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Principles of Finance

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Principles of finance can be defined as managerial finance and the environment within which the decision-maker functions. It focuses on what these managers, investors, and governments’ agencies do with information in financial records and other managerial finance records.

Statement of work

Though Guillermo’s furniture store is undergoing serious financial difficulties, he can turn around his fortune by understanding some basic financial concepts. He can witness profit once again in his business, be able to operate more effectively, and even make wiser decisions for future business ventures. Financial concepts that Guillermo will need to address include power of cash flow, risk vs. reward, time value, debt vs. equity financing, and opportunity cost.

Equity versus debt financing

It is borrowing money to finance your business. Debt financing is where you borrow repayable capital, e.g., a bank loan, whereby equity financing is soliciting funds from an investor. In Guillermo’s scenario, he has the option of choosing either. He can decide to shift to primary distribution and then inscribe his patented coating on the Rival’s furniture. This is equity financing, since the competitor from abroad will basically finance all production and his mainstream will be distribution. He can, on the other hand, choose to acquire the expensive hi-tech production mechanisms used in foreign fields and eventually cut down production costs. This will most probably demand debt financing.

Power of Cash Flow

Power of cash flow is experienced when the amount of revenue for the company (sales of Guillermo’s furniture) is more than the expenditure (labor, overheads, miscellaneous). It is evident that Guillermo’s business was hard hit by the increase in labor cost. This in effect changed the cash flow from positive to negative. Guillermo’s can address this issue by reducing labor costs, e.g., through use of robots and hi-tech technology.

Opportunity Cost

This is the foregone cost of another one. It is associated with taking one cost over another. Guillermo had an option of either being merged/swallowed by another company, and thus escaping most of overheads, or acquiring another company and sharing cost. He has foregone the two and decided to strengthen his independent store by doing more research and using technology to enhance his services.

Risk versus Reward

Having the courage to make a risky venture is the secret to make gains in business. Guillermo is in the identical scenario where he has to decide which business he will venture in. He can decide to acquire the expensive hi-tech mechanisms (robots and laser machines), merge or even exploit his patents to make unique products that stand out from those of competitors. All these are risky ventures that need courage of a veteran businessperson in which Guillermo fits the bill.

Conclusion

Finance concepts are the researched financial aspects in the business world that manage the way it runs. There are issues that business managers need to address in order to succeed in terms of quantitative finance and risk management. By working on these concepts, Guillermo Navallez will put his store back to the furniture’s market.

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