What Is The Basic Concepts Of Finance?

Financial Management

Finance is the activities related to the exchange of different capital market goods between individuals, companies, or States and with the uncertainty and risk tolerance that these activities entail. It is considered a branch of the economy that is dedicated to the study of raising capital market for investment in productive assets and investment decision of savers. It is related to transactions and money or financial management.

FINANCE PURPOSE

The main objective of finance, theoretically, is to help natural or legal personal finance to make the correct use of their money, relying on financial health tools to achieve a correct optimization of resources. Finance is a fundamental aspect in the essence of any project, its theories can be confusing, but once we put them into practice we can begin to implement them in the best way. Although carrying numbers and net worth or money represents a great weight, both in a company and in the personal finance sphere, once we begin to understand the different financial concepts of finance, it will change our way of seeing work and our life.

Finance aspects

Finance is made up of three financial aspects:

• Money and Capital financial Market

• Investment

• desision in Financial administration

Money and Capital financial Market:

In this area, you must have knowledge of how to identify the factors that support and affect the economy. The tools used by financial institution to control the money financial market are also known.

Investments:

Investments are closely related to finances since it is involved with the money financial management. Determine how to allocate resources efficiently.

Financial administration:

This area aims at expanding money and is concerned with how to properly manage sales and expense to obtain a good return. It focuses on two important aspects of financial resources such as profitability and liquidity. This means that financial management seeks to make financial resources profitable and liquid at the same time. So, we can say that the financial market that generate functions in the control market in which strategic acquisitions are usually made that strengthen different organizations worldwide. 

Basic finance concepts

To make the right financial decisions, starting from households and ending with public finances, it is necessary to clearly understand the patterns of development of financial markets, to know the basic financial concepts of financial theory. Fundamental financial concepts guide include the following.

Financial capital

Group those amounts of money or personal finance that a person saves. In general basic financial terms, it refers to the capital that seeks a profit or compound interest later and, with it, the increase in it. One of the most significant characteristics of financial capital market is the basic finance concepts of time value since when referring to future income statement or compound interest it is related to other economic basic financial concepts such as purchasing power of inflation.

Investment

It is a set of savings mechanisms, location of the capital, and postponement of consumption, with the objective of obtaining a benefit or gain, that is, protecting or increasing the assets of a person or financial institution. The investment itself consists of the use of a surplus of capital in economic or financial activity. Let see its broader view, it is considered part of the gross capital formation, one of the determining factors in the constitution of the Gross Domestic Product (GDP).

Savings

It is the practice of separating a part of the monthly income statement, either from a household, organization, or individual, in order to accumulate it over time, to then allocate it to other purposes. Saving is an essential practice in economic theory, understood as the percentage of income statement that is not consumed, which is why there are different ways of doing this task.

Contribution Margin (MC)

Knowing how to calculate the Contribution Margin (MC) is essential to discover the gross profit from sales. It is the difference between the revenue generated by the entrepreneur and the Variable Cost of production. Discovering this value is essential to define our company’s Breakeven Point
Purchasing power
It is defined as the number of goods or services that can be obtained with a determined amount of money according to the price level, this is called “purchasing power”. In other words, it refers to the relationship between the price that an individual, a company pays to satisfy their needs and resources.

Inflation

It is the general increase in the prices of the goods, products, and services existing in the market in a determined period of time, giving way to the decrease in the purchasing power of the currency. It involves a loss of its real value. The most common causes of inflation are related to the increase in demand for a good or service, the increase in production costs, and socioeconomic problems developed in the country.

Cash Flow

Control of cash flow through cash flow statement is a fundamental measure for every entrepreneur. It is through this mechanism that it is possible to measure the inflows and outflows of financial resources in a given period and, thus, to know if the company is able to fulfill or assume obligations (loans or installments made with suppliers), also calculate the share of goods that can be purchased in cash flow, the availability to pay fixed cost or expense, etc.

Budgeting

It is nothing more than a plan of operations or Making a budgeting is simply sitting down to plan what you want to do in the future and express it in money or budgeting

Balance point

In the field of finance, it refers to the level of sales of a company to cover both fixed and variable costs. Fixed costs are those that do not depend on the company’s production volume. They will occur even if there is no productivity. They cover, for example, wages, rent, cleaning, among others. While Variable Costs are all those whose value is tied to the level of production, that is, the more it is produced, the more it is generated. What does the balance point mean? A company, at its equilibrium point, will have a profit equal to zero, where it will not lose money, but it will not earn it either.

Liquidity

It is the ability to meet short-term commitments and payment obligations.

Solvency

It is the ability to meet long-term commitments and payment obligations. While liquidity may be a specific problem at any given time, the lack of solvency is a more permanent problem because it implies the impossibility of facing a future with guarantees.

Profitability

It is the ability of the company to produce benefits, a relationship between these and the investment decision is necessary to achieve these results.

Utility

It refers to the measure of satisfaction by which users value and prefer the choice of services or goods in basic financial terms since they have certain characteristics that meet the needs of individuals. It can also be said that it is the profit or interest rate that is obtained with the use of a service or, that is, that the greater the utility, the more compound interest there will be in buying it.

Active

Considered as the goods and rights that an individual or entity possesses. For example, a machine is an asset, but we can also consider other intangible elements such as a patent right. It is said that they are the investment decision made.

Interest rate:

It is defined as the price paid for the mutual fund requested on loan, over a period of time. It is usually expressed as a percentage and represents an exchange rate between the price of money today in basic financial terms of future money.

Contract:
The trusts are constituted by public deed, in which the conditions that will govern it are reflected.

Personal Items:

They are the individuals or legal entities that grant the public deed of trust.

Liabilities

It represents the financing of the company since everything invested has had to be financed in some way, at some point, if we speak in general terms, it includes both the money that is owned by business owner by the company and the debt.

Net worth

It covers the set of assets, rights, and obligations that constitute the economic means for a company to function, it is made up of assets and liabilities.

Income

It is the increase in the net worth of the company, in addition, it does not take place due to the contribution of the partners or business owner, it should be noted that, on many occasions, they coincide with the collections, however, it is not frequent. 

Conclusion

For any company or franchise to grow sustainably, it is necessary to keep in mind the soil where the new fruits will be planted. So, original ideas and administrative and strategies of financial market are fundamental for growth, but none of this will be possible without strict control of the company’s finances and accounting. Hopefully, this article helps you a lot, as above mentioned basic financial concepts cannot be left aside in the financial management of your enterprise.

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Irma Terry

Irma Terry loves To talk about Finance, Scientific works in the theories of finances and credit, according to the specification of the research object, are characterized to be many-sided and many-leveled.