This paper critically explains the finance concepts as related to Guillermo's Furniture Store Scenario. It explains the basic concepts that Guillermo which is a small business enterprise in Mexico can grasp on while running its business. The concepts look simple in nature but, but their understanding is much important to small business like the one in question, as it will help Guillermo run his firm in a financial sound manner.
Guillermo needs to understand that for greater returns, he is required to take greater risks. Though this is the oldest financial concept in books, but its application is much relevant under the circumstance. The concept just relates returns and risks. Guillermo need to understand that, the most correlated relationship in finance is risk and returns. For any return to increase, he absolutely must take on more risk. It is stated that, for any securities where this is false, then one having better risk return relation will be bought, while the other one will not. To him, he needs to take the risk of family life and business. He is supposed to expand his management responsibilities by acquiring another organization, hence affecting his time with his family in ways that he will not be in a position of not enjoying. He should also risk buying another product to apply to his furniture to increase value and quality, (Clayton, 2010).
Another concept is efficient markets. This is also referred to as `good deals disappear fast' idea.
There are chances that, if he thinks that he has seen a good deal in being a distributor and not a manufacture, just because of news release, then it has already been bid up for the news reflection. Other item he needs to consider is arbitrage chances. This is when Guillermo has chances of performing a series of transactions and at the end receive a profit without any risk. Risk free arbitrage at times might happen due to inefficiencies in the market, but once such opportunities are realized by analysts, they quickly take advantage of it till they disappear. This is exactly what happened when his competitors realized lack of automation in the market, so they took advantage of it. As an advice, he needs to also take advantage of his patented process for furniture coating creation. Though currently there is no market, but it will grow when more individuals come to learn about it, (Docstoc.com, 2010).
He needs to know that cash is the king in finance. Revenue, net income as well as other forms of measuring businesses are not nearly as important as the operating cash flow of the enterprise. It is not possible to manipulate cash by the use of accounting procedures, and be able to represents an unbiased benchmark for the firms position. It has been clearly shown that his competitors are consolidating into larger companies through merging or acquiring. Though he does not relish the merging or acquiring idea, on the basis of not wanting to squeeze every peso he has on the overhead expenses of acquiring new company, the good idea is that, that overhead expense is not just a waste, but it is just a way of increasing firm's operating cash flow.
Last but not least is asymmetric information. Guillermo need to know that some individuals outside there know more than him about whatever he is looking forward to invest in. this forms the basic theory about asymmetric information. Out there, there is a difference in knowledge for every security. Insider trading, industry expertise as well as experience lend themselves a greater wealth of knowledge for analysts. If Guillermo thinks that a deal of being a distributor is good to be true, then generally it is. There are no things like free lunch in this market; as a result, he must be much careful when buying into seemingly incredible deals, (Carter, 2010).
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