Financial Management: Principles and Applications is considered to be one of the best works by Arthur J. Keown, John D. Martin, John. W. Petty, and David F. Scott. It is the 10th edition, and certain changes take place in this book. The first chapter provides interesting information about a flow of funds, and the second chapter presents a discussion of taxes. This book may serve as a good study guide in order to help students learn more about the concepts of financial management, its principles, and possible approaches. Each chapter demonstrates a brief overview of the major points and gives a clear picture of what this or that chapter will be about.
Harley-Davidson is one of the most popular firms in America; its development and popularity are also under hot discussions of many people; in this book, the authors speculate upon the ideas of how the firm may create some wealth for each of its shareholders using Harley-Davidson as an example. Because of perfect financial management, the representatives of Harley-Davidson make right decisions and achieve good results.
There are three major areas in the sphere of finance: financial management, financial markets, and investments. These very issues are considered to be the major ones in the work by Keown. In the first chapter, the authors underline the idea of finance and represent the goals, the firm under consideration wants to achieve or has already achieved. Keown makes a wonderful attempt to introduce ten major principles that “form the basic of financial management.” (Keown et al., 2004, p. 12) These points turn out to be the central theme of the first chapter. The first principle lies in the idea that the firm should not take on additional risks without being sure about the compensation of additional terms. The second principle is all about money and its value; the representative of the firm says that it is better to concentrate on a dollar, received today, than on a dollar, that will be received in future. The third principle underlines that the power should be in cash, as only cash may settle the norms, according to which people may live. If the things cannot change, they should not be counted – this is the essence of the fourth principle, called “Incremental Cash Flows”. The following two principles tell about the conditions under which markets may compete, explain why the idea of competition is so crucially important for many firms, and describe the steps, markets can take in order to take leading positions. The seventh principle opens the truth on the existed agency problems and the desire of managers to work taking into consideration their own principles. The 8th and 9th principles are about taxes and risks, which are inherent to any firm. It is necessary to admit that risks may be of different natures, this is why it is better to be ready to find the ways and overcome them. The last principle gives a clear understanding that ethical behavior still plays a considerable role in business and financial management in particular.
The second chapter helps to comprehend the nature of taxes, cash flows, and financial statements. In this part of the work, the authors provide the reader with an opportunity to compute all firm’s taxes and measure free cash flows. Free cash flow in the firm is a kind of measures, which are connected to financial performances, which deal with cash incomes to the firm. Usually, free cash flow consists of taxes, various expenses, and investments. “Harley-Davidson has positive cash flows from assets because the company generated more money from operations than invested.” (Keown, 2004, p. 49) With the help of financial statements, the records, which introduce firm’s financial status, it is better to follow the chances in the sphere of international business. In this chapter, the authors explain the meanings of the income statement and the balance sheet. The point is that the income statement of the firm give the answer to the questions like “How profitable is the business?”, and balance sheet helps to check the changes and analyze the profits in order to achieve better results in future. Study questions and problems at the end of the chapter provide students and other readers with a chance to evaluate personal knowledge and comprehension of the topic.
If, in the previous chapter, the authors concentrate on details, connected to cash and its significance, the major idea of the following chapter is about financial ratios. Due to financial ratios, businessmen may easily identify the strong and weak points of the company and compare own profits with those of the competitors. In this chapter, several good pieces of advice offered by Jeff Bleustein are presented; one of them is the importance to understand that “not all businesses are the same” and that it is necessary to be “willing to experiment with something different”. (Keown, 2004) This very chapter is full of different equations, which provide the reader with an opportunity to see and analyze the actions of Harley-Davidson and learn how to get profits. It is stated that Harley-Davidson has more success within its operations but not within its competitions. It is also possible to use the DuPont analysis in order to evaluate the “firm’s return on equity.” (Keown, 2004, p. 86) The authors pat also enough attention to this approach, its peculiarities, and effects on the development of the firm, both negative and positive.
The themes of financial forecasting, planning, and budgeting are considered to be the major ones in the fourth chapter. Financial forecasting plays a very important role in all planning processes; it aims at pointing out future financial needs and costs. The ability to predict the results of the operations help lots of businessmen avoid problems and possible difficulties within their work and services. Proper planning and forecasting helps to be prepared for unexpected actions. If a manager is unable to forecast the future of his/her company, such business may go on bankrupt because of the disability to plan as well. Panning is a kind of activity, when a person thinks in advance in order to fasten the development and achieve considerable results. If a person spends plenty of time planning his/her future, but not sure about profit, such planning is equal to zero and does not bring any results. Of course, nowadays, even professionals can make mistakes and face certain problems with forecasting. Taking into consideration today conditions of affairs, even a deep analysis of the firm’s past will hardly help to make the right decisions only. In this chapter, the idea of the cash budget is perfectly described to the reader. It represents “a detailed plan of future cash flows and is composed of four elements: cash receipts, cash disbursements, net change in cash for the period, and new financing needed.” (Keown, 2004, p. 118) This very chapter turns out to be rather helpful, as it underlines not only the importance of forecasting, but also shows what may happen because of wrong or absent planning.
Chapters five and six of this books are belong to the second large theme – valuation of financial assets. The first point under discussion is the concept called ‘the time value of money’. It is quite old concept, and Benjamin Franklin is one of the firsts, who comprehended its essence. The power of money is really great, and people cannot resist it. People live in order to earn, and earn in order to live. This strange circle will never find its logical end. This is why the theme of money values remains one of the most captivating ones in the sphere of business and finance; to demonstrate really successful business, it is necessary to comprehend the techniques connected to compounding and moving money during different periods of time. Compound interest is a kind of interest “paid on the investment during the first period is added to the principle; then, during the second period, interest is earned on this new sum.” (Keown, 2004, p. 138) Future value is the concept, characterized by the growth of sum during a certain period of time taking into account that compounded are at a specific rate. The authors inform that future value may be increased by means of increasing the years of compounding, discount rate, or original investments. In addition to future value and compound interest, certain attention is paid to present interest, which reflects the future receipt’s current value.
The objectives of the sixth chapter that is all about risks and rates of return are to be able to measure, reduce, and price risk, and get a clear understanding of what inflation and rates of return are. Returns may be of two types: expected and required. Expected returns are those, when an investor is waiting to earn on the asset because of its price and potential. Required returns are those, which an investor has a need on asset because of its risk and interest rates. The notion of risk is one of the most frequent ones in the sphere of business. It is quite possible that actual returns do differ from expected returns, this is what any risk is all about. If a person is uncertain about the outcomes, the risk gets much more grounds. This is why it is crucially important to measure risk. It is possible after looking at the stock’s price range during several past years. In this chapter, the authors present several reliable formulas in order to evaluate the degree of risk and find the ways to reduce it. The peculiar feature of this chapter is that illustrative examples help to analyze the factors, which may influence interest rates: the price of time, expected inflation, various future returns, and the risk premium.
The last chapter under consideration attracts our attention because of its ideas as for capital-budgeting decision criteria. Capital budgeting is a kind of process that aims at planning for purchases of quite long-term assets. According to these authors, capital-budgeting decision criteria should include the following steps: (1) including all the cash flows, which exist from the beginning of the project, (2) considering the time value of money, and, finally (3) incorporating the required rate of return. There are four major methods, which are used in order to determine investment proposals. One of them is the playback period, which answer to the question “How much time does it take to generate enough cash in order to pay for a project?” The others are net present value (also known as NPV), profitability index (PI), and internal rate of return (IRR). Each of these methods has its own shortages and positive feedbacks. The payback period cannot consider time of money value and required rate of return.
Without any doubts, Financial Management: Principles and Applications is one of those treasures for students, which help to get a clear understanding of all the necessary financial management terms and learn the ways to success, proved by another firm, Harley-Davidson. Great explanation of lots of significant financial concepts, illustrative examples, and numerous comparison – this is what makes this book really useful and readable. Arthur J. Keown and his team made a great contribution to the sphere of finance and provided many students with an opportunity to learn he general terms of the financial management. Clear and simple langue attracts the attention of many readers. 10 principles, which form the basics of financial management, financial ratio analysis, and the necessity of forecasting – these and many other issues are raised in this book and have to be analyzed by those students, who want to connect their lives with finance.
Works Cited
Keown, Arthur. J., Martin, John. D., Petty, William. & Scott, David. F. Financial Management: Principles and Applications. Prentice Hall PTR, 2004.