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How is Financial Development Measured?

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  • Written By: M.J. Casey
  • Edited By: Daniel Lindley
  • Last Modified Date: 26 January 2020
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The measure of financial development is a function of what is being developed and what the goals of that development are. This can apply to nations or other governmental entities, businesses or other enterprises, or the family or individual. Financial development can refer to the group’s well-being, or it can refer to the maturity in handling financial matters. Well-developed financial status in all settings implies stability, sustainability, and equitable growth opportunities for those involved.

Nations, businesses, and individuals alike acquire financial abilities through a maturation process. In many nations, the financial institutions have become well developed over time. Still, regulations governing those institutions and international financial trading agreements are under continuous modification. A government entity would be considered financially mature with a minimum of a functioning treasury, a means to raise revenues, and a stable and accepted currency. New nations must establish these structures quickly.

A new business may fail due to a lack of financial development wisdom. Investors attempt to measure a company’s financial well-being through the analysis of business plans, review of the business books, and a general awareness of the company activities. Financial maturity in families and individuals varies considerably. While a general understanding of economics and personal finance is usually included in the secondary curriculum in the US, it may be inadequate to prepare an individual to be financially mature as an adult. Family instruction may be helpful in this area.

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The overall health of an organization may be measured by calculations similar to those performed by corporations. Financial development in a company is usually measured by examining a set of standard financial statements. A profit and loss statement is a description of the revenues and expenses over a set period. It is correlated with a beginning and ending balance sheet, which states the actual balance of all of the asset and liability accounts of the company. A cash flow statement describes the sources and uses of cash during the year.

Taken together, the financial statements yield a net worth. Net worth is what the total value of the company would be if all of its assets were liquidated, and all of its liabilities paid. Families and individuals can also calculate net worth. In a positive scenario, the net worth increases each year.

While nations do not calculate a net worth typically, they do track many measures of the health of the economy. A commonly used metric is the gross domestic product (GDP), the worth of final goods and services produced domestically in a year. The national income (NI) is the sum of the income received by individuals and is calculated from the GDP. Disposable personal income (DPI) is calculated by subtracting the total personal income tax paid from the NI. An increasing GDP is considered a positive but partial indicator of a nation’s financial development.

Another document that is crucial to financial development is the budget. The budget is a planning document, based on historical performance and future projections. Performance in companies is often measured by comparing the profit and loss statement to the budget. Positive financial development is more likely when nations, companies, and families follow their budgets. A deficit budget, in which expenses exceeds revenues, is not typically an option for individuals, families, or companies.

The ultimate goal of financial development is to improve lifestyles and financial security for individuals. Standards of living, as measured by infant mortality, average lifespan, the availability of clean water, air, and food, the degree of freedom enjoyed, and other traits are assessed by many international groups, including the United Nations. Financial development goals expressed on a corporate level may include working conditions, equitable pay and benefits, and business growth. Family goals may include financial independence of each member, the time and ability to enjoy life, and other personal goals.

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