4 Financial Concepts Every Manager Should Know
When you understand a company’s functioning, you are in a better position to succeed in either a vertical or horizontal career move. With these conceptual tools, you will be able to visualize how finance and capital acquisition activities have an impact on your organization.
Present Discounted Value (PDV)
Fact: $1,000 today is worth more than $1,000 in five years. Why? The $1,000 today has five years of interest-earning potential that the latter lacks. The present discounted value (PDV) is the current value of a future sum of money, taking into account a specified rate of return.
A business can use PDV to determine how much to pay for an investment today if that investment will produce a certain cash flow in the future.
Net Present Value (NPV)
How can a business figure out whether a new project is financially feasible? Calculating net present value (NPV) can lend some insight.
NPV compares the initial costs of a project with the total value of future revenue from that project. Because the future revenue is worth a different amount than if that revenue were earned today, a discount rate is applied to the future revenue, allowing the business to compare the future revenue to alternative investments today.
Structure & Function of Major Financial Markets
Watson exhorts managers to take the time to understand how major financial markets work. With this knowledge, managers can better understand the financial decisions that executives are making to position the company for success.
Investopedia has a thorough introduction to the wide range of financial markets.
A key component of investment decisions is the risk involved. Companies identify and analyze the risks associated with an investment before deciding whether to proceed. They then decide how to handle those risks, depending on the company’s investment objectives and risk tolerance.