Money View
If you are an Individual, your Investment Life-cycle is based on the Current Cash Flows, Income Generating Capacity, Life Commitment & Life Goals, Dreams & Aspirations, Expenditure and Savings.
Key Considerations for taking Investment Decisions: -
Life Style
Life Style is a combination of Personal and Family Background, Education & Profession, Life Commitments & Goals, Societal Status, Community Living, Quality of Life, needs, desires, wants & aspirations of a particular Individual. Understanding the Life-Style is a very important factor for efficient Expenditure and Investment Management.
Income & Expenditure (Cash Inflows & Cash Outflows)
Cash Flows depends on the Income & Expenditure of an Individual which may be regular or irregular and may be fixed or variable. For the purpose of Investment, the Post-tax Cash Flows of Income & Expenditure need to be ascertained after considering the Time Value of Money. The Cash Inflows & Cash Outflows are critical factors for taking decisions on Investments, Expenditures & Borrowings.
Assets & Liabilities (Net-Worth)
The value of Assets & Liabilities needs to be ascertained for understanding the overall strength of the current Financial Position of an Individual. This will help an Individual in examining the over or under exposure to the various Asset Classes like Real Estate, Equities, Mutual Funds, Provident Funds, Bank Deposits and also exposure to Loans & Liabilities. Right balancing of Assets & Liabilities is required for Income generation & Wealth creation, Liquidity for Emergency needs, Family Commitments & Goals and for efficient Expenditure & Investment Management.
Financial Planning (Life Commitment, Life Goals, Household Expenditure)
Financial Planning is a Goal Planning aligned with fulfilment of dreams, aspirations & needs of an Individual and also achieve the goals with available resources in a more efficient manner. Financial Goals may be discretionary and non-discretionary. For Example, Children Education & Marriage is considered as Life Commitments and need to be fulfilled with the Current & Future Cash Flows. Financial Goals like Domestic & International Vacation are considered as Discretionary Spending. Household Expenditure like Rent, Food & Groceries, Clothing etc., is a necessary expenditure which cannot be avoided.
Investment Planning (Wealth Creation)
Investment Planning is a crucial part of Financial Planning where the Long-Term Wealth creation is required for fulfilling the Life Commitments, Life Goals & building a Retirement Corpus with a main focus of protecting the Capital erosion from Inflation and at the same time grow the Capital with a Proper Asset Allocation & Risk Management.
Retirement Planning (Annuity Withdrawal)
Every Individual and Families need to understand the importance of Retirement planning where the Life-Expectancy of Earning Members & Family Members is averaging around 70 years and Inflation-adjusted Living Expenses need to be derived for sustained Regular Cash Flows to match the post-retirement Life-Style Expenditure throughout the expected Life Cycle.
Insurance Planning (Wealth Protection)
Insurance Planning is a Financial Risk Planning designed to protect the wealth created over the years to avoid any large financial shocks which will erode significant wealth due to any reasons. Insurance is a very critical part of Income & Asset Protection from any unexpected financial shocks on the Family.
Estate & Succession Planning (Wealth Transfer)
Wealth transfer is a process of passing-on the Assets, Money, Property or Business of the Family to the next generation. Wealth created over the years has to be transferred to the next generation without any hassles & disputes, designed in terms of Family structure after considering the Legal, Financial & Taxation aspects. There are several methods of Wealth Transfer which can be through Gift, Will, formation of Trust or HUF or through a corporate structure.
Tax Planning (Compliance)
Tax planning involves the process of organizing the finances and wealth in a way that maximizes tax efficiency and minimizes tax liabilities within the boundaries of the law. Tax Planning is an essential part of all the ingredients of Income, Expenditure, Investments, Retirement, Wealth and Estate & Succession Planning. Effective tax planning helps individuals and businesses manage their tax burdens in a way that aligns with their financial goals.
If you are a borrower or wanting to borrow money, you need to understand the terms & Conditions of the Bank & Interest Rates which depends on the Credit Score & Risk Profile of the Borrower. Effective borrowing involves careful consideration of these factors, comparison of loan options from different lenders, and ensuring that borrowing aligns with overall financial goals and capabilities. It is important to manage the debt responsibly and ensure that borrowing decisions contribute positively to the long-term financial well-being. Individuals should carefully evaluate their borrowing needs, consider the alternatives and select the best option that aligns with their financial circumstances and goals.
Key Considerations for taking Borrowing Decisions: -
Interest Rates
The cost of borrowing is typically expressed as an annual percentage rate (APR), which varies based on the creditworthiness of the borrower, purpose of the Loan, Loan value, Tenure of the Loan, Repo Rate of Central Bank, Bank’s benchmark rate and the prevailing market conditions. Borrower need to compare the interest rates and the terms & conditions from different lenders to find-out the most cost-effective borrowing option.
Repayment Terms
The borrower needs to understand the repayment schedule, method of payment including monthly payments, interest rates, due date and the total repayment amount over the loan term. Further, the borrower should understand about the Late fees, Grace Period, Foreclosure Charges, Penalties for delayed payment and specific terms & conditions of the loan of a particular borrower.
Collateral
Collateral is an asset given as a Security for the Loan by the Borrower to the Lender. If the borrower fails to repay the loan as agreed, the lender has the right to seize and sell the collateral to recover the owed amount. Some loans require collateral like Property, Vehicles, Stocks, Inventory for securing a loan which reduces the lender's risk and lowers interest rates to the borrower.
Creditworthiness
Lenders will make an assessment of borrowers' credit histories, income levels, repayment capacity and financial stability to determine the eligibility for loans and interest rates offered. The borrower needs to maintain a good credit score to qualify for lower interest rates and better borrowing terms. The borrower needs to monitor the credit report regularly for accuracy and address any discrepancies
Financial Goals
Borrow strategically to achieve specific Financial Goals such as improving the credit score, buying a property, financing the education or for any emergency personal expenses. Borrowing should align with specific financial goals or needs and determine the appropriate loan type or product that fits your requirements.
Risk Management
Risk Management in borrowing involves strategies and practices designed to minimize the potential financial risks associated with availing a Loan. Proper risk management ensures that the debt can be managed efficiently to avoid any negative consequences. Assess your ability to repay the borrowed funds and manage debt responsibly to avoid any financial stress or default.
Entrepreneurs or Business Owners & Corporates need funds for financing their Business Operations, Expansions and for Strategic Business Investments. Access to capital is very critical for Entrepreneurs or Business Owners and Corporates to survive, sustain and grow the business to achieve their Strategic Objectives. Sources of Capital can be through Equity, Debt and the Bank Credit.
Key Considerations for Accessing Capital from Banks & Financial Institutions: -
Assessment of Business Model & Market Conditions
Evaluate the stability and predictability of the business model & revenue streams. Assess the scalability of the business and the growth potential. Consider the current economic conditions and market trends that might impact the business ability to generate revenue and manage debt. Emphasis should be on generating revenue and achieving profitability early and create a sustainable & viable business model.
Preparation of Business Plan
Lenders often require a solid business plan outlining the purpose of the loan with expected outcomes and repayment strategy. Borrowing should be aligned to the specific business needs and opportunities that have a potential to generate returns and contribute to business growth and profitability. The Business organizations need to clearly define how the loan will support the business objectives, whether it is for expansion, equipment, working capital or for research and development.
Evaluation of Financial Health
Evaluation of financial health involves analyzing the Organization Financial condition to understand its performance, stability and ability to meet the Debt obligations. The Organizations should review their Balance Sheets, Income Statements and Cash Flow statements to understand their financial health. Evaluation of Business & Financial metrics is required for understanding the efficiency in Operations. The Organization’s credit rating and past borrowing history will impact the loan availability and terms & conditions.
Assessment of Borrowing Capacity
Assessment of borrowing capacity is very critical for ensuring that a business can obtain and manage the debt responsibly. This process helps Businesses to avoid overleveraging and ensures they can meet their debt obligations without jeopardizing their financial stability & growth. The Organizations has to evaluate the ability to generate sufficient cash flows to meet the current & future Debt obligations.
Compare Lenders and Loan Products
Management of the business can take informed decision on the Debt under consideration by systematically comparing the lenders and loan products, based on the comprehensive evaluation of terms & conditions that aligns with the business goals, minimizes costs and ensures favorable borrowing conditions. Entrepreneurs’ or Key Management’s personal and business credit histories play a significant role in loan approval offered by Banks & Financial Institutions.
Review of Terms and Conditions of Loan
The Organization has to evaluate the loan tenure, repayment schedule, frequency, and flexibility to ensure that the proposed debt aligns with the cash flow & the financial projections. Proper understanding is required on the total cost of borrowing including interest rates, origination fees, and other costs to assess the affordability & loan options. Some loans may require collateral, such as business assets or personal guarantees of Entrepreneurs and Key Management of the Organization for securing a loan.
Risk Management
Risk management in borrowing ensures that the Debt is manged efficiently & effectively without compromising on the Organization’s financial health. Risk Management involves preparation of detailed forecasts to demonstrate how the loan will positively impact the business and also building a strategy to handle unexpected challenges or downturns through an emergency funding. The Organization also need to consider the Business Insurance which covers potential risks including loan default.
Legal and Compliance
Review the loan agreement carefully to understand all the terms and obligations. It is essential to understand the compliance obligations with relevant laws and regulations related to borrowing and lending as per the particular industry rules, regulations & Economic Policies of the Governments. The Organization also need to understand about disclosure requirements of Financials & other Business information which need to be submitted as per the Loan Agreement.
Monitor Performance
The Organizations should proactively and regularly monitor whether the Debt is managed efficiently & effectively through the evaluation of results as per the Strategic objectives stated in the Business plan. Frequent assessment of the performance particular to the Debt is also needed by way of assessment of various Business & Financial metrics. The Management of the Organization need to adjust the Debt Management strategies based on the performance and the market conditions.
Seek Professional Advice
Entrepreneurs/Organizations should carefully evaluate their borrowing needs, explore various financing options and work with financial advisors or lenders who understand the unique challenges and opportunities in business financing. Effective borrowing can support the business growth and stability when aligned with strategic planning and financial management practices. Engage with financial advisors or accountants who specialize in corporate finance for tailored advice. Consult legal experts to ensure that all contractual terms & conditions are clear and favorable.
Forex (foreign exchange) risk management is essential for exporters and importers to mitigate the potential losses or volatility stemming from currency fluctuations. Foreign exchange risk can significantly impact both exporters and importers affecting their revenues, costs, and overall profitability. Exporters & Importers face Forex risk in terms of Transaction risk, Translation risk and Economic Risk.
Key strategies to mitigate the Forex Risk for both exporters and importers: -
For Exporters: -
Exporters face forex risk primarily due to fluctuations in exchange rates between the time a sale and the time when the payment is received.
Invoice in Local Currency
Organization can consider invoicing in own currency to eliminate currency risk for major revenue streams, if agreed by the Customers. This strategy will shift the Forex risk to overseas customers.
Forward Contracts
Use forward contracts to lock-in the exchange rates for future transactions. This allows you to hedge against adverse currency movements and stabilize the cash flows.
Currency Options
Purchase currency options to have the right (but not the obligation) to exchange currency at a predetermined rate in the future. This provides flexibility while limiting downside risk.
Natural Hedging
Align expenses and revenues in the same currency wherever possible. For example, sourcing materials in the same currency can be the natural hedge against the Export Invoice and eliminates the currency risk.
Diversify Sales Markets
Selling the Organization products & services to customers in different countries with different currencies can help to diversify forex risk, as currency movements may offset each other.
Monitor Exchange Rates:
Stay informed about the currency market trends and developments that could impact Organization’s finances. Consider setting trigger points or thresholds for implementing hedging strategies.
For Importers: -
Importers face forex risk due to fluctuations in exchange rates affecting the cost of goods and services from suppliers from other countries.
Negotiate Payment Terms
Negotiate payment terms with suppliers that allow flexibility in timing to take advantage of favorable exchange rates.
Use Forward Contracts
Similar to exporters, importers can use the forward contracts to lock-in the exchange rates for future purchases. This will help in stabilizing the costs and budgets effectively.
Currency Options
Consider using currency options to protect against the adverse exchange rate movements while maintaining the flexibility.
Local Sourcing
If feasible, source materials locally or from countries that use the Organization currency which reduces the exposure to currency fluctuations.
Evaluate Supplier Currency
Evaluate suppliers based on their currency stability and consider diversifying the suppliers to minimize the risk.
Review Contracts
Ensure contracts with suppliers that can include clear terms regarding the pricing adjustments based on the currency fluctuations to mitigate the unexpected costs.
General Strategies for Both Exporters & Importers: -
Risk Assessment:
Conduct regular risk assessments to identify and quantify forex exposure based on transaction volumes, currency pairs, and sensitivity to exchange rate movements.
Utilize Hedging Instruments:
Understanding of various hedging instruments such as forwards, futures, options, and swaps is a must for suitability for the Organization’s specific needs.
Financial Expertise:
Consider consulting with financial experts or utilize treasury management services from Professional firms to develop and implement effective forex risk management strategies.
Monitor and Adjust:
Continuously monitor currency markets, economic indicators, and geopolitical events that could impact exchange rates. Organization should be prepared to adjust hedging strategies in accordance with changes in forex movements & forecast.
Educate Stakeholders:
Ensure that the key stakeholders within your organization understand the importance of forex risk management and are aligned with the hedging strategies that are implemented.
By adopting proactive forex risk management strategies, exporters and importers can minimize uncertainty, protect profit margins and maintain financial stability in an increasingly globalized business environment.