What are the Principles of Business Finance

A policy is one that, if followed in the performance of certain tasks, is guaranteed to achieve the desired goal. Business organizations are run to make a profit. To achieve this goal the financial manager has to strictly follow some principles. The following are the financing policies:


1. Risk-Reward Adjustment Policy: Risk and return are inseparable. It is related to each other. Firms where risk is high and where profit is also high. And where the risk is low, the profit is also low.

2. Net Cash Flow Principle:
The amount of return expected from the invested capital should be reasonable to implement the investment decision. Consequently, the quantitative and qualitative effects of resource maximization and risk and uncertainty must be considered together.

3. Internal Financing Policy:
In most cases, the required investment funds can be met from internal sources. If there are internal funds, priority should be given to using them.

4. Principle of the time value of money: Financial values ​​also change over time. Today's Rs 1 and tomorrow's Rs 1 are not equal to each other, the time value of money is determined by a certain amount of interest rate for proper valuation of investment.

5. Loan Repayment Policy:
The most important thing after taking a loan is to repay the loan on time.

6. Principle of Diversification:
Risk should be reduced by investing in multiple projects rather than investing in one project. Because it is possible to correlate the failure of one project with the success of another project.

7. Minimum Passage Cost:
External financing requires transition costs i.e. commission or brokerage or selling cost etc. for the issue of security. Capital expenditure increases for these expenses. In this case, the aspect of minimum transition cost of financing should be observed. Hence the cost of capital analysis is necessary.

8. Liquidity and Profitability Policy: A financial manager can manage assets properly by combining liquidity and profitability. Liquidity and profitability are opposites. It is possible to achieve success in financial management by combining both.

9. Minimum capital expenditure: Investable funds have to be raised from various sources. Costs from different sources are not the same. Capital expenditure also includes transition costs. Therefore, leverage analysis should be used to determine and select the financing mix with the lowest average cost of capital.

10. Dividend Distribution Policy: Financial decisions of the business should be taken keeping in mind the dividend distribution policy.