Home » Kavan Choksi Sheds Light On Certain Basic Financial Principles

Kavan Choksi Sheds Light On Certain Basic Financial Principles

by janeausten
Kavan Choksi

Finance can look like an intimating subject to someone who does not have an educational background or adequate industry experience in finance. The true importance of finance might get lost amidst spreadsheets, formulas, and financial statements.

An experienced business and finance expert, Kavan Choksi stresses the fact that finance is not just about some numbers on a spreadsheet. Rather, it is more about ensuring the proper utilization of funds by businesses and individuals.

Kavan Choksi mentions a few basic financial principles people must know about

Financial principles typically act as a guideline for financing and investment decisions. Financial managers make investment, operating, and financing decisions for both short and long-term, based on these principles.

Basic financial principles include:

  • Risk and return: The principle of risk and return implies that investors have to be conscious of both return and risk. The higher level of risk would ideally lead to better returns, while lower risks would reap lesser returns. Comparing risk with a return is critical for businesses financing. Both direct measurement and relative measurement are vital to be assured of the optimal ROI.
  • Time value of money: This principle deals with the value of money. This valuation increases with time. For instance, the value of $1 at the current moment is much more than the value of $1 after a couple of years or so. Hence, it is imperative to think about the inflation rate of the economy before making any investment. ROI must compensate for the loss incurred by inflation.
  • Cash Flow:  The cash flow principle largely takes into account cash inflow and outflow. More cash inflow in the earlier period is preferable to later cash flow by investors. However, it is important to note that a new company is likely to likely have a negative cash flow for a while until a while till they start selling its product or service, and even then, it might take a bit more time before the company becomes profitable.
  • According to Kavan Choksi, cash flow can be of three types, such as:
  • Financing cash flow: Net cash generated from financial activities like dividend payments and debt payments
  • Operating cash flow: Net cash generated from normal business activities
  • Investing cash flow: Net cash generated through investment activities

Gaining a good understanding of the cash flow type provides context for budgeting, and offers insights into how the expenses and revenue of the company factors into its financial health.

  • Profitability and liquidity:  An investor has to be assured of both the profitability and liquidity of their investment, making this principle quite important. Liquidity is known to indicate the marketability of the investment, which implies how easy it is to get cash by selling the investment. Investors additionally have to make their investments in a manner that can provide assurance of maximization of profit with a moderate or low level of risk.

If a person has a good understanding of finance and its principles they would be in a better position to make smart financial decisions and would be able to achieve improved ROI.

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