mini question

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  • Explain the various aspects of finance that management must understand. 
  • Describe why a manager needs to understand the characteristics and importance of financial markets including their liquidity, competitiveness, and efficiency.
  • May 1st, 2015

    1. Various aspects of finance that management must understand are - 

    a. IRR - Internal rate of return gives the expected returns on a project. High IRR is desirable. This is must to decide where to invest or which product to promote among a list of them

    b. Time value of money - Money received today is more valuable than same amount of money received in future. This concept is important to design appropriate cash flows

    c. Cost sensitivity analysis - Its about incremental cost that will be incurred to increase the production or quality of service.

    d. Capital markets - It is important for the companies which are listed in NYSE / NASDAQ or in any other exchanges (publicly listed companies). 

    e. Risk management - It is important to manage and mitigate the risks emerging from various business and financial decisions

    f. Valuation - Techniques like future cash flows are very important for correct valuations of projects and even of companies.

    g. Mergers & Acquisitions - In these globalized times companies look for synergistic M&A which can give them a lead over competitors

    2. Financial markets presents an opportunity to leverage on existing resources and raise the money for expansion. This way companies can grow quickly rather than relying solely on reserves. However financial markets comes with their inherent risk. Any change in the economic scenario affects the markets. There are risks like interest rate risk, foreign exchange risk and market risks. 

    Liquidity - It tells how easy or difficult it is to transact (buy/sell) at any given time in the market. Financial managers must consider liquidity as an important parameter as financial decisions and results are time bound. Usually, higher the number of buyers and sellers in the market, higher the liquidity.

    Competitiveness - It refers to the property of the market where no one player can manipulate the prices. It has 3 parameters - 

    a. No or negligible transaction cost 

    b. Larger number of players

    c. Free flow of information

    For a financial manager it is important to understand the extent of competitiveness of the market in order to safeguard the interest of his/her company in the event of market manipulation. 

    Efficiency - Concept of efficiency originates from Efficient market hypothesis (EMH) and suggests that at any given time the prices in the market fully represents all available information. Truly speaking, no market can be fully efficient as legendary investors have routinely beaten the market. Financial managers must understand the correlation between information and prices to be successful in markets. 

    Let me know if you need further help. Best this answer if it helped.

    May 1st, 2015

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