Finances affect one and all, but Financial IQ is the prized property of a select few. Financial IQ is reared by learning the unglamorous, binary story told by numbers and histograms. For this reason, several investors would prefer to choose an investment avenue or instrument based on a sales pitch or trend. However, a more forensic, clinical approach is the need of the hour.
In unprecedented challenges such as that of the COVID-19 pandemic and the ensuing disruption, financial planning is hit the worst. The first signs of a financial slowdown due to the pandemic were seen, as in many other crises, in the stock market. Experts observe that although the first effects were seen in the supply-side economies, the disruption in the demand-side is the more far-reaching, encompassing one. Evaporating liquidity curbs spending in every area across the length and breadth of India’s geographical expanse.
The importance of financial management in modern businesses is established long before the onset of the effects of coronavirus in India. India has had to deal with global economic meltdowns, war, political and communal crises, and more. They have, directly and indirectly, impacted stock prices, foreign direct investment, and ease of doing business. With India’s multinational corporations and reliance on inflows from across the world impacting its economy, the current healthcare crisis transitions speedily into an economic deceleration. The commitment to draw lessons from market forces and apply them with gumption is a matter of pride for India under the current circumstances. Business finances can be affected for a period of 18 months to 3 years in various sectors.
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Young and old businesses in India recognize the need to take these oscillations in the business environment into their stride. Risk management and risk analysis is an imperative part of the business plan for every sector including startups. This can include product risk, financial risk, market risk, and people risk in the case of companies which are dependent heavily on their employees. This last one is true of all businesses except one-person companies. Among the rest, financial risk is the most quantifiable. It involves figuring out the financial knowledge and antecedents of research, development of a product or service, marketing it, and planning and providing for the use of the proceeds. This is a necessary discipline.
Every wage earner and business owner knows the importance of developing their Financial IQ because it not only provides records for the past but also lays the path for the future of the business.
Financial planning is where the ‘time value of money’ is recognized and put to use. A financial planner would advise an investor of any scale to determine their risk appetite based on the risk analysis of their business entity. Then, they deploy investments that pay along the way, all the way into the longer term.
Why liquidity is so crucial?
A new-fangled investor would ask why is financial management so important in business. This is because money remains valuable only when it is moving. Assets and liquid funds have different characteristics in the payback they bring. This is why business people master the movement of money – the cash flow. The profitability of organizations depends not only on managing inventory with care. They also need to balance their equity and debt and keep the turnover ready for reinvestment.
In times of pandemic as in other crunch times, the government of India can be trusted to rally forth to the aid of businesses and individuals in the form of stimulus packages. In this case, it was a 20 lakh crore relief package rolled out by the Modi-led government. A business person with a true Financial IQ would use this opportunity to take advantage of local manufacturing and enjoy the perks rolled out by the government for small businesses and domestic production. Interest rate cuts by the Reserve Bank of India and welfare measures aimed at specific sections of the society also add value to business finances.
Finally, Financial IQ also concerns itself with recognizing and evaluating investment opportunities quickly. With attributes such as awareness and swift execution, financial management takes a proactive rather than a reactive approach to shoring up wealth and re-mobilizing it in a planned fashion.
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- Robert Kiyosaki, Financial Intelligence: The Key to Seeing Money Where Others Don’t, Rich Dad, May 5th 2020
- Malini Goyal, Covid-19: How the deadly virus hints at a looming financial crisis, The Economic Times, March 22nd, 2020
- Roshan Kishore and Abhishek Jha, Economic impact of Covid-19 pandemic to vary in sectors, Hindustan Times, June 14th, 2020
- Press Trust of India, India’s Rs 20 lakh crore Covid relief package one among the largest in the world, The Economic Times, May 15th, 2020