Foundation Paper

In assuming the role of a small business owner there is three principles of finance that relate to the business. The three principles of finance are the competitive economic environment, value, and financial transactions of the business. I will discuss the importance of these principles and how it affects a small business owner. Net income and cash flow are both critical financial components of a small business but as a small business owner I need to know the differences between them, and how they are critical to my business.
A small business owner needs to be able to make good business decisions especially when it comes to their business. An opportunity cost is the difference between the values of an action compared to the best alternative of that cost. It provides the indication and relevance of a decision that is made by the small business owner. If a small business owner makes a small cost then the opportunity of that cost is going to be small but if the small business owner makes a large cost the opportunity cost will be large this is something that the owner would need to take into consideration when it comes to making the right choice about their business. Another, important application of this principle is the agency theory which analyzes the conflicts of interests, and behaviors within the principal-agent relationship. It is very important for a small business owner to understand the financial end of their business.
A small business owner needs to understand the financial transactions of their business because each transaction has two different sides of the transaction. When a small business owner makes a sale there will be a purchase, and for every buyer there is a seller so with this being said there can be a difference in beliefs which would lead to selling more orders than buying more orders. If my prices are high it will benefit me but will not benefit the buyer but it can go both ways if the price is too low then it would be good for the buyer but not the seller. As a small business owner I have to remember that there will be two sides to every transaction that I do but by underestimating the competitor’s will lead my business to disaster. Actions speak and convey information about your small business such as selling an asset may seem like the asset is in poor condition even though it is not.
The value that a small business owner takes concerning his business means that they value the ideas that their customer’s might have to increase the profits of the business. By taking into consideration the different types of products, and services that a small business owner can offer to their customer’s can be endless. If a small business owner does not show that their business can produce different types of products and services they will not have the repeat business they are looking for. Customers will go to other businesses that have the products and services that the customers are seeking. When is the market value of the firm's assets or liabilities equal to their book value? There are four factors’ that will make a difference in the firm's market value compared to the book value. These factors consist of the asset's liquidity, inflation, time when the asset was acquired, and whether or not the asset is tangible or intangible. When the liability is acquired by the firm it will stay that way until the liability is due then the maturity will affect the difference in the book and market value.
In conclusion, my small business will benefit from the knowledge that I have learned throughout this paper, and will result in obtaining a business that will grow and prosper. The three principles of finance are very important to any business owner to understand how the business will be able to meet their financial needs, and keep the customer’s coming back for more. Understanding the net income and cash flows of the small business will also help in understanding the financial standing of the business. Financial principles, financial markets, and business ethics form a foundation for the financial decisions that managers routinely make (Emery, 2007).

Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate financial management (3rd ed.). Upper Saddle River, NJ: Pearson-Prentice Hall.