Any Decision making can be made effective with a thorough research and planning. A clear set of mind for your life’s decisions and a clear set of Goals and Plans for your financial decisions whether it’s personal or corporate is required.
The basic elements in financial decisions are:
Capital Budgeting:
The biggest investment a layman does is buying a house. He’ll decide on his budget and go ahead. Similarly, when starting a business deciding on your initial investment i.e. the capital budget is very essential. But the difference here is your business idea should be ready. Research thoroughly; understand your potential market and target groups, your competitors, infrastructure, machineries, etc. Be ready with the plans for every element in your business. A clear and well planned business will help you avoid unnecessary expenses though miscellaneous expenses are always there.
In personal finance, the same procedure follows. You have your monthly income in your hand. Before the money reaches your account plan how a part of it needs to be invested. Not only will you like receiving your regular income and spend on your housing EMI’s but also you would love to see a share of it grow more, won’t you?
Capital Structure:
Now after you got your budgeting done next step is to know your investment sources. From where to get loans, how much you got in your hand? It’s about finding the means to finance your project or business. The key issue is how much should be your own or owners’ investment and how much should be the borrowings. Yes, that’s the debt equity ratio. There should be a fine balance in this. Also after reaping out profits what should be the dividends paid to the owners for the capital that they invested. The balance should be such that your firm has flexibility, it should be able to raise capital or loan later on during the course of business and not locking the position to fund in any way.
In personal finance, a person needs to understand that his loan shouldn’t be to that extend that he is never able to repay it back or you put yourself in a position to take another loan to repay it. Your monthly or yearly income should be distributed in such a way that not only do you keep paying your expenses but also you invest a little part of it in some minimum risk based Mutual funds or Bonds, etc so that you earn more. Don’t hesitate to learn the various loan rates from different banks. Comparison of all sort of loans are available online. Choose the best one for you.
Working Capital Management:
It is the cash management for the short term or on day today basis. For firms, it deals with the current assets and liabilities i.e. the stock inventories (goods in the godown/warehouse), short-term securities, cash, etc. How much credit to be given to the clients (Debtors) and how much grace period your supplier allows you (Creditors), etc. It deals in all short term cash investment and management.
In personal Finance, it’s the liquid cash (cash in hand) and how you deal with it in your daily life. How much you lend to your friend, how much the shopkeeper gives you credit, how much of purchasing and shopping you got to do this month? Etc. As simple as that 🙂
D.V.P
FinancialDoodle 