Basic Finanacial Management

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Basic Principles of Finance
In: Business and Management
Basic Principles of Finance
10 Principles of Financial Management

PRINCIPLE 1: The risk-return trade off
– Investors won’t take additional risk unless they expect to be compensated with additional return.
PRINCIPLE 2: Time Value of Money
– A dollar received today is worth more than a dollar received a year from now. Because we can earn interest on money received today, it is better to receive money earlier rather than later.
PRINCIPLE 3: CASH, not profits is KING
– It is cash flows not profits that are actually received by the firm and can be reinvested.
PRINCIPLE 4: Incremental Cash Flows
– It's only what changes that counts. The incremental cash flow is the difference between the cash flows if the project is taken on versus what they will be if the project is not taken on.
PRINCIPLE 5: The Curse of Competitive Markets
– This is why it's hard to find exceptionally profitable projects. In competitive markets, extremely large profits cannot exist for very long because of competition moving in to exploit those large profits. As a result, profitable projects can only be found if the market is made less competitive, either through product differentiation or by achieving a cost advantage.
PRINCIPLE 6: Efficient Capital Markets
– The markets are quick and the prices are right. An efficient market is characterized by a large number of profit-driven individuals who act independently.
PRINCIPLE 7: The Agency Problem
– A problem resulting from conflicts of interest between the manager/agent and the stockholder. Managers won't work for the owners…...

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