The 3 Financial Axioms

in #business3 years ago

There are three axioms which we use in financial management.

1- A dollar recieved today isn't worth a dollar recieved tomorrow.

2- Do not put all of your eggs in one basket.

3- Don't take additional risk unless you are compensated with additional profit.

1- A dollar recieved today isn't worth a dollar recieved tomorrow.

Here applies the concept of time valuation of money, due to inflation rates and other micro and macro factors money loses its worth over the time. Like if you facilitate someone with money you are expecting to get something extra when they return it. Because what you can buy with $100, you can't buy the same thing in that price, 6 or 8 months later.

2- Do not put all of your eggs in one basket.

This axiom gives us the concept of portfolio. It means investing your money in different financial securities to minimize the risk and maximize the return. So never invest all of your money in one company's stock, invest it in different company's stocks.

E.g if you have got $10 M investment. Don't invest all of your money in one company i.e company A rather invest some percentages of the investment in 3 to 4 companies.

Company A= $200,000

Company B= $200,000

Company C= $200,000

Company D= $200,000

Company E= $200,000

Now look at the above example, if company A and B stocks go down and company C, D and E stocks goes up then the loss will be compensated. But if you invest all of your money in company A then you will get a huge loss for that.

3- Don't take additional risk unless you are compensated with additional profit.

This axiom clearly describes what does it means. Never take additional risk if you don't know that you will get maximum profit. Always take calculated risk.

For example if you own a company and you have a spare land. Now you have an offer that lend it to someone who gives you $100,000 annual for it or you have an option to buy a plant and equipment for your company to increase product manufacturing. Now if you chose the second option then you must increase your sales that you add at least more than $100,000 in the net income of your company at the end of the year. Otherwise it won't be wise that you skip that option of lending it to someone and invests so much money in new plant and equipment and you don't meet the sales target.

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