Finance for Business: Research on Principles and Analysis Report

This report analyzes five fundamental principles of finance: cash flow, time value of money, risk and reward, market prices, and agency problems. It emphasizes the importance of cash flow over profit, highlighting its role in business valuation and investment decisions. The report explains the time value of money and its impact on financial decisions, noting that money's value changes over time due to its earning potential. It also discusses the relationship between risk and reward, the efficiency of market prices in reflecting information, and the agency problems arising from conflicts of interest between managers and shareholders. The report supports its arguments with examples from current news articles, demonstrating the practical application of these principles in real-world financial scenarios.

Running head: FINANCE FOR BUSINESS
Finance for Business
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Table of Contents
Five basic principles of finance..................................................................................................2
1. Cash flow is what matters..................................................................................................2
2. Money has a time value......................................................................................................2
3. Risk requires a reward........................................................................................................3
4. Market prices are generally right.......................................................................................3
5. Conflicts of interest cause agency problems......................................................................3
Reference....................................................................................................................................5

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Five basic principles of finance
1. Cash flow is what matters
Cash flows determine the value of the business, as cash flows are different from
financial profit. For a business, it is possible to generate profits however, it is not necessary
that cash flow always come to be positive for a business. While making financial decision a
firm should always try to determine its incremental cash flows as for making any type of
investment cash is an essential requirement. Cash flow is one of the financial statement that
shows the cash transaction of the business by dividing the transactions into operating,
investing and financing activities. Stakeholders require the cash flow statement to know the
net change in cash of the business and to know what is the amount of cash and cash
equivalence is there with the business at the end of the financial year. As per the article
mentioned in ABC Australian news, Westpac an Australian finance company says that
despite of laundering risk the company is in good shape (ABC News, 2020).
2. Money has a time value
The value of money received today will be much more the value of money received in
future. It is one of the core principle of finance as money can earn interest and the purchasing
power of money differs with the passage of time. For any financing decision and for any
investment decision the idea of time value of money is critically analyzed. Even for capital
budgeting decision time value of money is taken into consideration. Most financial decisions
involve costs and benefits that are spread out over time. By keeping this concept in mind,
business can compare cash flows from different periods. According to the article “The Battle
of the Savings Accounts” there are banks that provides 20X the interest of most others. It is
known that savings account interest rates are low. UFB Direct has their APY higher
(Bankrate.com - Compare mortgage, refinance, insurance, CD rates, 2020).

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3. Risk requires a reward
As it is truly said that if one takes more risks the more return he will get.
Businessperson also takes risk to get additional returns. When investors put their savings in
banks, they expect a return and they expect to earn a higher rate of return on stock relating to
savings account. Certain risk ratios are used to calculate return on investment. In addition, to
determine the worthiness of investment, the investor use the risk reward ratio. As per the
article mentioned in ABC Australian news, margin money could be beneficial in
supercharging the savings by taking some amount of risk (ABC News, 2020).
4. Market prices are generally right
It is seen that if a business decision is taken by analyzing the whole market condition
then it proves to be profitable for the organization. Usually the value of the firm is
determined by its stock price. Any change in prices shows deviation in expected future cash
flows. If the decision-making process is done by evaluating the market conditions then
ultimately it will lead to increase in stock prices and will be profitable for the firm. For
determining the value of an asset market price is used due to which a reasonable and valid
financial statement is prepared which can be used by the stakeholders for taking effective
profitable decision for the firm. As per the article mentioned in CNN BUSINESS, Australia’s
one of the top financial firm is in crisis. AMP Ltd is one of the leading wealth management
company in Australia that is facing crisis because the company is alleged for overcharging its
customers and misleading its regulators (CNNMoney, 2020).
5. Conflicts of interest cause agency problems
Agency theory mainly deals with problems arising between employer and employee.
Separation of business from its owners leads to business entity concept however; it also leads
to agency problems. Certain problem may arise when the manager’s takes decision, which are
not profitable for the shareholders of the firm. Mainly issue occurs between stockholders and

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business managers in a financial market. Whenever the management takes decisions which
do not proves profitable for the shareholders, agency issue arises. It is the prim e
responsibility of the corporate managers to take decision that will prove to be beneficial for
both the company as well as for the all the stakeholders. According to the article mentioned
in CNN Business, “Rupert Murdoch’s news Corp Australia calls for breakup of Google”
because of new outlets and online advertiser (CNN, 2020).

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References
ABC News, 2020. There's a risky way to supercharge your savings that some Australians are
embracing. [online] ABC News. Available at:
<https://www.abc.net.au/news/2020-01-23/margin-lending-could-supercharge-savings-but-
not-without-risk/11889866?section=business> [Accessed 25 Jan. 2020].
ABC News, 2020. Westpac in 'good shape' despite the money laundering scandal, new
chairman says. [online] ABC News. Available at: <https://www.abc.net.au/news/2020-01-
23/westpac-money-laundering-scandal-chairman-john-mcfarlane/11893396> [Accessed 25
Jan. 2020].
Bankrate.com - Compare mortgage, refinance, insurance, CD rates, 2020. The Battle of the
Savings Accounts. [online] Bankrate.com - Compare mortgage, refinance, insurance, CD
rates. Available at: <https://www.myfinance.com/best-savings-accounts/?
utm_source=CNN+Money&utm_campaign=cnn-biz-markets-myfi-battle> [Accessed 25 Jan.
2020].
CNN, 2020. Rupert Murdoch's News Corp Australia calls for breakup of Google. [online]
CNN. Available at: <https://edition.cnn.com/2019/03/12/tech/news-corp-google-break-up/
index.html> [Accessed 25 Jan. 2020].
CNNMoney, 2020. One of Australia's top financial firms is in crisis. [online] CNNMoney.
Available at: <https://money.cnn.com/2018/04/30/news/companies/amp-australia-scandal-
catherine-brenner/index.html> [Accessed 25 Jan. 2020].