Principles of Business Finance – One of the goals of a business organization is to achieve the goal of maximizing wealth through profit making. To achieve this, organizations and managers follow a number of techniques. Policies without norms never work. Here We will briefly discussed 12 Principles of Business Finance. Therefore business financing and policy are not above the norm. What are the principles of business financing that are discussed?
12 Principles of Business Finance
1. Trade off between risk and income:
It is the root of misfortune. The word proverb refers to the possibility of misfortune caused by money. Therefore, considering risk or uncertainty as an integral part of the financial functions of financial management. As an application of this policy, a financial manager is expected to coordinate the risk of investment and the uncertainty of repaying it in making a decision.
For example, a company can make a profit of Rs 5,000 per month if it invests Rs 5 lakh, but if the investment is Rs 6 lakh, the profit will be doubled to Rs 10,000, and if the investment is Rs 10 lakh, the profit will be Rs 20,000. The higher the investment, the higher the profit. In other words, the higher the investment risk, the higher the profit. But if the firm has a total capital of Rs 10 lakh, will it be right to take this risk? Of course not. Financial managers make such important decisions considering the risks and uncertainties.
2. To consider the time value of money:
This principle should be applied to all types of investments for firms. It can be seen that the price of goods has doubled or in some cases even tripled in the last few years. For example, the price of 1 kg of beef has gone up from Tk 120-130 to Tk 190,200. The amount of meat is right here but the price has gone up by 60-70 rupees. That is, the purchasing power of money has decreased with the passage of time. That is why a Principles of Finance manager will deduct the expected cash flow by the time value factor when making an investment decision and if the discounted value of the cash flow is higher than the initial investment, the investment proposal will be accepted by the manager or not.
3. The principle of Net Cash Flows:
When making a decision on the principle of Net Cash flows, it is seen that the net cash flow received after deducting depreciation cost and risk rate is positive. ) Whether or not. The decision was taken with this in mind.
4. Adjustment between liquidity and profitability:
Liquidity is a measure of how much a business organization can handle instantly. If more capital is invested then more profit will be earned. In other words, the profitability of the project will increase. However, this will reduce the liquidity of the organization. Decisions have to be made considering the inverse relationship between liquidity and profitability. Otherwise the organization may fall into potential losses.
5. Optimal capital structure:
In the case of capital structure, an accurate picture of how much of the capital will be provided by the owner and how much will be borrowed. If this policy is not implemented properly, both the owner and the creditor (lender) of the organization may fall into loss.
6. Principle of wealth maximization:
The goal of this policy is to utilize profits in the long run to acquire wealth and to build an inward relationship between profit and wealth.
7. Hedging principles:
Provides guidelines for determining which source of funding should be raised. For example, short-term sources such as banks, debentures, business loans should be chosen as the source for purchasing stocks and long-term sources of wealth should be through long-term loans, bonds and share issues. Thus the suitability of the source has to be judged.
8. Business Eye Principles:
Due to some unavoidable and pertinent reasons, the national economy as well as the international economy is in a state of turmoil, recession and stagnation. This policy teaches how to make financial decisions by understanding the economic situation. That being said, financial decisions also change with the business cycle.
9. Principles of Dividend:
This principle has to be considered very carefully for business. Dividends will be interim or one-time, in cash or in stock. This is because if dividends are not paid in the right way, it can have a negative impact on the stock market.
10. Diversification policy:
This policy is adopted in the case of desirable management of resources. Financial managers are expected to reduce risk and uncertainty by investing in multiple alternative investment projects. If only the stock product is invested, then it is not possible to compensate for any loss of stock product. However, if there were multiple options such as purchase of property, purchase of shares and bonds, the loss of stock could be adjusted. Therefore, the diversification policy of investment is one of the Principles of Finance.
11. The Principles of Transparency, Accountability and Fairly Presentation on Financial Statements:
Financing Policies call for the pursuit of a common global policy. That is, financial statements must be presented in a specific form with complete information in simple, beautiful and clear language and must be published for the use of various stakeholders for transparency and accountability.
12. Recovery principles:
Recovery principles are sales policies. This policy can be strict and flexible. However, variability can be observed in both cases. Coordinating policy is a significant part of financial management.
In addition to the above Principles of Finance, financial managers conduct business activities by following a number of policies and making quick decisions. Such as priority policy, capital expenditure policy, valuation policy, hint policy and coordination policy etc.