Rules of Finance
The field of finance deals with allocating scarce resources, and people should always view financial decision-making with a clear sense of fiduciary responsibility, recognizing that they are using the funds they have acquired from someone to do something. They always need to keep in mind that they should make the best possible use of those dollars, taking into consideration the finance issues, as well as ethical considerations, stakeholder concerns, and so on.
We make decisions on an incremental basis. That is, we look at the changes and the marginal effects of our decisions. We need to think of all the consequences of our decision-making, including possible impacts that may not appear in our immediate focus.
We must never forget that money has a time value, and the dollars of different time periods are different. In multi-period decisions, we try to draw a timeline that will show all the impacts of the decision and when those impacts will occur. Financial decisions have to be made in the context of other issues besides finance (ethics, regulatory issues, and so on), so every decision must be related to the impact on shareholder value. Notice that I didn’t say shareholder value must be maximized, but the impact must be recognized. Shareholder value should not be maximized to the disadvantage of other important stakeholders.
