Financial_Concepts

Financial Concepts Christine Fields Professor Thomas Jemison June 25, 2012 Financial Concepts Three categories of financial concepts exist: competitive economic environment, value, and financial transactions. The company used in this examination of financial concepts is Guillermo’s Furniture Store. Guillermo’s Furniture Store is in Mexico and creates handcrafted products. With the changes occurring in the area and the advancements in technology Guillermo’s Furniture Store needs to evaluate his company to figure out a more productive profit margin using the financial concepts. The Competitive Economic Environment The competitive economic environment has four principles: the principle of self-interest behavior, the principle of two-sided transactions, the signaling principle, and the behavior principle. All four principles will be used to evaluate Guillermo’s Furniture Store. The principle of self-interest behavior is self-explanatory and often the case used by many people. One will usually act in their own financial interest first. Mr. Guillermo’s decision will be based on what is in the best interest of his business. The principle of two-sided transactions is every transaction has two sides; do not get self-centered. While Mr. Guillermo is acting in his business interest first; others are working in their own self-interest. The signaling principle involves the company’s decision to enter into a new line of business will expose the company’s position and belief in the venture’s potential. A competitor of Guillermo’s Furniture Store has been looking for a distributor in North America for its furniture. Guillermo could use his established distribution network for the other manufacturer. The behavioral principle implicates what others in the same industry are doing. The best choice is to choose the company likely to be the best guide. A new competitor that has entered the furniture market is using a high-tech approach, providing furniture to exact specifications at rock-bottom prices. A computer controlled laser produces exact cuts in the wood; this also decreases labor cost for the company. Value Value consists of three principles: the principle of value ideas, the principle of comparative advantage, and the options principle. These principles are used to evaluate possible changes in Guillermo’s Furniture Store. The principle of value ideas states that extraordinary returns are available with new ideas. The principle of comparative advantage is that expertise can add value to a product. The options principle is that options add value to a product. Guillermo’s offers these principles with his furniture store. Guillermo’s Furniture Store offers handcrafted specific furniture to each order. All furniture has a coating created on it from a patented process that Guillermo’s uses. The process creates a flame-retardant, complete, and stain resistant coating on all furniture. This coating is optional to all orders. Financial Transactions A financial transaction consists of the principle of risk-return trade-off and the principle of diversification. Financial transactions principles are present in business every day; with every transaction. The principle of risk-return trade-off is that every return has a risk involved. Guillermo’s has three options to choose from all containing risks and returns. The optimal decision has the lowest risk and highest return. The three options Guillermo’s have are consolidating the company by merger, switching to high-tech solutions in producing furniture, and become a distributor for the Norway Company. The principle of diversification says that diversification is beneficial to the company. If Guillermo’s wants to become diverse; the company could offer distribution for the Norway Company, still produce handcrafted products, and offer to sell patented coating process. Conclusion Guillermo’s Furniture Company has reevaluated its production process using financial concepts. Three categories of financial concepts were used in this evaluation: the competitive economic environment, value, and financial transactions. The different concepts and the area of the company have been noted in this paper.