Fin_571_Guillermo_Paper

Foundational Principles of Finance Amber Chancey-Anguish University of Phoenix FIN 571 Danica Djordjevich April 12, 2010 Foundational Principles Guillermo Navallez currently faces some very difficult business decisions, which will make or break his business. To ensure Guillermo is making the most effective, positive decisions on behalf of his furniture business, he should first evaluate the basic foundational principles of finance. This document will outline some of these principles and show how they apply to Guillermo’s current situation. First, is The Principle of Self-Interested Behavior, which says that when all else is equal, all parties to a financial transaction will choose the course of action most financially advantageous to themselves (Emery et al, 2007). Guillermo is not looking to expand his management responsibilities. Therefore, he is considering becoming a representative for another manufacture to become a channel for distribution in North America. Guillermo needs to realize that this other manufacturer is not in the game of treating all vendors fairly and ensuring all vendors receive equal payouts. On the contrary, this manufacturer will make decisions to affect their business in a positive way, and if that means hurting Guillermo’s business, they will do it. Another principle for Guillermo to understand is The Principle of Two-Sided Transactions, which says that for every sale, there is a purchase. For each buyer, there is a seller (Emery et al, 2007). Guillermo may consider selling his business. Although he does not relish the idea of being acquired by a larger competitor, it does offer pros to consider. However, Guillermo should beware of zero-sum game in which one player can gain only at the expense of another player. Guillermo is currently in a vulnerable position, so he needs to be cautious about approaching an option in zero-sum game could become a reality. Guillermo will need to be careful with any decision he chooses, and how his actions affect the public. This is evident in The Signaling Principle: Actions Convey Information. In this principle, a decision to sell an asset may imply that the asset is in poor condition. Likewise, a firm’s decision to enter a new line of business may reveal something about the firm’s position. People often interpret these actions as signals about the firm’s future earnings (Emery et al, 2007). Guillermo’s business relies heavily on repeat business. If his current buyers feel Guillermo’s business is not doing well, the customers will most likely shop elsewhere. Guillermo will need to pay special attention to the information released, ensuring the information is explained in a positive position to retain as many current customers as possible. Trying to find the perfect answer will be very difficult for Guillermo. He should consider The Behavioral Principle: When All Else Fails, Look at What Others Are Doing for Guidance. Guillermo can imitate the firms that he believes are most likely to be the best guides, or he can imitate the majority (Emery et al, 2007). Guillermo is already on the right track by investigating what his foreign competition is doing and how they are using a high-tech solution with a laser lathe. By researching other businesses in the industry, Guillermo stands a better chance of finding a solution to his own problems, finding efficiencies, etc. Guillermo has an advantage in his patented process for creating a coating for his furniture. In The Principle of Valuable Ideas: Extraordinary Returns Are Achievable with New Ideas, new products or services can create value (Emery et al, 2007). Guillermo is already one step ahead by owning the patent for this process. He should consider how he can use The Principle of Valuable Ideas to use the patent to its fullest advantage, possibly to help negotiate a deal with the foreign manufacturer to become the distributor for North America. Last, The Principle of Comparative Advantage: Expertise Can Create Value. If everyone does what they do best, we will have the most qualified people doing each type of work (Emery et al, 2007). Guillermo is definitely an expert in his field. His furniture is hand-crafted plus he has a patented process. He can use this expertise to his advantage in negotiations and to help him secure repeat customers for future business. Guillermo is in a tough position and needs to make decisions that will help his business succeed. By understanding these foundational principles of finance, Guillermo stands a better chance at making accurate decisions for his company, decisions that will help his business earn more revenue. References Emery, Finnerty, Stowe. (2007). Corporate Financial Management(3rd ed.). New Jersey: Pearson-Prentice Hall.