5 Principles of Finance – Financial Management

Principles of Management

This video is for MBA 101 focusing on

financial management. If you watch my

other videos on the MBA 101 segment on

this channel then you’re aware of the

type of the videos I make if so please

keep the introduction which will get you

straight to the topic the exact time is

stated in the description below this is

one of the topics that was requested

from many viewers from my other videos

also special thank you to all the

viewers and the positive comments that I

received from all across the world

especially Croatia Belgium Russia India

Pakistan and Philippines your kind words

inspire me to make better content let’s

dive straight into the video with my

engineering background I really had a

tough time with this course for my MBA

studies but like always

I decided to come up with a real life

simple examples to understand the

theories frameworks and concepts this is

the genesis of the videos and content I

create so what is finance as per my

business school’s textbook which is

introduction to financial management by

tippmann at all finance is the study of

how people and businesses evaluate

investments and raise capital to fund

them this can be simply put into context

in two scenarios

number one imagine if you work for a

company as an engineer who gets paid

weekly the understanding evaluation and

analysis of your paycheck and what you

need to do with it

may be called as looking for looking

after finance number two say if you own

a business at a local market called for

example I happy novelties selling

light-up t-shirts the understanding

evaluation and analysis of structuring a

price point for sale of t-shirts to

accommodate the rent worker wages

ongoing inventory and am i right of

other things is also called as finance

make sense let’s look at it in a more

granular manner the scope of the video

will be more focused on business and

corporation finance I highly suggest you

watch the video on my channel

to thoroughly understand the difference

between sole proprietors corporation

limited liability I will add a link in

the description below more importantly

relax most financial calculations are

now handled by powerful calculators so

you just need to have a good

understanding of the concepts and my

team and I will try a hardest to portray

this in an interesting and simplistic

manner my curiosity is like my pet cat

Raja I always wondered why study finance

turns out most successful people have a

firm understanding on financial

management and it’s extremely important

to understand the concepts of money if

you envision yourself to be a successful

entrepreneur or if you’re studying for a

school trust me

the concepts you’ll learn can be applied

in your daily life once you start

earning unlike studying history or

literature just joking

we’re now going to look at five basic

principle of finance please ensure you

understand the five principle as they’ll

be the backbone of future videos rule

number one money has time value in

simple terms this means if I were to

tell you I’ll give you two choices and

now you have to pick one of them first

choice I’ll give you a thousand dollars

in a year from now second choice instead

of giving you a thousand dollars two

years from now or a year from now I will

give you a hundred dollars today think

about it for a moment

although a thousand dollars in two years

is nice but there is something called as

opportunity cost that you’ll be

foregoing hence based on the principle

it’s better to choose the money now then

choose the money in the future remember

this question as it shows up in a lot of

tests quizzes rule number two there’s a

risk return trade-off now using the same

example above I give you the same option

but add to you saying that rather than I

give you the money if you give me the

money today

I’ll give you an enormous return at the

end of one year now it’s really

depending on the risk associated with

the money and the trade-off see if

you’re willing to forego

hundred dollars and believed in my

business also because the rate of

interest is so convincing that you’re

willing to lose a hundred dollars on

hopes of making ten times the amount

that’s the risk return trade-off rule

number three cash flows are source of

values normally profits are an

accounting concepts which gives a

performance of the business over time

remember profits could be projected

value or real time but does not

guarantee you can take the money out of

business for example for ìhappy

novelties if I sell a t-shirt with a

cost price of ten dollars with a selling

price of thirty dollars my profit on the

t-shirt would be twenty dollars which is

pretty good right what if from my

profits I need to pay the rent bank

charges employee wages etc so say for

example I need to sell at least five

t-shirts every day to cover for the

charges which is a break-even point this

value is a cash flow of the business so

cash flows are very important and hence

a source of value for business it is

important that you understand clearly

the difference between profits and cash

flow as we’ll be discussing this in

future topics as well rule number four

market prices reflect information this

is more applicable to a public company

meaning the information of the company

is available where secondary research

meaning of available on a public domain

if you watch the stock market as soon as

companies earning come out the stock

rise or fall accordingly this is a good

example of market prices as per the

financial management book by tippmann at

all managers can expect their company

share prices to respond quickly to the

decisions they make the book further

states that a good decision will result

in higher share prices poor decision

will result in lower share prices lastly

rule number five individual response to

incentives this is a fundamental theory

that you need to understand if you want

to be a successful manager or an

entrepreneur or become or have a

successful business

the explanation about agency theory and

stewardship is extremely extremely

important and I’ll post a link in the

description of the video that I made for

another segment that explains this

clearly the part that you need to

understand is that you need to motivate

people to act on their behalf for

example if you have a business you need

to ensure that the people are well paid

and that their interest are well taken

care of

only then they will work on the

betterment of the company the principle

states that the individual will keep

their interest ahead of the company’s

interest so as a manager you need to

reward them with incentives to maintain

the balance I really hope you enjoyed

this video I’ll be posting written notes

on my website where you can easily

download it for your class or reference

your comment and feedback are always

cherished and welcome

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