Financial Management Principles Essay Example | Topics and Well Written Essays - 500 words - 2

Financial Management Principles - Essay Example It should be noted that a lender cannot simply lend his excess fund to potential borrower without making sure that the latter will not default on his payment. In this situation, an intermediary should exist in order to gather information about both parties and mitigate risk (Mishkin 2004). Financial institutions are able to minimize the risk of information asymmetry by building their reputation in the industry. Thus, individuals are not cautious in putting their money in a bank’s savings account which are then lend to parties who are in need of funds. Financial institutions like banks, as stated above, carry out the important function of making financial resources available to parties who need them. By building expertise in information search and reputation in undertaking their financial functions, financial institutions serve as a great help for individuals and business organizations which require help in financing. On the other hand, individuals and companies who want to invest their money can trust in the efficiency of financial institutions in ensuring return to their investments. As the illustration above shows, as financial institutions carry out their role in the financial system, they take on the risk which should be handled by the borrower and lender. Thus, financial institutions also take measures in minimizing the risk that they take by ensuring that their borrowers will not default on their payment obligations. This scrutiny is even more highlighted when a company which borrows from the financial institution conducted its Initial Public Offering. As the company becomes public, it exposes itself from the critical eye of its current and potential creditors. A company can cope with this increased financial intermediation scrutiny by adhering to the standards set by accounting institutions. It should also instill tighter measures in ensuring the truthfulness of its financial reports and accounts.