Understanding Basic Finance Principles - equitybizz.com

Understanding Basic Finance Principles


basic finance principles

There are four basic finance principles that are extremely important to understand. First, you need to understand the concept of income and expense. Next, you should understand business finance. The third principle is money flow. And the fourth and final principle is risk management.

An Overview

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It doesn’t matter what type of business you have. When it comes to financial management, there are four fundamental finance principles that are equally important for all businesses. These are called income and expense, cash flow, business financing and financial analysis. If you have an accurate picture of your income and expense, along with a good understanding of your cash flow, your financial statements will be accurate. A good cash flow projection can prevent serious problems with your finances. Cash flow forecasting is a vital part of setting and maintaining a reasonable balance sheet.

When you are preparing a financial statement, remember these four basic finance principles. If you do not follow them consistently, you will be unable to prepare accurate financial reports. Regardless of the type of business you are in, it is essential to manage your financial resources well. Whether you are a small business or a large corporation, these basic finance principles are essential to company management.

The Basic Finance Principals

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The first of the four basic finance principles that you must understand is that you must set aside a portion of your salary to set aside as an emergency fund. This emergency fund is an amount of money that you can set aside each month in order to meet emergency expenses, without having to rely on your take out a loan. There is much money saved by keeping the emergency fund separate from the other funds in your business.

Another of the four basic finance principles is to use the financial statements you create to set aside a percentage of your net worth for your retirement. The key here is that you include the definition of “net worth” in your financial planning. If you do not include this definition in your financial planning, you are simply investing your wealth blindly. You must include the definition of net worth in all your financial planning decisions.

The third of the four basic finance principles that you must understand is that you must make sure that all of your family members are financially secure. The stock market is notorious for pumping and dumping, which means that a company can quickly move up in price and then quickly move down. The family business directors responsible for making corporate finance decisions need to make sure that their own personal assets are secure before they move the business forward. This means that they need to do their own research on secure personal investments and then include those investments in their family business.

The fourth principle that you must understand is that you should use current income to determine the capital appreciation and loss carrying amount of any business property that you might purchase. Most corporate finance policies will allow for current income to be used as part of the equation for determining capital appreciation and loss carrying amount. However, you should use current income as the primary indicator of future capital appreciation and loss carrying amount only after careful review of the total assets of the business. There are many different situations where the value of the company’s stock would go up dramatically and it would make no sense whatsoever to purchase additional shares in the company. You should always put a great deal of thought into every investment that you make in order to ensure that you are using the maximum amount of capital efficiently.

Bottom Line

You also need to understand basic principles of finance such as the first, second, and third, above mentioned. These are the most basic principles and they are the basics that you must master if you want to become a successful finance manager. Once you have mastered these three concepts, you will have a solid foundation to start you on your journey toward building a solid financial portfolio.

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