In general terms, finance can be defined as the art and science of managing money. Where there are vast tools to solve economic problems to carry out investment projects in a company. However, the risk or uncertainty that exists in carrying out a good financial operation is high due to the volatility of the financial and credit markets. It is important to highlight the restrictions of finance as a risk by virtue of making bad financial decisions, it can cause the failure of all types of investment. A clear example is the poor projection when contracting a bank loan in relation to the recovery periods, resulting in a high economic risk for the company.
Abstract
In general terms the finance can be defined as the art and science of managing money. Where there is vastness of tools to solve economic problems up to carry out investment projects in a company. However the risk or uncertainty that exist in a good financial transaction are high in virtue by the volatility of financial markets and credit. It is important to note the restrictions of the finance and risk under that to make bad financial decisions, you can cause the failure of any type of investment. A clear example is the bad projection to hire a bank credit in relation to the timing of the recovery, resulting in a high economic risk for company.
Finance as risk
The main objectives of private institutions is to maintain the value of their shares, but also to maximize it as best possible, through the efficient use of financial resources. Shareholders must know how to manage their investments and prevent crises since, at the time of being surprised, their assets could be damaged.
To avoid this type of circumstance, it is advisable to carry out a valuation plan so that each partner is aware of the decisions that are made regarding investment, sale of shares, financing, operations and dividends, among other aspects..
According to (Zvi Bodie, 2003) he says that finance is a discipline, which consists of the study of the way in which scarce resources are allocated over time under conditions of uncertainty. There are three analytical pillars of finance: optimization over time, asset valuation, and risk management.
Based on this idea specifically in the risk part, running a business successfully means making the best use of the money received. That is why shareholders must give appropriate financing to investments, both short and long term.
One way to increase the profits of the company is through the good use of the resources of another, that is, through the technique of leverage, funds are borrowed and contributed to a business that yields a higher percentage (financial decisions).
(A. Brealey, C. Myers, & Alan, 1996) Mention that investment decisions always have effects on financing decisions, every dollar must be achieved in some way. Sometimes these side effects can be significant. For example, if the project allows the company to issue more debt, it can also bring greater tax savings.
For companies of a creation in their early years, bank credit is an alternative that can definitely contribute to their growth. The ideal financing should offer the lowest rate, the lowest commissions, and the least possible collateral.
From a qualitative point of view, it should be obtained quickly and adapted to the needs of the business (in terms of time and feasibility of payment).
Corporate finance measures the level of performance of an investment, studies the real assets (tangible and intangible) and the obtaining of funds, the rate of growth of the company, size of the credit granted to clients, compensation of employees, indebtedness, acquisition of companies, among other areas.
The most important mission of company executives is to generate the maximum possible value creation, that is, to make the company more and more valuable. When the capital invested generates a rate of return higher than its cost, then value will be being generated.
The process of forming the trade-offs between the benefits and costs of risk reduction and deciding what action to take is known as risk management.
Now let's start with the distinction between uncertainty and risk. The first exists when we do not know for sure what will happen in the future, on the other hand, the risk knows a value which may be higher or lower. Therefore uncertainty is a necessary but not sufficient condition for risk. Every risky situation is uncertain, however there can be uncertainty without risk.
Companies are organizations whose main economic function is to produce goods and services. Practically every activity of the same implies exposures to risk, assuming these is an essential and inseparable part of the company.
We often assume that risk is beyond our control. A business is exposed to unpredictable changes in the cost of raw materials, tax rates, technology, and a long list of variables.
(Zvi Bodie, 2003) says that companies accept risk but use financial instruments to offset it. This practice helps to manage risk, this is known as hedging. These tools include options, futures, forward contracts (FORWARD), and swaps (SWAP).
Business risks are assumed by those who have an interest in the company: shareholders, creditors, customers, suppliers, employees and the government. The financial system can be used to transfer risks faced by companies to other parties.
According to (Villegas H & Ortega, 1990) defines that the Mexican Financial System is made up of a set of institutions that capture, manage and channel to investment, the savings of both nationals and foreigners.
Specialized financial companies, such as insurance companies, perform the service of combining and transferring risks, however in the end all the risks that companies face are exclusively those of the decision makers.
The importance of the financing resources that companies can use to create investment projects must be planned or projected, so that said institutions or organizations have growth possibilities. In order to maintain that they have a sustainable economy.
It is advisable to carry out an investigation of the different sources of financing, which should represent the most favorable accounts payable for the company, usually the cheapest in relation to the different types of credits.
Finances are essentially highly risky, although good financial planning analyzing the cost-benefits reduces all kinds of uncertainty in the face of any changes expected in the future. Not everything depends on these circumstances so that a company or a project does not have the expected success, bad decisions vary from choosing an option that does not yield great returns or simply spending resources on other activities that are out of business.
That is why it is important when you have the facility to acquire resources through financing to have a clear vision where to put the money to work, generating interest that helps us meet the terms agreed with the debt in less time.
Bibliography
- A. Brealey, R., C. Myers, S., & Alan, JM (1996). Fundamentals of Corporate Finance. Madrid, Spain: McGRAW HILL.Villegas H, E., & Ortega, RM (1990). The New Mexican Financial System. México, DF: PACC.Zvi Bodie, RC (2003). Finance. Mexico: Pearson Education.
