Chapter 3 Financial Management
Chapter 3 Financial Management
Chapter 3 Financial Management
Financial Management
Introduction
In contemporary life, money is a crucial factor for everyone’s daily living and for
conducting business in all sectors, whether public or private. Money serves as a medium for
acquiring resources or necessary factors for living or conducting business, including the four
essentials: land, buildings and equipment, and human labour. Therefore, financial planning and
understanding orderly and systematic financial management are essential for creating stability
and ensuring sustainable future security, thus protecting financial safety. In practice, financial
planning is a challenging task that most people struggle to accomplish, especially when various
factors impact financial planning, such as increasing desires and aspirations, leading to higher
expenses. Hence, learning financial management is necessary for planning quality spending.
Understanding various aspects of finance, the meaning of financial management,
financial planning, the use of capital in operations, investment alternatives for savings, and life
insurance can serve as guidelines for financial management planning. With patience,
perseverance, and determination, one can achieve the goals of financial management step by
step.
Raw Materials,
Labour Costs, and Debtors
Production Costs
Cash
Financial Planning
4 Steps to Achieve Financial Stability and Independence
Step 1: Wealth Creation
"Wealth Creation" is the first hurdle to overcome if you aspire to financial
independence. To build wealth, one must consistently "earn, save, spend wisely, and invest"
until these practices become second nature. Create wealth for yourself by "planning your
spending," "managing debt," and "planning your savings." The core principle of wealth
creation is to remember that "every pound saved today is like having an additional pound to
build future wealth."
Step 2: Wealth Protection
Life presents various risks, including unforeseen events such as accidents or illness that
can affect you and your family at any time. Without proper planning, your accumulated assets
might be depleted due to unexpected risks. Therefore, it is prudent to seek methods for "Wealth
Protection" to safeguard your assets. Implementing "insurance planning" can help mitigate
financial losses, even though it may not eliminate all risks. Additionally, planning for
retirement from today is crucial to ensure you have sufficient funds to live comfortably in your
later years.
Step 3: Wealth Accumulation
In recent years, inflation has outpaced interest rates on savings accounts. Solely saving
money in a bank may not achieve the financial goals or wealth accumulation you desire, as
savings grow slower than prices and costs. Instead, consider letting your money work for you
through various investment opportunities. "Investment planning" becomes crucial, as investing
acts as a fast track to wealth. Starting early, following a well-designed plan, and focusing on
investment growth will help you reach your financial goals. Additionally, paying attention to
tax planning can further enhance your wealth, as "tax planning" reduces your tax burden,
leaving you with more money to save and invest. Exploring tax-advantaged savings and
investment options, such as long-term equity funds (LTF), retirement mutual funds (RMF), or
life insurance, can contribute to long-term wealth accumulation.
Step 4: Wealth Distribution
Once you have built and accumulated a certain level of wealth, it's time to consider how
to distribute it. Reflect on what assets you have, their value, and whether your heirs will receive
the legacy you intend to leave. "Wealth Distribution" is an essential step in wealth management,
as it ensures your accumulated wealth is allocated according to your wishes. This may include
donations to charities, foundations, or individuals in need, or during emergencies. The key to
effective wealth distribution is "estate planning," which ensures that your wealth is passed on
according to your intentions and helps secure the legacy for future generations (Stock Exchange
of Thailand, 2015).
Investment Options
Investment risk is often correlated with potential returns, and assets can be classified into
three risk categories:
1) High-Risk (High Return)
o Stocks: The value of stocks can fluctuate due to various external factors.
Returns from stock investments come from dividends and profits from trading,
with the latter being tax-free. Stocks vary in types; for stable long-term returns,
consider investing in well-established companies with consistent dividend
payouts and moderate price fluctuations. For higher risk and short-term gains,
one might opt for stocks with significant price volatility. Keeping abreast of
news and market trends is essential; alternatively, investing through equity
mutual funds managed by experts is also an option.
o Derivatives: These are contracts whose value depends on the underlying asset,
which could be financial instruments like foreign exchange rates, bonds, or
common stocks, or commodities such as gold, oil, or rice. Derivatives are
primarily of two types:
a) Futures Contracts: Agreements to buy or sell an asset at a
predetermined price in the future. The buyer and seller are obligated to
fulfill the contract, but it can be offset by executing a counter-transaction
before the contract expires. Futures require less investment compared to
the actual asset value, thus presenting higher risk if predictions are
incorrect.
b) Options Contracts: Agreements allowing the buyer the right, but not
the obligation, to buy or sell the underlying asset at a specified price
within a certain period. If the buyer chooses to exercise the option, the
seller must comply. Both types of derivatives can be used for short-term
speculation or for hedging risks associated with primary assets.
If investors do not meet the conditions, they will not receive the tax benefits and may
have to repay the tax benefits received, with Long Term Equity Fund ( LTF) requiring
repayment for 5 years and Retirement Mutual Fund (RMF) requiring repayment with a 1.5%
monthly increase from April of the year the tax exemption was claimed. Additionally, capital
gains from selling units are subject to tax. Therefore, investors should carefully consider
whether they can meet the conditions before investing in these funds.
3. Low-Risk Group (Low Returns)
• Bank Deposits: Currently considered the lowest risk investment, as the government
provides deposit insurance. Therefore, depositors do not need to worry about losing their
principal, but the returns are very low. In some cases, the returns may be so low that they may
not keep up with inflation, leading to a potential loss of purchasing power. Since August 2012,
the government reduced the deposit insurance coverage to 1 million baht per depositor per
financial institution, meaning amounts exceeding this may be at risk if the financial institution
is poorly managed. Thus, bank deposits are not the best long-term investment choice but are
the safest option for new investors who do not have much experience.
• Life Insurance: Another investment form, life insurance, may not offer high returns
but provides risk protection. There are various types depending on the assessed risks, such as
critical illness insurance or health insurance. There are also life insurance products with savings
components or investment-linked insurance that may offer returns comparable to market
investments but with increased risks.
Principles of Asset Allocation for Risk Management
Allocating investments across multiple asset types is the best way to diversify risk.
Here, risk refers to the potential loss of principal due to various factors such as market volatility,
the management capability of the invested companies, currency depreciation from inflation,
liquidity issues leading to premature withdrawals, and risks from exchange rate fluctuations
and interest rate changes.
The most popular approach to managing risk through asset allocation involves
spreading investments across various channels. The guidelines for this practice are as follows:
• Avoid Concentration: Investors should not place all their funds into a single
investment option. Instead, they should diversify investments across different asset
types and securities, and across short, medium, and long-term periods appropriately.
• Avoid Over-Diversification: Investing in too many channels or spreading investments
too thinly can make it challenging to track prices and news related to those investments.
• Balance Risk and Return: Create a balance between investments with low risk and
guaranteed returns and those with higher risk and potentially higher returns. Allocate
proportions that align with your personal investment goals.
• Maintain Flexibility: Ensure that your investment portfolio is flexible enough to adapt
to changes in circumstances. Monitor economic and financial news regularly and adjust
your portfolio to align with the current situation.
This approach helps in managing risk by ensuring that investments are not overly concentrated
and by maintaining the ability to adapt to changing economic conditions.
Life Insurance
Life insurance is a long-term savings tool that not only aims to provide funds for use in
retirement but also serves as a risk management tool. It can be used for savings protection,
health insurance, and ensuring the quality of life for loved ones in the event of unexpected
circumstances leading to their premature departure.
Saving money through life insurance offers higher returns compared to deposit interest
rates. Throughout the policy period, you will receive coverage up to the sum insured. You have
the option to purchase supplementary insurance such as health insurance, accident insurance,
and income compensation, which can be used as emergency funds without withdrawing from
your savings or investments, thus avoiding missed opportunities for higher returns.
Additionally, insurance premiums can be deducted from taxes up to 100,000 baht.
However, life insurance is not a guaranteed formula for maximising savings benefits.
It is one of the top choices when considering saving for retirement, particularly when you have
limited savings capacity, and should be a primary option in your investment portfolio when
you have sufficient savings for more significant investments.
1. Describe the factors related to profit and risk. What should be considered?
2. Explain the key principles of financial management. How many are there and what are
they?
3. Describe what investment in fixed assets is.
4. Explain what the 5 Cs are. What are they?
5. Explain how investment risk is often linked to the level of return. How can risks be
categorized? What are the categories?
6. Describe what future investment is.
7. Describe what type of investment a mutual fund represents.
8. Describe the characteristics of mutual funds used for tax benefits. What are the types?
9. Explain what asset allocation is.
10. Describe the characteristics of a savings insurance plan.