I’m working on a business question and need guidance to help me learn.
- What are the five principles of finance? Discuss each one and explain which principle is the most significant.
They are five principles when it comes to finance. They are cash flow matters, money has time value, risk requires a reward, market prices are generally right, and agency problems are caused by conflict of interest. Cash flow matters is value is determined by cash received. I believe this is the most significant of all the principles because no other principal would be around if cash did not create value. Money has time value is the concept of money has more value now then in the future. Think of it as inflation lowers the buying power of the dollar over time so you want to use it now. Risk requires reward is pretty self explanatory. No one would takes risks if they had no benefit coming out of it. Market prices are generally right because products are slow to respond to big events or news compared to the financial market like stocks. Finally, agency problems are caused by conflict of interest is seen when supervisors, managers, or CEOs act out of self interest which can harm the company they are working for.
- How will the study of finance influence your future decisions both professionally and personally? Explain.
The study of finance will influence my future decision both professionally and personally by allowing me to make more informed decisions. I will understand concepts better when it comes to finance which, in turn, will allow me to understand why some people make the choices they do. It will also allow me to better understand the area of finance when it comes to my own financial decisions. For example, why I would own a building charging a premium on rent but not having anyone actually rent it out. I personally see this often in California where previous thriving marketplaces are now barren with for rent signs. I want to learn tips and tricks that would help me in the future.
Fernando, J. (2021, October 21). Time value of money (TVM). Investopedia. Retrieved October 22, 2021, from https://www.investopedia.com/terms/t/timevalueofmoney.asp.
What are the five principles of finance? Discuss each one and explain which principle is the most significant.
– Cash flow – how much money actually enters and exits your business each period – determines if you can pay your suppliers, cover your bills, and make payroll. When cash flow suffers, you’re at a significant risk of going bankrupt or having to lay off staff to get by.
– The time value of money: is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. This is true because money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future. (Also, with future money, there is the additional risk that the money may never actually be received, for one reason or another.) The time value of money is sometimes referred to as the net present value of money.
– Risk requires reward: Investors will only invest if they expect to receive a return on their investment. It is generally true that the greater the risk a person takes, the greater the reward he or she will receive if the investment makes money. On the other hand, if an investor only takes a small risk, he or she is likely to earn a small reward. This principle is called the risk/reward trade-off. The risk-return relationship is another key concept of finance in valuing stocks, bonds, and proposed capital investments.
– Market prices are generally right: the market price is the amount of money an asset can be sold for on an open market. A simple market price definition specific to financial markets is that it is the price of the most recent transaction for a security on a traded market such as a stock exchange.
– Conflicts of interest cause agency problems: keeping a line between different divisions within a corporation.
In my opinion, the time value of money is the most important principle of finance because the cash you have today has a higher value than cash that you are anticipating in the future. You can use the money available today to make an investment and earn interest. The sooner you are able to earn or save money, the quicker it can work for you.
How will the study of finance influence your future decisions both professionally and personally? Explain.
Personal finance can help us increase our cash flow. Keeping a track of our expenditures and spending patterns enables us to increase our cash flow. Tax planning, spending prudently, and careful budgeting ensure that we do not lose our hard-earned money on frivolous expenses. Most obviously, understanding how to manage your own personal finance helps us to understand how to manage not only business finances, but set goals and create fundamentals skills in planning and decision-making, all especially helpful if we are running your own business.