The importance of Money Management

Finance tosses a coin and can win whether it is head or tail, considering a side of coin stands for fund raising and other side stands for fund management. As applied economics, finance manages the money. In other words, the role of a finance manger is to manage the money and raise the risk-adjusted return up to an optimal level.

Money must be managed as there is an opportunity cost. As a unit of money today is more valuable than a unit of money tomorrow, similarly an unit of money to be spent for a purpose loses its utility for alternative uses. Hence there lies the significance of money management. Management of money involves allocating the money in areas where it is required most.

Opportunity cost stands for the best alternative option one loses due to accepting the better option. While choosing to eat rice, instead of bread, the bread is the opportunity cost. One may intend to go for rice, for simply he is habituated to it or otherwise rice costs cheaper. In another sense, opportunity cost can be the difference between return from two investment areas.

If Investing in T-bill would reward an investor up to maximum 8.0 per cent, and if one does it, for an example, it will involve a loss of 16 per cent return generated from stocks. Hence 16 – 8.0 = 8.0 per cent is the opportunity cost. The question may be raised whether there is opportunity cost of anything if the best option is chosen. The reply is, opportunity is a chance of getting something which is the best.

But opportunity cost of capital may be as such that any one starts business with borrowing at 8.0 per cent and their own fund investment in stocks at 18 per cent. Herein the case of cost of capital, the idea is quite reverse.

Fund means any money kept for a purpose. Project financing involves funding from debt and equity sources. The cost effective borrowing is important because project viability depends on it. But unethical use of fund and earning management and faulty forecasting may ruin the life of a project when it is at the implementation stage.

Hence many professional designations are evolving for better ethical and intellectual practice of finance. Professional designations demand both the blend of intellect and education. In addition, it requires practical experience. In finance, gloablly a number of certification is available. So it would be a healthy strategy to hedge risk by knowing the way to do it.

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