Finance is commonly associated with banking, capital, debt, or investment, and oftentimes the concept of finance can be overwhelming and intimidating, creating a mystified boundary between those with and without financial backgrounds.
However, finance is closer to home than most people are aware of. In fact, finance is deeply embedded in our human nature and every single decision we make is rooted in the principles of finance.
Principles of Finance and the Uncertain World
In an uncertain world, exacerbated with the global pandemic, businesses and individuals are challenged every day by decisions to be made on the most ordinary questions to the life-changing ones — if I go out today will I get infected? Should I travel or move country? Should I close down my business amid this hardship, or should I ride out the storm?
The answers differ as people land on different decisions that best suit them, though the thinking process will have shared the same route via ‘trade-off’. By thinking about the trade-offs of our decisions, we are weighing the risks and rewards, and that ultimately boils down to the heart of finance: in the face of uncertainty, how does one allocate their energy and resources to make the right decision?
The core concept of finance helps us identify and deal with such risks, put logic before fear, acknowledge changes, and navigate our uncertain world.
People from all backgrounds and occupations come across and embody the principles of finance every day, and it is not necessarily to do with money. Rather, it is how people allocate their resources, time, and energy to make a decision, execute a plan, and manage the outcome. It is the internal risk-reward calculation and trade-off system that have been practiced time and time again to the point that it functions the ‘finance world’.
Understanding finance is not really learning a new skill, it is more like tapping into the inner acumen that transcends the ability to weigh costs and benefits of a commercial decision.
Finance vs. Accounting
While accounting and finance may go together, there are key differences:
Accounting is all about the historic record of what has already happened in the past. The fact that records are static and unchangeable, accounting, by definition, is backward looking.
Finance, on the other hand, focuses on what the future holds and how one can dramatically change course simply by executing a plan and a vision. The fact that a company’s value is based on the present value of its future cashflow applies to our lives as well: the only true source of a person’s value today is their future. There is no point in being stuck in what has already happened in the past – what you are going to do is what truly matters.
So, by embodying the core principle and philosophy of finance, an entrepreneur or even a ‘non-finance person’ can articulate their financial thinking to identify and mitigate risks, while being able to allocate time and energy to properly pursue the future and set today’s goals.