10 Principles of Financial Management
10 Principles of Financial Management
The 10 simple principles that do not require knowledge of finance to understand. However, while it is not necessary to understand finance in order to understand these principles, it is necessary to understand these principles in order to understand finance. Keep in mind that although these principles may at first appear simple or even trivial, they will provide the driving force behind all that follows. These principles will weave together concepts and techniques presented in this text, thereby allowing us to focus on the logic underlying the practice of financial management. In order to make the learning process easier for you as a student, we will keep returning to these principles throughout the book in the form of "Back to the Principles" boxes-tying the material together and letting you son the "forest from the trees."
PRINCIPLE 1 The Risk-Return Trade-Off-We won’t take on additional risk unless we expect to be compensated with additional return. At some point, we have all saved some money.
Why have we done this? The answer is simple: to expand our future consumption opportunities-for example, save for a house, a car, or retirement. We are able to invest those savings and earn a return on our dollars because some people would rather forgo future consumption opportunities to consumer now-maybe they’re borrowing money to open a new business or a company is borrowing money to build a new plant. Assuming there are a lot of different people that would like to use our savings, how do we decide where to put our money? First, investors demand a minimum return for delaying consumption that must be greater than the anticipated rate of inflation. If they didn’t receive enough to compensate for anticipated inflation, investors would purchase whatever goods they desired ahead of time or invest in assets that were subject to inflation and earn the rate of inflation on those assets. There isn’t much incentive to postpone
The 10 simple principles that do not require knowledge of finance to understand. However, while it is not necessary to understand finance in order to understand these principles, it is necessary to understand these principles in order to understand finance. Keep in mind that although these principles may at first appear simple or even trivial, they will provide the driving force behind all that follows. These principles will weave together concepts and techniques presented in this text, thereby allowing us to focus on the logic underlying the practice of financial management. In order to make the learning process easier for you as a student, we will keep returning to these principles throughout the book in the form of "Back to the Principles" boxes-tying the material together and letting you son the "forest from the trees."
PRINCIPLE 1 The Risk-Return Trade-Off-We won’t take on additional risk unless we expect to be compensated with additional return. At some point, we have all saved some money.
Why have we done this? The answer is simple: to expand our future consumption opportunities-for example, save for a house, a car, or retirement. We are able to invest those savings and earn a return on our dollars because some people would rather forgo future consumption opportunities to consumer now-maybe they’re borrowing money to open a new business or a company is borrowing money to build a new plant. Assuming there are a lot of different people that would like to use our savings, how do we decide where to put our money? First, investors demand a minimum return for delaying consumption that must be greater than the anticipated rate of inflation. If they didn’t receive enough to compensate for anticipated inflation, investors would purchase whatever goods they desired ahead of time or invest in assets that were subject to inflation and earn the rate of inflation on those assets. There isn’t much incentive to postpone