In finance there are many theoretical, mathematical and accounting elements that must be fully learned in order to understand the entire functioning of the financial world.
To facilitate the study of finance, I set out to structure these into 6 major areas, which are key if you want to fully learn financial concepts and take advantage of this knowledge.
Although these elements are different from each other, they are related, so it is ESSENTIAL to learn how each of them works, and that is the objective of the course.
The 6 main areas that the course contains are
1. General Aspects of Finance.
2.- Money and capital.
3. Financial Mathematics.
4. Corporate finance.
5. Financial Analysis.
6. International Finance.
We will briefly explain each of the 6 elements mentioned above.
General Aspects of Finance
Finance is the science that studies the correct administration of the values of an entity, be it an individual or a company. Study the cash flows, the way they are obtained and the administration (the way they are spent or consumed, the way they are invested, lost or made profitable) of these so that the economic objectives can be met.
Finances are important for two things: first, because they establish the ways in which you can obtain economic resources (money, securities, etc.) in an easier and more efficient way. Second, the administration; once resources have been obtained, they must be used efficiently to produce more resources.
The objectives of finance are:
• Provide sufficient financial resources.
• Maximize the market value of companies.
• Manage economic and financial risks.
• Analyze the value of money over time.
The main finance-related sciences are accounting and administration. Finance is directly related to accounting because they need ordered, structured and monetary information to make correct decisions about the use of resources.
As money is an economic resource in individuals and organizations, finance uses administrative models to plan the obtaining of money, organize its use and control its entry and exit, in an efficient way that allows the entity to generate wealth.
Money And Capital
One of the most important concepts in the study of finance is the importance of money, the role it plays and the various uses it can have in economic functioning.
Money is a common exchange instrument and generally accepted by a society as a means of paying for goods, services and debts.
Money does not necessarily have to be a precious asset. It is enough that it is a good which both parties agree on its value and capacity to be used as a payment instrument. Money is the result of a social pact, where everyone agrees to deliver their goods or services to others, in exchange for the monetary symbols.
For a good to be considered as money, that is, as a common instrument of exchange, it must meet three criteria.
1. Medium of exchange
2. Accounting unit
3. Conservation of value
Money loses real value over time, that is, more and more money is needed to acquire the same amount of goods. For finance, it is important to know the reasons why money loses value, and most importantly, calculate how much value it loses in a given time.
There are two main factors that directly influence the loss of value of money: the interest rate and the inflation rate. The minimum interest rate of profit expected when investing a certain amount of money in a certain period of time.
The inflation rate is the volume of generalized and continuous increase in the prices of goods and services in a given period in a given area.
When we use money to create wealth, we are said to be making an investment. The initial amount that we use for that investment is called capital. Capital, as a factor of production and as a source of wealth, can be classified into two depending on its use: circulating capital and fixed capital.
Financial mathematics
The topics that make up this area are simple interest, compound interest, annuities and their classifications, amortization and depreciation.
Interest is the amount a person must pay for the use of money. The study of interest in finance is divided into two, simple interest and compound interest.
Simple interest is multiplying principal by the applicable interest rate, and multiplying it by applicable time units. In compound interest, the interest generated is added to the capital, so the interest generated in the following period is based on the new capital, so the interest accumulates continuously. That is, that interest produces more interest.
An annuity is a set of payments made at equal intervals of time; that is, any payment with a constant amount, made at regular intervals.
There are several types of annuities depending on their characteristics. Of these, three stand out: past due annuities, advance annuities and deferred annuities.
In past due annuities, payments are made until the end of the periods. In advance annuities, payments are made at the beginning of the periods. In deferred annuities, the first payment period is delayed.
Amortization is the method by which a debt is paid in partial payments, in a scheduled and organized manner.
Depreciation is the loss or decrease of the value of a good, due to its use and enjoyment or obsolescence. There are two great ways to calculate depreciation, which in turn have different methods. These forms are:
1. Depreciation in a straight line.
Understand in turn
• Linear method.
• Fixed percentage method.
2. Depreciation for sum of digits.
Corporate Finance
The study of finance can be divided into two, corporate finance and international finance.
Corporate finance is an area of finance that focuses on how companies can create and maintain value through the efficient use of financial resources. That is, the finances applied to the correct administration of the companies.
Corporate finance focuses on four fundamental decisions:
1. Investment decisions.
Where the company should invest to get the maximum benefit from that investment.
2. Financing decisions.
What is the best way to get resources (external or internal financing) to make productive investments
3. Dividend decisions.
What to do with the benefits obtained, either reinvestment or distribution of benefits among the investors of the organization.
4. Management decisions.
Operational and administrative decisions for the organization to function properly.
In the exercise of finance by companies, there are key concepts to keep in mind, in order to maintain adequate financial management.
- Risk vs. benefit.
- Value of money over time.
- Liquidity vs. investment.
- Opportunity cost.
- Appropriate financing.
- Leverage (Adequate use of debt).
Financial risk can be defined as the possibility that an individual or organization has of experiencing a financial loss, that is, losing money. The risk originates from uncertainty, that is, from not being able to know with certainty the future events, and how these events will affect the finances of the individual or organization.
Accounting is a system of recording economic transactions that aims to provide timely and accurate financial information at the right time to make appropriate economic decisions. Accounting is the language of finance. To be able to understand finances correctly.
The information provided, the final product of accounting is the financial statements, which is a set of detailed reports of the financial situation of an organization.
The main concepts of accounting, from which all other details follow are assets, liabilities, capital. Asset is the set of assets and rights that an organization or individual possesses. Liabilities are the set of debts and obligations that an organization or individual has. Stockholders' equity represents two things:
1. Contributions made by members of an organization to finance its operations.
2. Losses or gains that the company has obtained in the current period and in previous periods.
Financial statements are the end product of accounting. In these, a summary of the economic situation of the organization is recorded, in a methodical, orderly, clear and easy to interpret way for those dedicated to the administration of the organization. Financial statements are the most important tools that organizations have to assess the state they are in.
The main financial statements with which the economic situation of an organization is evaluated are:
• Statement of financial position (Balance Sheet).
• Profit and loss statement (Income statement).
• Statement of cash flows (Financial run).
Within the financial administration, there are 6 basic aspects that are taken into account to carry out this administration successfully. These aspects are:
- Investment.
- Cost budgets.
- Sources of financing.
- Financial structure.
- Amortization of credit.
- Asset depreciation.
- Interpretation of financial statements.
The financial structure of a business organization can be defined as how it is constituted, that is, how it is formed. An organization may be made up of external financing, liquid contributions from partners or equity.
Financial analysis
When you are going to undertake a project, you want to have an idea if this project is going to be profitable, that is, if the project is going to generate benefits. For this, a series of analyzes must be carried out that will have the purpose of evaluating each of the aspects of the project that is to be undertaken.
There are 4 main studies that will help forecast the progress of the project under certain conditions. These studies are:
- Market study.
- Technical study.
- Study of operation.
- Financial study.
The financial study analyzes the project from the point of view of money, that is, if considering the income, the investment made, the costs and expenses, the project can be economically profitable. It is the most important study, because it is the one that directly predicts whether the project will be beneficial or not.
There are 5 methods of financial analysis of investment projects
- Net present value
- Internal rate of return.
- Recovery period.
- Financial reasons.
- Breakeven.
1. The Net Present Value is defined as the present value of the set of cash flows (losses or gains) derived from an investment, discounted at the required rate of return of the same at the time of disbursement of the investment, minus this initial investment, also valued at that time.
2. The Internal Rate of Return is the rate of return that the project will generate, under certain economic conditions previously considered in the study. It is the discount or update rate, which applied to the expected cash flows generates a total current value equal to the current value of the investment.
3. The period or period for the recovery of an investment is defined as the period in which the benefits of the flows obtained recover the investment initially made. From that moment, the flows obtained are converted into profits generated by the project.
4. Financial ratios are a set of indicators that measure the financial situation of a business organization. They are used to immediately measure the liquidity, indebtedness, operation and profitability situation of the company.
5. The equilibrium point is an indicator that indicates the point where income is equal to income, that is, there is neither loss nor profit.
International finances
International finance can be defined as the correct management of economic resources at the international level, that is, outside local borders.
It is important to study international finance because many companies have operations in other countries, in currencies other than their local currency, so these events influence the economic health of companies. Knowing the operation and importance of international financial events will help maintain proper financial management.
There are 5 main aspects that make up the study of international finance:
1. Exchange Rate and Currencies.
Study of the currencies of the countries, their relations regarding the exchange rate and its repercussion on the finances of a country and a company.
2. International Financial System.
Norms and institutions that regulate the operation of international financial operations.
3. Principle of purchasing power parity.
Explains the differences and causes of the purchasing power of one country compared to another.
4. Financial derivatives.
Hedge and speculation contracts used in international negotiations.
5. Stock markets.
Financial institutions where all kinds of negotiable securities are traded (stocks, metals, currencies, merchandise, etc.)
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