The Curse of Competitive Market

Market is the place where uncertainty never dissapeared. Though people can’t determine the activity of the market perfectly, people still can predict market activity with enough financeducations. As we know, there are many type of market such as perfect competition, monopoly, oligopoly, monopolistic competition, and monopsony. Every type of market are not stand alone in economy. They combined together to create economic activity within the countries and worldwide.

In term of monopolistic competition market, monopoly and perfect competition take place in one type. Like a perfectly competitive market system, there are numerous competitors in the market. The difference is that each competitor is sufficiently differentiated from the others that some can charge greater prices than a perfectly competitive firm. An example of monopolistic competition is the market for music. While there are many artists, each artist is different and is not perfectly substitutable with another artist.

Monopolistic competition market is the closest type of market which can create the curse of competitive market. The curse of competitive market is the principle in term when a project, product, or any other business and financial instrument are easy to make profit, there are always a significant increase in supply. Therefore, it makes unbalance in supply curve, which decrease the amount of profit in business and financial instrument without the support of demands.

In 10 principle of financial management, the curse of competitive market is often forgotten. In my opinion, maybe it because of people can minimize the curse of competitive market with finance some sources in marketing (not pushing the curse, but strenghtened branding to win the competition). A good marketing may push the competitors away because people’s trust in branding. For example, in smartphone market, many manufacturers produce the same specs in one smartphone. But only one or two manufacturers can rise on the top. The one who can reach the top of sales indicates that they overcome the curse of competitive market.

I believe there are many other case that can be discussed in this topic. We will discuss more specifics in another post. Thanks for coming to the financeducations.

Incremental Cash Flow

Incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project and any other operating activities that generates cash flows. A positive incremental cash flow means that the company's cash flow will increase with the acceptance of the project known as operating activities.

 

In determining how the company should or should not accept the new project, there are several things that must be identified when determining the incremental cash flows, such as the initial outlay, cash flows from taking on the project, terminal cost (or value) and the scale and timing of the project. A positive incremental cash flow is a good indication that an organization should spend some time and money investing in the project.

Not only in accepting a new project, but also determining incremental cash flow is necessary for investors. A good investment come from how much you spend for a new instrument and the opportunity for that instrument to be grow. The grow of investment may vary, but to simplify it, let’s just see it as capital gain, and cash flow generated from that instrument. Remember about cash is the king? Cash is something that we can use to finance in business. In this term, cash is resource to expanding business, investment, etc. With the resource of cash, we can expand it to a bigger one with help of incremental cash flow principle. We can generate cash flow and expand our business depending how wise we use our resources to create bigger cash flow.

In the world of business valuation, knowing how much incremental cash flow generated can be really useful in determining value of discounted cash flow with 2 models known as free cash flow to firm model and free cash flow to equity model. The result of this process is the value of company.

Cash Is The King

Cash is the king is term or belief that money (cash in hand / bank) is most valuable or more valuable than any other form of investment instrument. The "cash is the king" statement is typically used when prices in the capital market are high and investors decide to save their cash for when prices are cheaper. It can also refer to the statement of financial position or statement of cash flow of a business; a lot of cash onhand is normally a positive sign, while strong cash flow allows a company more flexibility in regards to business decisions and potential investments.

Financial Reports consist of 4 items, such as statement of comprehensive income, statement of financial position, statement of change in equity, and statement of cash flow. In old term statement of comprehensive income also refer as income statement, and balance sheet for statement of financial position. In business, many investors always look at the statement of cash flow instead of statement of comprehensive income to determine are they will invest in that business or not.

Statement of cash flow shows the availability of cash in hand or bank in a business, while statement of comprehensive income shows profit or loss of the entity. It’s not impossible for a company, entity, or any other business to have a lot of cash flows while their business’s statement of comprehensive income shows minus account (loss). If the entity has a lot of cash flow, entity doesn’t find it hard to finance their business in the next period or if their cash flow is enough, maybe they don’t even need to find any other resources to finance their business.

Importance of the free cash flow shows you that cash is the king. You will always hold cash to finance something. If you don’t, you will find other resources such as debt to finance your needs. The more sufficiently your cash flow is, the less necessary your need for the debt.

Time Value of Money

Time Value of Money is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Time Value of Money also referred to as present discount value.

As one of 10 Principles of Financial Management, time value of money is the most well-known principle in finance and business world. In accounting, time value of money is closely related to effective interest rate to measure financial instrument, notes receivables, notes payable, and other items. Accountants are must implement this standard in creating financial report.

Time Value of Money is also related to inflation. When inflation occurred, the value of money is decreased. People always mistake this phenomenon for the increasing prices. In fact, it’s not the price that increased, but the value of money itself has decreased. Why is this happening? Because the principle of time value of money makes its appearance.

The value of money this time is higher than the value of money in the future. For example, you can buy fuel now at $1 per litre. If you have lived for 10 years, you must be realized that the price of fuel ten years ago was cheaper. As time goes, in the future, maybe you can buy fuel in the range $2 - $3 per litre. Without enough financial educations, you must be thinks the price of fuel is increased. If you think like that, you are half right and half wrong. You are right because of scarcity has occurred in the commodity of crude oil energy source, and you are wrong because not only scarcity made the inflation, but also the value of money itself has decreased.

Risk-Return Trade Off

One of 10 Principle of Financial Management is Risk- Return Trade Off. Risk-Return Trade Off is the principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.Therefore, people often use this term as High Risk, High Return instead of Risk-Return Trade Off.

In the world of business, when you invest more capital, the more potential of gain or loss you get. For example, there is a market share that valued $10. There are two possibility of this share in the future. Its value can be increased above $10, or can be decreased below $10. Depending on your analysis, you can get a capital gain or capital loss. The more you purchase the stock, the more you can get capital gain or capital loss. Let’s take a look at the condition when you purchase more or purchase less if the share value increase to $25:

Share Value at Purchase Price	Share Value at Sell Price	Capital Gain	Gain if Purchase less (100 Shares)	Gain if Purchase More (10000 Shares)
$10	$25	$15	$15 x 100 = $1,500	$15 x 10,000 = $150,000

I use the example when purchase less at 100 shares and 10,000 shares for purchase more. When you Purchase 100 Shares, you only get $1,500 capital gains, and you get $150,000 if purchased 10,000 shares. Here lies where Risk-Return Trade Off show off. The value $10 shares has potential to increase or decrease. When you believe that you can get more and purchase more you also purchase the risk in one bucket. When the value increase to $25, you get 150% gain. Percentage of this return remain unchanged instead of risk, while the amount you spent makes difference on your account.

Let’s take a look at the condition when you purchase more or purchase less if the share value decrease to $5:

Share Value at Purchase Price	Share Value at Sell Price	Capital Loss	Loss if Purchase less (100 Shares)	Loss if Purchase More (10000 Shares)
$10	$5	$5	$5 x 100 = $500	$5 x 10,000 = $50,000

I use the example when purchase less at 100 shares and 10,000 shares for purchase more. When you Purchase 100 Shares, you only lost $500 capital loss, and you lost $50,000 if purchased 10,000 shares. Here lies where Risk-Return Trade Off show off. The value $10 shares has potential to increase or decrease. When you believe that you can get more and purchase more you also purchase the risk in one bucket. When the value decrease to $5, you lost 50% of your account. Percentage of this return remain unchanged, while the amount you spent makes difference on your account.

Depending on how much you have control on your finance, you can change the amount of gain or loss in your account. Risk-Return Trade off just one of narrow mindset. You can also minimize the risk with much knowledge. Financial Risk is something that inevitable, but we can always improve our account with much knowledge.

10 Principles of Financial Management

Financial Management can be defined as the activity of planning, organizing, actuating, and controlling of funds held by an organization or company. The content itself can be diversivied in wide area of business. Any business needs financing so that business can be run, improved, and expand. Maybe you already know that the finance of business must be manage wisely.

Financial management involves managing the finances of a business. Financial managers, people who manage a business firm's finances perform a number of tasks. They analyze and forecast a firm's finances; assess risk, evaluate investment opportunities, decide when and where to find money sources and how much money to raise, and decide how much money to return to the firm's investors.

This time, we will describe a little about 10 Principles of Financial Management. 10 Principles of Financial Management consist of:

      1.       Risk-Return Trade Off,

      2.       Time Value of Money,

      3.       Cash is the King,

      4.       Incremental Cash Flow,

,     5.       The Curse of Competitive Market,

      6.       Efficient Capital Market,

      7.       The Agency Problem,

      8.       Tax Bias Decision,

      9.       All Risk isn’t Equal, Some Risk Can Be Diversified Away,

      10.    Ethical Behavior is Doing the Right Thing.

10 Principles of financial management is an axiom. Axiom itself is something that is not necessary to be scientifically proved. People just believe in that principle and often use axiom as base of decision making (in this term it's all about finance). Since old times, people just follow this rules in the world of business. While some others maybe not follow this rule and implementing another rule. But this “10 Principles ofFinancial Management” is used in school, university, other education, and even in business in many countries.

Unfortunately, the world of business and finance is continuing to evolve. The complexity of business is always improve. Maybe someday this 10 Principles of FinancialManagement will expired and replace with new principles. Therefore, we must always continue to learn in order to enrich our knowledge especially about finance.

Finance and Human Needs

Finance and Human Needs is like two side of coins.

Most of people work to earn money so they can fulfill their needs such as foods, schools, vehicles, house, etc. If we can't determine our needs, then our finance is just like the lost lamb. We don't know when to earn and when to spent. Thus, our money will gone to useless junk before we knew it.

Maslow summarized human needs in his theory that called Maslow's hierarchy of needs. Maslow's hierarchy of needs is portrayed in the shape of a pyramid with the most fundamental levels of needs at the bottom and the need for self-actualization at the top. While the pyramid has become the de facto way to represent the hierarchy, Maslow himself never used a pyramid to describe these levels in any of his writings on the subject.

The most fundamental and basic four layers of the pyramid contain what Maslow called "deficiency needs": esteem, friendship and love, security, and physical needs. If these "deficiency needs" are not met with the exception of the most fundamental (physiological) need, there may not be a physical indication, but the individual will feel anxious and tense. Maslow's theory suggests that the most basic level of needs must be met before the individual will strongly desire the secondary or higher level needs. Maslow also coined the term Metamotivation to describe the motivation of people who go beyond the scope of the basic needs and strive for constant betterment.

The human mind and brain are complex and have parallel processes running at the same time, thus many different motivations from various levels of Maslow's hierarchy can occur at the same time. Maslow spoke clearly about these levels and their satisfaction in terms such as "relative," "general," and "primarily." Instead of stating that the individual focuses on a certain need at any given time, Maslow stated that a certain need "dominates" the human organism. Thus Maslow acknowledged the likelihood that the different levels of motivation could occur at any time in the human mind, but he focused on identifying the basic types of motivation and the order in which they should be met.

Physiological needs

Physiological needs are the physical requirements for human survival. If these requirements are not met, the human body cannot function properly and dead. Physiological needs are thought to be the most important; they should be met first.

Air, water, and food are metabolic requirements for survival in all animals, including humans. Clothing and shelter provide necessary protection from the elements. While maintaining an adequate birth rate shapes the intensity of the human sexual instinct, sexual competition may also shape said instincts.

Safety needs

With their physical needs relatively satisfied, the individual's safety needs take precedence and dominate behavior. In the absence of physical safety due to war, natural disaster,family violence, childhood abuse, etc. people may (re-)experience post-traumatic stress disorder or transgenerational trauma. In the absence of economic safety due to economic crisis and lack of work opportunities, these safety needs manifest themselves in ways such as a preference for job security, grievance procedures for protecting the individual from unilateral authority, savings accounts, insurance policies, reasonable disability accommodations, etc. This level is more likely to be found in children because they generally have a greater need to feel safe.

Love and belonging

After physiological and safety needs are fulfilled, the third level of human needs is interpersonal and involves feelings of belongingness. This need is especially strong in childhood and can override the need for safety as witnessed in children who cling to abusive parents. Deficiencies within this level of Maslow's hierarchy due to hospitalism, neglect,shunning, ostracism, etc. can impact the individual's ability to form and maintain emotionally significant relationships in general, such as friendships, intimacy, family.

According to Maslow, humans need to feel a sense of belonging and acceptance among their social groups, regardless if these groups are large or small. For example, some large social groups may include clubs, co-workers, religious groups, professional organizations, sports teams, and gangs. Some examples of small social connections include family members, intimate partners, mentors, colleagues, and confidants. Humans need to love and be loved both sexually and non-sexually by others. Many people become susceptible to loneliness, social anxiety, and clinical depression in the absence of this love or belonging element. This need for belonging may overcome the physiological and security needs, depending on the strength of the peer pressure.

Esteem

All humans have a need to feel respected; this includes the need to have self-esteem and self-respect. Esteem presents the typical human desire to be accepted and valued by others. These activities give the person a sense of contribution or value. Low self-esteem or an inferiority complex may result from imbalances during this level in the hierarchy. People with low self-esteem often need respect from others; they may feel the need to seek fame or glory. However, fame or glory will not help the person to build their self-esteem until they accept who they are internally. Psychological imbalances such as depression can hinder the person from obtaining a higher level of self-esteem or self-respect.

Most people have a need for stable self-respect and self-esteem. Maslow noted two versions of esteem needs: a "lower" version and a "higher" version. The "lower" version of esteem is the need for respect from others. This may include a need for status, recognition, fame, prestige, and attention. The "higher" version manifests itself as the need for self-respect. For example, the person may have a need for strength, competence, mastery, self-confidence, independence, and freedom. This "higher" version takes precedence over the "lower" version because it relies on an inner competence established through experience. Deprivation of these needs may lead to an inferiority complex, weakness, and helplessness.

Maslow states that while he originally thought the needs of humans had strict guidelines, the "hierarchies are interrelated rather than sharply separated". This means that esteem and the subsequent levels are not strictly separated; instead, the levels are closely related.

Self-actualization

"What a man can be, he must be." This quotation forms the basis of the perceived need for self-actualization. This level of need refers to what a person's full potential is and the realization of that potential. Maslow describes this level as the desire to accomplish everything that one can, to become the most that one can be. Individuals may perceive or focus on this need very specifically. For example, one individual may have the strong desire to become an ideal parent. In another, the desire may be expressed athletically. For others, it may be expressed in paintings, pictures, or inventions. As previously mentioned, Maslow believed that to understand this level of need, the person must not only achieve the previous needs, but master them.

Finance itself is necessary to support those needs. Most people get work to get financed and buy their needs. Be careful not to spend too much, because your needs will turn into wants. When that happen, your finance were screwed up.