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What are the basic principles of financial management?

Jessie Thompson

in Student Loans

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Kathy Robinson on January 12, 2018

There are ten principles that form the foundations of FINANCIAL MANAGEMENT. These may be called as the foundation of finance that plays an important role in the decisions made by finance managers. so here we go... PRINCIPLE 1: The risk return trade - investors will not take additional risk unless they expect to be compensated with additional return. PRINCIPLE 2: the Time Value of Money - a dollar received today is worth more than a dollar received a year from now. PRINCIPLE 3: CASH, not profits is KING - it is cash flows not profits that are actually received by the company, 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. PRINCIPLE 5: The Curse of Competitive Markets-Why it's hard to find exceptionally profitable projects. PRINCIPLE 6: Efficient Capital Markets the markets are quick and 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 as a result of the conflicts of interest between the manager/agent and the shareholder. PRINCIPLE 8: Taxes Bias Business Decisions PRINCIPLE 9: All Risk is not Equal-some risk can be diversified away, and some do not. PRINCIPLE 10: Ethical Behavior is doing the right thing, and ethical dilemmas are everywhere in finance.


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