Financial management is grounded in certain key principles that guide decision-making and strategies. Here are the ten axioms:
- Time Value of Money: Money available today is worth more than the same amount in the future due to its potential earning capacity.
- Risk and Return: Higher potential returns on investment are associated with higher levels of risk.
- Cost of Capital: The cost of obtaining funds is the weighted average cost of equity and debt, influencing investment decisions.
- Cash Flow Management: The focus should always be on managing cash flows rather than just profits.
- Asset Allocation: Proper allocation of resources across various asset classes is crucial for maximizing returns.
- Diversification: Spreading investments across various areas can help reduce risk.
- Leverage: Using borrowed funds can enhance returns, but it also increases risk.
- Financial Flexibility: The ability to adapt and respond to changing financial conditions is critical for homeostasis.
- Investment Analysis: Evaluating potential investments carefully ensures that resources are directed effectively.
- Long-term Perspective: Financial decisions should consider the long-term impact rather than focusing solely on short-term gains.
Understanding these axioms helps in making informed financial decisions that can lead to sustainable growth and stability.