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Financial Management

Whether you are managing money on a small or large scale; and whether in a business or personal context, there are always three things you must aim to achieve:

1. Increase Assets

Total assets (e.g. Money and investments such as property, shares, etc) either increase or decrease, but never remain constant. If assets decrease and continue to decrease, eventually there will be no assets (or finance) to manage.

2. Sustain Cash Flow

Assets need to be used in order to survive. Businesses use assets to sustain activities that generate income. People use assets to sustain their existence. If cash flow stops, a business stops doing business. If personal cash flow stops, there is no money for food or shelter.

3. Organise Finance Effectively

Finance must be organised and controlled well if you are to optimise gains and minimise losses. Financial activities (business or private) are subject to legal controls (e.g. everyone pays tax, and everyone must be able to account for how they handle their finance).

How Viable Are You?

Everyone should make it their business to know their own balance sheet is at any given time. Know the summation of your assets and your total liabilities. It gives an indication of your financial position. If you have a lot of debt, then your assets should ideally be high. But if you are borrowing money and spending it on purely expenses and not assets, you need to consider the fact that your asset value is likely to be low, your liabilities high and your finances in a bad state. Consider the impact this will have on your future lifestyle and potential borrowing power. If you are going to borrow money, then put it to good use and ensure you have a growing asset value.

Even though cars are considered assets, they rarely appreciate in value. If you are borrowing money and paying interest to own one, you might want to think about other more positive ways you could use that extra cash. Buying a cheap but reliable car for cash and then borrowing money in to invest in property/shares is likely to yield a far better future balance sheet, than spending on assets that do not appreciate. When you invest in an asset that goes up in value, and reinvest the interest/income, your money compounds over time. This is the way to grow wealth and have a balance sheet that will enable you to sleep better at night.

Article by Staff of ACS Distance Education

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