Back to Basics

I introduced myself to a new corporate finance class yesterday and was reminded that, although much has changed in business and the economy since the 1970's when I first taught the course, the same basic principles of financial management still apply.

Not to be confused by current economic circumstances or the impacts of globalization, green themes or new technologies, the basic principles are worth remembering.

A quick summary may help you get back to basics too:
The primary objective of financial management is to increase long-term shareholder value, not short-term profits.

  1. Long-term value requires ethical consideration of other stakeholders - employees, customers, suppliers, government - and respect for corporate social responsibilities.
  2. Every financial decision needs to deliver an economic benefit that adds to shareholder value.
  3. Risk and return are inevitably linked - expectations of higher return will necessarily involve acceptance of higher risks associated with volatality and uncertainty of results.
  4. Continuous monitoring and improvement of financial performance requires analysis and benchmarking against prior years and the indices of top performers in the industry.
  5. Higher fixed costs in operations or from debt financing add to risk and raise the break even point for the business.
  6. There is a time value of money that requires future cash flows to be discounted to Net Present Value.
  7. Managing cash flow is as important as managing net income.
  8. The simple principle of managing working capital by "Collect Fast, Pay Slow" needs to be balanced against the maintenance of good service relationships with customers and suppliers.
  9. Asset management cannot be neglected and significantly affects liquidity, credit worthiness and the valuation of the business.

Worth remembering.

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