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6 Principles of Finance You Must Know [Successful Financing]

Financing is the process of collecting funds to invest to ensures proper utilization. Proper financing required to follow 6 core principles of finance to ensure the maximization of benefit. Briefly, finance is the management of funds. The person who is responsible for managing the fund is well known as financial managers.

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 the short term and some long term. The 6 Principles of Finance everyone should Know whether it is for individuals or organizations.

six principles of finance

There are six principles of finance you must know

  1. The Principle of Risk and Return
  2. Time Value of Money Principle
  3. Cash Flow Principle
  4. The Principle of Profitability and liquidity
  5. Principles of diversity and
  6. The Hedging Principle of Finance

Risk and Return

The principle of Risk and Return 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 passes. The value of $1 of the present time is more than the value of $1 after some time or years. So before investing or taking funds, we have to think about the inflation rate of the economy and the required rate of return must be more than the inflation rate so that return can compensate for the loss incurred by the inflation.

Cash Flow

The cash flow principle mainly discusses 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 benefits rather than later years benefits.

Profitability and Liquidity

The principle of profitability and liquidity 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.

Diversity

This principle helps to minimize the risk by building an optimum portfolio. The idea of a portfolio is, 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

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.

Finally, if you have a basic understanding of finance and its principles then you will be able to take financial decisions effectively. And there is a higher possibility to become financially gainer.

Written by
Md. Nahian Mahmud Shaikat
Financial Analyst
Email: [email protected]
ResearchGate: Nahian Mahmud Shaikat

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Reader Interactions

Comments

  1. tanvir says

    February 5, 2015 at 8:43 pm

    as i student of finance i like to read this type of article. Hope you will continue to present more and more informative things.

  2. manaini nateru says

    April 13, 2015 at 8:38 pm

    as a student also…..this article is more helpful to us……..am looking forward for more n more information…
    THANK YOU

  3. nahian says

    April 13, 2015 at 8:44 pm

    Thanks for your nice comment. Hope we will be able to share more and more

  4. Elenoa Marama says

    March 7, 2016 at 11:01 am

    Really helps alot…looking forward for more useful and informative article as this ones

  5. nahian says

    March 7, 2016 at 11:58 am

    Thank your for your feedback. Hope you will get as expected.

  6. Muhammad Adnan khan says

    February 6, 2017 at 6:21 am

    I really appreciat your effort to explain in easy word very helpful article thanks .

  7. SULEMAN MAQSOOD says

    April 17, 2019 at 2:45 pm

    helpful article and excellence keep continue help for others……

  8. Hassan says

    June 29, 2019 at 4:49 pm

    nice one

  9. Maria says

    August 20, 2019 at 2:07 pm

    Thanks for your sharing your useful writing.

  10. Caroline J Koech says

    September 11, 2019 at 5:39 pm

    Your article has really help me.Thanks alot.Keep on the goodwork!

  11. roxies says

    December 4, 2019 at 4:24 am

    I was just looking for this information for a while. After 6 hours of continuous Googleing, at last I got it in your site. I wonder what’s the lack of Google strategy that don’t rank this type of informative sites in top of the list. Normally the top web sites are full of garbage.

  12. Onesmo Justice says

    December 30, 2019 at 6:48 pm

    Well put sir. Thank you

  13. Ziarul islam says

    January 4, 2020 at 10:51 am

    These types of articles are very much easy to understand for a student.
    I like it very much 😍😍

  14. Teput mai' asara vkto says

    July 15, 2020 at 3:48 pm

    Beautiful piece regarding finance, hope to read more from you.

  15. Ravinder says

    August 3, 2020 at 11:30 am

    Easy understand
    I hope to useful mi

  16. Chem fabiola tan says

    November 26, 2020 at 3:25 am

    As a student I’m so happy reading this, it’s well explained and easily understood. Thank allot🙏🙏🙏 may you continue to feel us with that knowledge

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