rate of earnings from business is the rate of opportunity cost for depositing money into a bank.

For your day to day business operation, you always need to take a decision of whether you want to make or buy. In case of small garments sometimes, you outsourced your work. Instead of making, if you buy from the third party then, you are losing an investment opportunity of making. So, in this case, the opportunity cost of an investment will be the benefit you are losing because of buying rather than making.

Finally, you need to understand that, whatever decision you take, you just need to sacrifice an opportunity. So, the opportunity cost is always there. But the most challenging task is to take investment decision where opportunity cost is lower.

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Is It Possible to Minimize Systematic Risk

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Is It Possible to Minimize Systematic Risk?

You may have a question in your mind that is it possible to minimize systematic risk? If you have then I am right here with your answer. After reading this hope you will understand what actually systematic risk is, what are the factors related with this and is there any way to minimize systematic risk or not.

First of all, let me explain the meaning of systematic risk. The risk associated with macroeconomic factors like; market interest rate, inflation, the rate of unemployment, economic recession, oil price etc. are the source of systematic risk. These factors cannot be changed or influenced by individual or organization. Normally risk which cannot be minimized through diversification of investment is considered as a systematic risk. In another sense risk which is beyond the control of individuals or organization is a systematic risk.

Minimizing risk is possible only through investing in negatively correlated financial securities. Here negatively correlated means the return of an individual security is not directly related to the return of other securities.

The main thing is, through diversification only we can minimize unsystematic risk portion which is arisen from the microeconomic factors. Because microeconomic factors can be controlled by individuals or organization through taking a proper economic decision. So at this point, we basically can say the unsystematic risk is a controllable and systematic risk is out of control, but the question is why systematic risk is out of control?

The influencing factors of systematic risk come from macroeconomic sources which are beyond our control. As individuals we do not have control over the unemployment rate of our country, we cannot reduce or control the inflation rate, we cannot fix the oil price, we cannot change the market interest rate, we cannot improve our unexpected economic recession situation by our own. Only proper economic policy taken by government can influence/ change or control these factors. That’s why as an individual’s we cannot minimize systematic risk.

It is not necessary that the percent of systematic risk always remain fixed. It can vary according to the change of economic condition. When there is a recession, more systematic risk will be there. For economic boom situation, the market provides more income, ensure less unemployment. And for these, there will have a less systematic risk.

Is It Possible to Minimize Systematic Risk

Beta is the measures of Systematic Risk, which is the function of macroeconomic factors. We can calculate systematic risk by:

Systematic Risk (Beta) = Covariance between Individual Securities & Market/ Variance of Market

You know that a market beta (Systematic Risk) is always 1. If your investment (Securities) beta is less than 1 then your investment is more stable (less systematic risk) than the market. On the other hand if your investment (Securities) beta is more than 1 then your investment will more unstable (more systematic risk) compared with the market.

At the end of these brief explanation, we can say that it is not possible to minimize the systematic risk. So it would be wise decision to work for minimizing unsystematic risk through diversifying your investment and try to make an optimal portfolio.

If you like this article then please leave your comment, or if you have any confusion about this topic then let me know.

Is It Possible to Minimize Systematic Risk

Written by: Md. Nahian Mahmud Shaikat

Mail: [email protected]

Financial Analyst

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Financing for Textile and Garments

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Financing for Textile and Garments

A good financing decision works as a driving force for an organization to build a strong financial position. Financing decision varies from industry to industry, organization to organization according to their financing requirement, financial strength and risk-taking behavior of that particular parties. Here in this article, you will have basic ideas of Financing for Textile and Garments business and how you can take a financial decision.

Basically, the objective of financing is to collect money from the least cost sources and then invest in the profitable sectors. Here the challenge is to minimize the cost and maximize the profit of the investment. Financing is required for different stages of business, like an initial startup of the business, or for maintaining the operational expenditures or for expansion of a business. The mechanism of these financing need varies from business to business.

If you are going to finance for the manufacturing industry then you will be required a large amount of fund for startup or for expansion of your business, and for operating expenditure you will be required working capital which is much less than the initial investment. On the other hand in the service industry, you have to invest a large amount of capital in the initial year and the operation cost is not that much high.

Requirement of Money for Textile and GarmentsNow come to the point of financing for textile and garments industries, as this one is manufacturing industry which requires to buy different types of equipment (power and electricity generator, spinning machine, knitting machine, dyeing machine, printing machine, sewing machine, cutting machine and many more) we have to spend lots of money and our huge amount of capital will be invested for this purpose. In addition to this thousand of garments, the worker will be working here, for payment of salary and wages you will be required a larger amount of working capital. On the other hand for importing raw materials you will also be required a huge amount of money.

If you want to expand your business to increase production capacity you have to invest a huge amount of money on a long-term basis.

The question is how you can manage this required money and from where you can source this money. At the time of sourcing of money/ fund you always have to be careful about the cost of that fund, least costing source will be preferable.

Financing for Textile and GarmentsFinancing for Textile and Garments can be for:

  • Initial startup of business.
  • Maintaining daily expenditures.
  • Expansion of Business/ Production Capacity.

Initial Expenditure for Starting a Textile and Garments Business

You already know that for starting a new setup for textile and garments you must spend a large amount of capital for purchasing capital machinery. The important thing is how you are going to finance for this, my suggestion is, and as capital machinery and equipment’s for long-term it will be a better decision of financing from the long-term sources. Available options for financing are:

  1. Long-term bank loan (Debt Financing).
  2. Selling share (Equity Financing); in case of public limited company.
  3. Or you can choose both debt financing and equity financing (the ratio of debt to equity will depend on the financial strength and the business risk of that company).

From the above alternatives, my personal suggestion is to choose the third one because you cannot usefully debt financing because you have to bear a fixed cost (interest) for a certain interval of time for a period.

  • Fixed cost financing may increase your financial risk, so try to avoid fully debt financing.
  • On the other hand, equity financing is more costly as you have to share all of your profit proportionately according to the contribution of equity capital.

The right choice is to use debt and equity to minimize the weighted average cost of capital. And you have to form your optimal capital structure by considering two major factors (business risk & financial strength). Taking a loan for a new business is not that much easy, that’s why initially we have to depend upon our own capital first. With the passes of time, for a successful business, it will be better to increase the debt percent so that taxable income can be reduced.

Financing for Maintaining Daily Expenditures

Actually maintaining daily expenditures means, managing working capital funds for your business operations or management of current assets and current liabilities. You may source your working capital either from long term or short term sources and the decision will depend on the working capital management policy (hedging, conservative, aggressive) of yours. Before choosing working capital management policy you have to have a brief idea of these policies:

  • Hedging Policy of Working Capital Management: Hedging policy is one of the popular policy of managing funds where a matching principle is used. Financing for current obligation is done from the current assets (current sources) and on the other hand financing for long-term obligation is done for the long-term assets (long-term sources). That means for a short-term requirement of funds you need to collect from short-term sources and for long-term requirements you have to collect from long-term sources.
  • Conservative Policy of Working Capital Management: In case of conservative policy company has the intention of taking a low risk for financing the current asset. Additional fund required for fixed assets company keeps the extra fund for using as a current asset. Here company financing (collecting) more funds from the long-term sources for both the current asset and fixed/long-term assets. The main intention is to lower the risk of financing for current asset.
  • Aggressive Policy of Working Capital Management: the Aggressive policy of working capital management is a risky policy in a sense that most of the required funds for current and long-term assets is to be financed from the short term sources, a lower amount of funds will be collected from the long-term sources. Basically, money will be kept less than the required amount for working capital that why risk is higher.

Before taking a policy form all these above-mentioned policies you must evaluate your ability to liquid your asset and liquid (cash) required for your business. Another thing is your risk-taking behavior towards working capital management.

The question is from which sources you can finance for the maintaining daily expenditures? The probable source available for the textile and garments are:

  • Lowering the collection period of accounts receivables.
  • Delaying the payment of accounts payable.
  • Delaying the payment of salaries and wages.
  • Taking short-term bank loan.
  • Purchasing raw materials on credit.

Financing for Expansion of Textile and Garments Business

As you already know that for the business of textile and garments you will be required a lot of money. Expansion of business or expansion of production capacity requires a larger investment to for purchase machinery and equipment, land, construct building etc. This is more or less similar to the initial investment for your business. In addition to acquiring capital assets, you have to hire workers and employees for supporting your business expansion. The thing is you have to pay wages and salaries, purchase of additional raw materials or any other operating expenditures. So you can manage this extra money from both long-term sources and from short-term sources. Whether you choose long term or short term source, is mainly depends on your financial strength and adequacy of money for your existing business. Normally a profitable textile and garments company has the intention to expand when they find that the business is profitable and they can manage their extra required fund from their own profit.

Financing for Textile and Garments

After these discussions, I think that it is clear how you can finance your textile and garments and which sources are available for financing. Careful analysis is to be done before any larger investment because large investment risk is higher and involve cost also.

If you have any confusion then you can comment here. I will try to give you suggestion about financing and different problematic situations.

Written by: Md. Nahian Mahmud Shaikat

Financial Analyst

Email: [email protected]

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Difference between Systematic and Unsystematic Risk

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Difference between Systematic and Unsystematic Risk

As an investor, you must know the difference between systematic and unsystematic risk because it will help you to take an effective investment decision. If you observer the investment decision of an investor, you can see that their investment decision is highly influenced by their risk-taking behavior. Although future is uncertain, people always try to assume how much risk may arise in future if an investment is made.

A risk is the portion of uncertainty which we can measure. Normally risk is considered the deviation between what an investor expects and in return what he/she gets.

In a broader sense risk can be categorized into two types; one is a systematic risk which is a non-diversifiable risk and other is an unsystematic risk or non-systematic risk or diversifiable risk. Let have a detail discussion of systematic risk and unsystematic risk with examples:

Systematic Risk

The percent of risk which we cannot minimize or reduce through diversification is considered as a systematic risk. This means that this type of risk is impossible to eliminate by an individual. It is directly related to the market, that’s why systematic risk also is known as market risk. From my point of view, the systematic risk arises from the macroeconomic factors (inflation, unemployment rate, oil price etc.) which are beyond our control. Only through the proper economic planning of government can reduce this types of risk. One important thing you need to know that although implementation of effective economic policies by the government would reduce this type of risk it needs time to be visible in the market. That’s why we cannot consider it when taking our individual investment decisions.

examples of unsystematic riskBeta is the measure of systematic risk and market beta is always one. The reason behind market beta is to be 1 is that we cannot minimize or eliminate systematic risk by our own. Beta can be calculated by dividing the covariance between individual securities and market to the variance of the market.

Beta = Systematic Risk

Examples of Systematic Risk

As we have already know that systematic risk arises because of change in macroeconomic factors, for showing the example of systematic risk we will use macroeconomic factors (Inflation rate, unemployment rate, market interest, oil price and political condition).

  • Suppose market interest rate is increased, in this case, if we want to borrow money from the market we have to pay more interest than previous because the cost of funds increased. Individually we cannot change the market interest rate so this works as a systematic risk.
  • Increase in the inflation rate, this means the buying power of money is decreased. For this reason, we can buy less resource than previous. So increase in inflation works as a systematic risk which existed in the market. The only monetary policy of government can influence the inflation rate.

If there is an increase in unemployment rate then people will have less money to purchase goods and services. And this will create a negative impact on the business which is beyond the control of individuals.

Unsystematic Risk

Unsystematic risk is also known as diversifiable risk or nonsystematic risk. This type of risk arises from the micro-economic factors which directly or indirectly related with business and through carefully managed you can eliminate this unsystematic risk.

A popular portfolio management concept is diversification, through investing in negatively correlated investment alternatives. That is investing in different companies from different industries which do not have any direct link between them. The better you manage your portfolio the lower will be your systematic risk.

As unsystematic risk is not directly related with the economic system, we can manage it in a better way through taking effective decision individually and maximize our return on investment.

Examples of Unsystematic Risk

Individual industry or company related any kinds of risk is considered as unsystematic risk for the company. Examples of unsystematic risk can be:

  • Increased labor turnover rate due to dispute of payment related issues among employer and employee.
  • Increase in research and development cost of the company.
  • Increase in operational expenses.

systematic and unsystematic risk

Here in this graph, you can see that systematic risk is fixed in nature, that’s why we work on with unsystematic risk to eliminate it or keep it at a lower level. If it is possible then the total risk of the investment will be reduced.

Difference between Systematic and Unsystematic Risk

From the above clarification about systematic and unsystematic risk, we can easily identify much difference between systematic risk and unsystematic risk of the business/investment. Here is the list of difference between systematic and unsystematic risk:

Systematic Risk

Unsystematic Risk

Systematic risk arises on account of the economy with uncertainties and the tendency of individual securities to move together with the change in the market.

Unsystematic risk is that part of risk which arises from the uncertainties and which are unique to individual securities and can be diversifiable.
Directly related to the economic system of a country.

Directly not related to the economic system, rather it is more about business or company related.

Systematic risk is known as non-diversifiable risk/ not diversifiable/ market risk/ macroeconomic risk.

Unsystematic risk is known as diversifiable risk, not a systematic risk.
We cannot reduce this type of risk individually This type of risk can be reduced
Negatively correlated investment cannot eliminate the risk.

It is possible to eliminate the risk by forming a portfolio of negatively correlated investment.
Beta is a measure of systematic risk.

Unsystematic risk is the function of may macroeconomic factors related to business.
Basically, investors not try to work with systematic risk.

Investors always try to reduce this type of risk through better managing their investment.
Examples:

  • Change in market interest rate
  • Increase in inflation
  • Change in oil price
  • Unemployment rate
 Examples:

  • Increase in business operational cost
  • Workers strike in the factory
  • Employee turnover

Although we cannot work with the systematic risk we have many things to do with unsystematic risk because if we can manage it in a better way, then our business will be more profitable with lower risk. By choosing negatively related investment alternatives we can form an optimal portfolio but it is not an easy task for the financial manager.  There is involvement of risk with every investment alternatives but we have to consider the systematic portion and then work with controllable factors which we actually can improve.

difference between systematic and unsystematic riskFinally, my suggestion is for you that take a time for risk analysis before any investment, otherwise, you may have to incur a loss. Risk always was there and will be there, so do not afraid to take the challenge, think and then take a right choice.

If you have any confusion then please comment here. We will try to help you to understand. You can also comment to our facebook page

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List of Project Management Acronyms

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The success of a project depends on the management of a project. Managing a project is not an easy task, most of the time its challenging job for the related parties. At the time of working with a project of government/ public or private, you may find acronyms and abbreviations of different key points those are very much confusing in nature. To reduce your confusion I have tried to combine commonly used and make a list of project management acronyms. Hope this will be helpful for the students of finance have interest in project management and any other parties related to a project (public or private).

List of Abbreviations Used in Project Management

List of Project Management AcronymsList of Project Management Acronyms

  • ADB- Asian Development Bank
  • AM- Aide Memoire (A document after review of a Project at any stage)
  • BB- Bangladesh Bank
  • BOO- Build Own Operate
  • BOT- Build Own Transfer
  • BOOT- Build Own Operate and Transfer
  • CFS- Combined Financial Statement
  • CONTASA- Convertible Taka Special Account
  • CSR- Combined Status Report
  • CD VAT- Customs Duty and Value Added Tax
  • CPM- Critical Point Method
  • CPA- Critical Path Analysis
  • CFS- Cash Flow Statement
  • CDR- Combined Delivery Report (For UN Project)
  • CAO- Chief Accounts Officer
  • DFID- Department for International Development
  • DP- Development Partner
  • DCA- Development Credit Agreement
  • DOSA- Dollar Special Account
  • DPA- Direct Project Aid
  • DPP- Development Project Proposal
  • ERD- Economic Relations Division
  • ECNEC- Executive Council for National Economic Council
  • FO- Field Office
  • FS- Financial Statement
  • FD- Finance Division
  • FP- Functions Point
  • GOB- Government of Bangladesh
  • GO- Government Order
  • GDR- Government Delivery Report (For UN Project)
  • HPNSDP- Health Population Nutrition Sector Development Project
  • IMED- Implementation, Monitoring and Evaluation Division
  • IRR- Internal Rate of Return
  • IT- Income Tax
  • IDB- Islamic Development Bank
  • IDA- International Development Agency
  • IDA- International Development Association
  • IIFC- Infrastructure Investment Facilitation Center
  • IMF- International Monetary Fund
  • IPFF- Investment Promotion and Financing Facility
  • JICA- Japan International Cooperation Agency
  • JVCA- Joint Venture Consortia Alliance
  • MB- Management Book
  • NPV- Net Present Value
  • NBR- National Board of Revenue
  • NEC- National Economic Council
  • PP- Project Proposal
  • PT- Project Termination
  • PCR- Project Completion Report
  • PA- Project Aid
  • PPA- Pre-financed Project Aid
  • PPR- Public Procurement Rule
  • PPP- Public Private Partnership
  • PC- Planning Commission
  • PBP- Pay Back Period
  • PEC- Project Evaluation Committee
  • PPT- Project Planning Tool
  • PERT- Programme Evaluation and Review Technique
  • PHQ- Project Head Quarters
  • PLC- Project Life Cycle
  • PPR- Public Procurement Rule
  • PPA- Public Procurement Act
  • PSC- Project Steering Committee
  • PD- Project Director
  • PM- Project Manager
  • PM- Project Management
  • PMO- Project Management Office
  • Pro Doc- Project Document (For UN-supported projects)
  • PER- Project Evaluation Report
  • PPM- Project Portfolio Management
  • PSIG- Private Sector Infrastructure Guidelines
  • PAO- Principal Accounting Officer
  • PRDP- Participatory Rural Development Project
  • RPA- Reimbursable Project Aid
  • SAFE- Special Account in Foreign Exchange
  • SEIP- Skills for Employment Investment Program
  • SOP- Standard Operating Process
  • SOE- Statement of Expenditure
  • SPV- Special Purpose Vehicles
  • TPP- Technical Assistance Project Proposal
  • USAID- United States Agency for International Development
  • WA- Withdrawal Application
  • WB- World Bank

List of project management acronyms pdf.

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