Financial Terms and Their Importance

This report delves into several key financial terms such as financing of assets, return on investment (ROI), and their significance in making important business decisions. It highlights how ROI is a crucial performance indicator used by businesses to determine profitability of expenditures and how it can help identify better strategic plans. The report also touches upon the effects of these financial terms on businesses, including the potential for less current assets if asset financing is excessive, which could affect the firm's ability to pay liabilities on time.

FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION'...........................................................................................................................1
MAIN BODY...................................................................................................................................1
What is Liquidity?........................................................................................................................1
Importance of Liquidity...............................................................................................................1
Effect of Liquidity........................................................................................................................1
What is Operation Profit?............................................................................................................2
Importance of Operation Profit....................................................................................................2
Effect of Operation Profit............................................................................................................2
What is financing of assets?.........................................................................................................2
Importance of financing of asset..................................................................................................2
Effect of financing of assets.........................................................................................................3
Return of investment:-.................................................................................................................3
Importance of return of investment:-...........................................................................................3
Effect of return of investment:-....................................................................................................3
REFERENCES................................................................................................................................1

INTRODUCTION'
It is the application of different principles of management and it deals with analysing of
money and investments for the business in order to make better decision. Report will include
about Liquidity and its importance and its effects on the business. Report will also identify
operation profit, its importance and its effect on the business. Further report will include
Financing of assets and its importance and its effect on the business. At the end report will
include ROI and importance and its effect on the business.
MAIN BODY
What is Liquidity?
Liquidity can be determined as that feature which determines that how easily a firm can convert
its assets into cash or cash equivalents. It included the term market liquidity and accounting
liquidity which are used in broader context (Parlatore, 2019). Market liquidity determines stable
prices at which the stock of a country is sold and accounting liquidity signifies the ease with
which company is able to meet its financial obligations. It determines how quickly an assets can
be sold in the market and converted into cash and included bills receivable, cash, shares, quick
assets etc.
Importance of Liquidity
Liquidity is an extremely important factor and helps in determining how strong the overall
financial position of an individual, company or country is. It further assists in taking financial
and investment decision s based on the availability of cash and how easily these can be converted
in cash (Korinek and Simsek, 2016). Further, liquidity also impacts the working capital of a
company and impacts the entire operations so that situation of crisis can be avoided and risk of
dissolving can be managed.
Effect of Liquidity
When there is liquidity i.e. excessive supply of money in the financial market of an economy, it
ultimately leads to reduced interest rate in the economy since increased liquidity reduces the
value of money and therefore the real interest rate gets decreased. Further, it is a sign that in
future, inflation is inevitable in an economy, i.e. it is expected that in future, inflation is bound to
increased and therefore, generally increase in liquidity is not a good sign for an economy.

What is Operation Profit?
Operating profit can be defined as that profit which a business accumulated from the core
business activities of a firm i.e. no marketing or other investment cost have been included while
calculating these profits (Ben-Yehuda, Agmon Ben-Yehuda and Tsafrir, 2016). Operating profit
can be treated as an actual indicator of true potential of a company in generating profitability for
a company.
Importance of Operation Profit
It is extremely important for an organisation to measure their profit continuously as it
assist them in identifying their current efficiency and profitability i.e. when the core business
activities of a business are more profitable, the net profits will also be higher therefore presenting
a strong upfront of the company. A company and its management should therefore maintain a
strong base of operations in the company so that they can develop more profitable business.
Effect of Operation Profit
The operation profit of a company impact the profitability of a business in a positive
manner i.e. the higher the profits, more will be the positive impact it will increase the goodwill of
the company and therefore the higher operating profit is perceived to be more strong upfront for
a company and lower profit can be treated as the one with lower profit levels (Kang, 2019).
What is financing of assets?
Financing of asset refers to the situation where firm make use of its asset in order to take loan
from banks and business friends. This approach is used to take short term business loan.
Inventory and investments are used to borrow loan from banks and other entities. Hire purchase
and lease are some of best examples of asset financing. Under hire purchase agreement full value
of asset is included in the balance sheet and rent amount is considered as expense.
Importance of financing of asset
There is huge importance of financing of asset. Working capital refers to the amount that is
required by the business firm to run day to day business operations. Many times, working capital
shortage is observed in the business and at that time asset financing is the option that is openly
available to the business firms. Under this companies sell their equity in the market and receive
cash to finance their working capital needs.
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Effect of financing of assets
There are both positive and negative points of asset financing. Major positive point is that in case
shortage of working capital faced firm do not need to go outside to finance its needs. Company
can simply sell its asset in market to finance its needs. However, excessive use of asset financing
may lead to less number of current assets in business. Such kind of situation may affect firm
capability to pay current liability on time. Thus, time to time monitoring must be done to identify
bottleneck level of asset financing in the business.
Return of investment:-
It is the measurement of performance in order to analyse efficiency of investment. Return
of investment is useful to measure the amount of return with respect to the particular investment.
It is basically difference between current value of investment and cost of investment that is
further divided with cost of investment in order to determine the actual return of
investment(Chisholm and et.al., 2016).
Importance of return of investment:-
Return on investment is essential for making important business decision that may
include decision related to purchasing a new tool, hiring a new employee, adding a new
department etc. ROI takes care of progress with respect to the business. ROI is helpful in
knowing business performance and identifies new efficiencies for the business. It also helps to
identify better strategic plan.
Effect of return of investment:-
It is a key performance indicator that is generally used by the business to determine
profitability of the expenditure. Good return on investment is beneficial to the firm and company
can beat the market at that rate. With the change in economy, different niche forms of ROI are
sure to be developed in the futures(Masters and et.al., 2017).
CONCLUSION
Various financial terms and its importance were discussed in the above reports.
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REFERENCES
Books and journals
Kang, J., 2019. Operating Profit-and-Risk Integrated Decision & Evaluation Over a Firm’s
Strategic Fixed-Cost Spending. Available at SSRN 3419784.
Ben-Yehuda, M., Agmon Ben-Yehuda, O. and Tsafrir, D., 2016, March. The nom profit-
maximizing operating system. In ACM SIGPLAN Notices (Vol. 51, No. 7, pp. 145-160). ACM.
Korinek, A. and Simsek, A., 2016. Liquidity trap and excessive leverage. American Economic
Review. 106(3). pp.699-738.
Parlatore, C., 2019. Collateralizing liquidity. Journal of Financial Economics. 131(2). pp.299-
322.
Chisholm, D. and et.al., 2016. Scaling-up treatment of depression and anxiety: a global return on
investment analysis. The Lancet Psychiatry, 3(5), pp.415-424.
Masters, R. and et.al., 2017. Return on investment of public health interventions: a systematic
review. J Epidemiol Community Health, 71(8), pp.827-834.
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