Financial Management

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Financial Management is Important For You! Let’s Know it!

What is financial management? The definition of financial management is all company activities related to how to get, use, and manage company finances.

Financial management can also be interpreted as management, which aims to manage funds and assets owned by the company to be used in things or activities that help achieve the company’s main goal, namely profit.

Learn Everything You Need to Know About Financial Management!

In a company or business, financial management has three main activities carried out by financial managers, namely:

acquisition of funds
Activities to use funds
Asset management

Financial Management According to Experts

The following is an explanation of financial management based on the explanations of experts:

1. Bambang Riyanto

According to Bambang Riyanto, the definition of financial management is “all company activities related to business to obtain the necessary funding with minimal costs and the most favorable conditions” and “a business to use the funds as efficiently as possible.”

2. J. L. Massie

According to J. L. Massie, the definition of financial management is “a business operational activity that is responsible for achieving and using the funds needed for effective and efficient operational activities.”

3. Agus Sartono

According to Agus Sartono, financial management encompasses all activities related to the effective allocation of funds in various forms of investment, as well as the business of collecting funds for investment financing or efficient spending.

4. J. F. Bradley

According to J. F. Bradley, financial management is a field of business management aimed at managing the judicious, selective, and accurate use of capital from a source of capital that allows units of expenditure to move towards achieving goals.

5. Sonny S.

According to Sonny S., the definition of financial management is a company’s activity related to how to obtain funds, use funds, and manage assets in accordance with the company’s overall goals.

Scope of Financial Management

As explained in the definition of financial management above, financial management involves an effort to manage the assets of the company, and so this management has a specific scope that a manager must understand. And these scopes include:

1. Funding Provisions

This includes any policy on how to get funded, such as a policy for issuing bonds or a policy to look for short- or long-term debt. The funds in question can be sourced from the company’s own internal resources as well as from external sources.

2. Investment Rules

all related to the formation of policies for investment, such as consistent assets or fixed assets. Capital can be in the form of land, buildings, or company infrastructure, including production machines.

3. Asset Management Provisions

a policy that discusses the efficient management of assets in order to achieve the company’s goals.

Financial Management Objectives

Above, it has been explained that financial management is carried out as a process to control company assets, especially in the form of funds. And financial management has several goals that need to be achieved, including:

1. Maximize profits

Through the right policies, financial management can maximize the company’s profits in the long term.

2. Maintain cash flow

Financial managers play a role in maintaining cash flow. Every day the company will certainly spend funds, for example on the purchase of standard materials, payment of member salaries, rent, and other payments. So if it is not supervised and controlled, it can have an overbudget impact that harms the company.

3. Preparing the Capital Structure

Balancing the use of borrowed funds to finance owned assetsThe goal is to prepare the capital structure.

4. Maximizing the Use of Company Finance

The financial manager acts to supervise the utilization of the company’s money. The budget used for activities that do not benefit the company can be cut and allocated for other activities.

5. Optimizing Company Wealth

Financial managers strive to pay as much dividend to shareholders as possible while also working to improve the stock market as it relates to the company’s performance.

Financial management functions are explained.

What are the functions of financial management in a company and why is it important?

In running a business, money is the spearhead of a company. Therefore, wise management of money, costs, and budgets with the help of financial statements is very important for the continuity of the company.

If the money is not managed carefully, the income and expenditure will not be well controlled, so as to create bankruptcy. Financial management is important to learn for many people who want to use their money as effectively and efficiently as possible, especially for those who want to do business. And below are the benefits of financial management for your business:

1. As a business or corporate life cycle

Most businesses or companies experience losses and negative cash flow during the period. The goal of financial management is to address that. Managers need to ensure that they have enough cash to pay employees and suppliers, even if they have more cash out than cash in the early years of the business.

The business owner also needs to make financial projections of the negative cash flow that is running so that he has an idea of how much capital will be needed to fund the business until it can reverse the conditions.

As the business begins to grow, it will need more cash to finance its growth. Planning and budgeting for these financial purposes are vital.

The financial manager decided whether to fund the expansion with internal funds or borrow from creditors.Financial management finds the right source of funds at the lowest cost, controls the company’s cost of capital, and does not allow leverage to be very high by looking for high-risk loans.

2. Financial Management in Normal Operational Activities

In normal operational activities, a business or company provides products or services, makes sales to its customers, collects money, and repeats the cycle. Financial management moves cash efficiently through that cycle.

It’s important to manage the turnover ratio of standard materials and inventory by selling to customers, collecting receivables on time, and restarting the cycle from scratch by buying more staples.

At that time, businesses must pay various fees and bills. This entire bill must be paid in cash, and it takes proper financial management tactics to ensure that cash flow flows efficiently.

The purpose of financial management is also to overcome external factors, namely the volatile economic situation. Businesses should plan to have adequate liquidity when facing a downturn in the economic situation.

If not, then the business is likely to go bankrupt due to a lack of cash to cover various operating expenses.

3. Reporting of business operational activities

Each business or company is responsible for providing operational reports. Shareholders and investors are sure to crave information regarding the returns and safety of their investments. Managers require additional types of reports in addition to primary performance and performance indicators that measure activities across the company’s divisions.

Not only must the platform be comprehensive to achieve this financial management goal, but it must also be capable of producing the various report models required by all Financial Statement users (investors, creditors, shareholders, and others).

4. Filing, Reporting, and Payment of Taxes

The government will always be available to collect taxes from each type of company. The usefulness of financial management is not really limited to planning and paying corporate taxes in a timely manner.

5. Planning

When a company has established itself and has a consistent income, the management will declare a business step forward, along with developing a plan and involving the company’s internal stakeholders.

They will understand the amount of financial energy that the company has in order to be able to assess the extent to which the company can finance and facilitate better business planning. For example, by planning to increase the number of employees or buying new machines for business operations,

6. Monitoring

Financial monitoring is one of the most important functions of financial management. when you have a plan to invest and grow your business in a new place. You must really supervise the new business, especially if the location chosen is near you.

The financial management function, through regular financial statements, is one of the most appropriate ways to supervise a business.includes cash flow, working capital, current assets, income statements, debts, and business receivables.

7. Controlling Finances

Financial control is the task of financial managers and corporate policymakers. Financial control is established by drawing up policies and procedures that help prevent mismanagement of money.

The policy includes how to document income and expenses, what financial reporting methods are adopted, and how the company wants to manage its overall finances. In accounting, there are several methods of revenue recognition that ultimately affect how income is reported and how taxes are handled. This is where the financial management function is needed to summarize all these reports.

What is a fixed asset?

Fixed assets are the property or equipment of an enterprise that generates income. Fixed assets have a long-term nature and cannot immediately become cash management within a year. different from inventory items, which companies purchase so that they can resell them directly or merge them into the products to be sold.

But if you think that fixed assets (items like chairs or tables) are the same as inventory, you’re wrong. Fixed assets are very important goods for a company and are purchased or rented only once every few years.

Characteristics of fixed assets

The company purchases fixed assets for a variety of reasons, including manufacturing or supplying goods or services, leasing them to third parties, or using them itself.The term “fixed” in fixed assets indicates that these assets will not be exhausted in the accounting year. Fixed assets usually have a physical form and are listed on the balance sheet as property, factories, and equipment.

At first, fixed assets are included as assets, and then you enter into such common types of accounting transactions as:

Periodic depreciation (for tangible assets) or amortization (for intangible assets)
Impairment (if the value of an asset decreases below its net book value)
Disposition (the asset has no selling value)

When a company acquires or disposes of fixed assets, it must be listed on the cash flow statement. The purchase of fixed assets is the cash outflow for the company, while the sale of fixed assets is the cash inflow.

If the value of an asset falls below its net book value, then it experiences a decrease in value. In this way, the value of fixed assets recorded on the balance sheet should correspond to the bottom, since their value is too high compared to their market value.

Then, when a fixed asset has reached the end of its service life, it will usually be sold to obtain the residual value, which is the estimated value of the asset if the asset is broken down and partially sold.

In some cases, assets may become obsolete and lose their value.If this happens, then usually the company will donate assets without getting a reward. However, sell or not, such fixed assets should disappear from the financial statements, since the company no longer uses such assets.

Objectives of Financial Management

Financial management is generally concerned with the procurement, allocation, and control of financial resources. The objectives of financial management include the following:

1. Maximize profits and wealth.

A financial manager is tasked with maximizing the value and profit of assets. However, this advantage is something that financial managers cannot guarantee in the long term. This is because business actually moves very quickly. The company can still get maximum profit if the financial manager can make good decisions and use the company’s money well.

2. Maintaining cash flow is also one of the goals of financial management.

The purpose of cash flow is to pay for the costs of daily company needs. For example, the purchase of raw materials, the payment of employee salaries, the payment of rent, and so on. Good financial management can maintain a stable cash flow, thereby increasing the success of the company.

3. Prepare the capital structure.

Financial managers must be able to make the right decisions regarding expenses, financing, and rent. This is so that the costs incurred and obtained from the rental can be balanced.

4. Make proper use of financial management.

If the use of finances is not right and there are certain mistakes, then this can be a danger to the company. Financial managers must be able to manage finances appropriately for maximum results.

5. Reduce operational risks.

Uncertainty is commonplace in the business world. There are risks that must be considered when conducting business, such as in operational matters. The financial manager’s job is to reduce such operational risks through specific decisions.

6. Reduce capital costs.

In business, you have to think about ways that the company can reduce its capital costs while still getting maximum profits. Financial managers must be able to compile a good capital structure so that capital costs are minimal.

7. Determine the viability of the company or business.

The performance of financial managers in financial management is undeniably important to the company’s survival. With the right financial management, you can compete with competitors in the market. Finance Resource and managers must be careful and have many strategies when making decisions.

Financial resources

Financial resources are those that form a set of cash and assets with a certain level of liquidity, that is, the capacity to be converted into cash. These resources consist of cash, bank deposits, loans, checks, and others. In this way, they represent one of the sources for meeting the goals of the company.

Types of financial resources

Finance Resource can be classified as own or third-party.

Own resources.

Also known as “equity,” “own resources” belong entirely to the company. This may be:

Cash: all money owned by a particular company or organization, with the ability to be used for investment.
Investors: in some companies, partners or shareholders take part, who provide capital in order to subsequently profit from the company (shares).
Profits and reserves: money arising from the commercialization of goods and services

Foreign resources.

External resources are resources that do not come from the company’s own capital but are subject to external financing, so they are payment obligations. This complements the company’s capital availability and can be:

Loans from creditors and suppliers: financial resources (products or services) with liquidity capacity that the company has but owes to suppliers or creditors.
Bank or private credit: to be able to defend itself and make new investments, the company uses the credit offered by the bank, which in turn is paid back by paying a certain interest.
Issuance of securities: among other things, stocks, bonds, public securities

The importance of financial resources

are one of the most important resources of an organization since they are the main means of making investments that allow it to achieve goals. In this way, since financial resources allow for the financing of the company in question, it is they who sustain it. Thanks to this, the growth and development of the organization have been achieved.

Examples of financial resources

Some examples of financial resources are:

Advantages of the products and services performed
contributions from partners or shareholders.
Stocks, bonds.
Credit
State subsidies.

What is asset management?

Because of the increasing open access to the financial industry, you may no longer be unfamiliar with this term.Since it was first introduced, some experts have tried to provide a simple explanation so that the term “asset management” is easy to understand.

Danylo and Lemer in 1999 explained that asset management is a methodology for the distribution of resources or assets in order to be used efficiently to meet certain goals.

Another expert, Gima Sugiama (2013), defines asset management as the art of guiding wealth or assets. This guiding art includes the processes of planning, auditing, maintaining, guiding wealth or assets. This guiding art includes the processes of planning, auditing, maintaining, removing, and transferring non-compliant assets.

Then what is the meaning of asset management in general?

In general, asset management is the process of managing assets belonging to individuals, organizations, or companies effectively and efficiently to achieve certain goals.

Financial decision

Financial decisions are divided into three types, namely as follows:

programmatic decisions or structured decisions, meaning decisions that are repetitive and routine so that they can be programmed. Structured decisions occur and are made at lower levels of management.
programmatic decisions or structured decisions, meaning decisions that are repetitive and routine so that they can be programmed. Structured decisions occur and are made at lower levels of management.
Half-programmatic, half-structured decisions mean decisions that are partly programmable, partly repetitive and routine, and partly unstructured. These decisions are complex in nature and require detailed calculations and analysis.
Unprogrammed/unstructured decisions, meaning decisions that don’t happen over and over again and don’t always happen, This decision occurs in upper management. This information is not easy to obtain and is not readily available. In addition, it comes from the outside environment.

Raw Material

For those who are not too familiar with the term “raw material,” the term is actually taken from English. If translated into Indonesian, “raw material” is a raw material that is generally used to refer to raw materials in the field of the manufacturing industry.

Raw materials themselves are raw materials that are not ready to be used or consumed, so they need to go through a processing process to become finished goods. So, raw materials belong to the types of commodities that are traded on stock exchanges around the world, since many companies need them.

Raw materials are an important aspect of production factors, especially for companies engaged in the manufacturing industry. Because of their very important role in the company’s productivity, raw materials become input goods whose inventory must be met according to company needs.

If not fulfilled properly, such manufacturing companies will have difficulty producing products and meeting market demand. Therefore, the production process can run smoothly with an adequate supply of raw materials.

What Are Short term Objectives?

Short term goals are goals that you want to achieve and complete in the near future, such as next week or next month. The strategy of implementing short term goals in the company is often a stepping stone or foothold towards a larger goal. Short term goals tend to be easier to achieve because you can break down some projects into smaller ones.

Key Differences Between Debt and Equity

The difference between debt and equity capital is represented in detail in the following points:

Debts are obligations of the enterprise that must be repaid after a certain period. Money raised by the company by issuing shares to the general public, which can be held for a long time, is known as equity.
Debt is a borrowed fund, while equity is an owned fund.
Debt reflects the money owed by the company to another person or entity. In contrast, equity reflects the capital held by the company.
Debts can be held for a limited period of time and must be repaid after the expiration of such a term. On the other hand, equity can be held for a long time.
The debt holder is the creditor, while the equity holder is the owner of the company.
Debt has low risk compared to equity.
Debt can be in the form of term loans, debt securities, and bonds, but equity can be in the form of stocks and shares.
The return on debt is known as interest, which is a burden on profits. In contrast to the gain on equity, it is referred to as a “dividend,” which is a deprivation of profits.
The return on debt is fixed and orderly, but quite the opposite is true in the case of a return on equity.
Debt can be secured or unsecured, whereas equity is always unsecured.

Definition of Working Capital

Working capital is another term for net working capital. The term “net working capital” refers to the difference between a company’s assets and liabilities over a given time period.Examples of company assets are funds in banks, cash data, potential income from consumer receivables, and assets that cannot be cashed out quickly.

Liabilities in working capital are the total debts of a company that must be paid in that year. Assets are reduced to liabilities to arrive at net working capital. In short, working capital is money that exists or is available to finance the operational needs of a business.

Working capital is important in business because it can be used to gauge the health of the company’s finances.If the difference between the company’s assets and short term debt is greater, it can be declared healthy. Conversely, if the amount of debt exceeds the asset limit until the nominal working capital is negative, then the company is on the verge of bankruptcy.

Management includes

Management includes the process of planning, organizing, directing, and supervising sources of strength in the form of finance, people, and also the news of a company or organization to achieve its goals.

As stated in the definition of management, there are four activities that make up the management process: planning, organizing, directing, and supervising. Here are some of the processes in management, including:

Planning

Planning is necessary to establish what the company should do and how it should do so. The Planning has three components: setting company targets, developing tactics to achieve targets, and designing tactical and operational planning to carry out the tactics that have been developed.

Organizing

Organizing is needed to determine the best way to organize energy sources and company busyness into a logical structure. Because without good organization, the company will be threatened with not operating optimally and certainly losing out to the competition.

Briefing

The managers or leaders of the company have the authority to give additional orders and request results. In providing a briefing, a manager is tasked with guiding and motivating employees to achieve company targets.

Supervision

Supervision is the process of monitoring the company’s performance to ensure that it achieves its goals. If there is a deflection, an assessment must be carried out immediately so that the company always takes steps to achieve the targets that have been determined.

So, that’s a quick rundown of what management entails and how it can be applied in financial management.In addition to this, you also have to make investment decisions. Then, what are investment decisions?

Investment Decisions

So, what are investment decisions?

Investment decisions are actions taken by the financial manager to allocate a certain amount of funds as investments.According to this rule, investors can expect profits over a relatively long period of time.

Investment decisions are also about the process of selecting one or more investment alternatives that are considered profitable from a number of existing investment alternatives for the company.

The rules of investment are underpinned not only by huge profits, but also by risks.The steps are not just risk analysis. Likewise with the characteristics of investment that you must know first before believing in placing funds in the form of:

1. Personal Project

This is when investors decide to invest in a business entity and believe the investment will be appropriate.The reason for being able to visit was the implementation of the company’s investment project.

or because the benefits of each investor’s investment project are different from one another. in order not to close the opportunity for many investors to make a profit.

2. A mutually exclusive project

This character will add more selective investment rules. Because the only thing that occurs is the use of similar investment projects between investors and each other. If you are looking for a business entity to invest in, make sure the investment allocation funds you have are strong so that the chances of being accepted are even greater.

Not only that, the investment decisions do not stop just because you understand the characteristics of investment and choose a customized instrument. This process will continue until a regulatory assessment is taken to determine whether performance has been adjusted to the expectations at the beginning or not.

That is why investment decisions are not just a case of deciding something but are part of an investment plan that has several crucial terms in it to make the investment process that will be carried out afterwards a success.

Basic Investment Regulations

The investment regulatory process involves understanding the interaction between the return and risk of an investment. The interaction of risk-adjusted return and return on investment is a unidirectional and linear interaction. That is, the greater the return on hope, the greater the level of risk that must be considered. Or it can also be called the basis of investment rules. Here’s the full explanation:

Return

is a name for the profit obtained from planting funds in an investment instrument. There are two types of returns in the context of investment management, namely:

Return asa (expected return), which is the level of return anticipated by investors in the visiting era,
and the actual or realized return, which is the level of return that has been obtained by investors in the past.
Risk.

It is a name for losses suffered by investors because of various factors. Most risks occur due to unforeseen things, immature tactics, and errors in the calculation and analysis of an investor.

The relationship between risk level and return as Financial Management

which is an interaction that is unidirectional and linear. That is, the greater the risk of an asset, the greater the return on that asset, and vice versa.

As a result, investors will usually make good and careful considerations before believing in obtaining a provision, especially in the basic part of their investment regulations.Because it is slightly incorrect, it is very likely to have a negative impact on investment placement.

How to Interpret Investment Terms in Financial Management

In making investment decisions, there are several steps that must be taken to find the best solution and the most profitable investment tactic. Those steps can be said to be an investment provision process.

The investment regulatory process consists of five terms of provisions that occur continuously until the best investment regulations are achieved. Here are the steps or stages in the investment rule process:

1. Determination of Investment Objectives

At this time, investors should be aware of what their goal is in investing, whether it is long-term or short term, high-risk with high profit potential or low-risk but with low returns.

2. Determination of Investment Policy

This stage begins with the determination of asset allocation decisions. This provision addresses the distribution of funds held in existing asset classes (stocks, foreign securities, and bonds).

3. Selection of Portfolio Tactics

There are two portfolio tactics to choose from, namely:

Active portfolio tactics include actively using existing information and forecasting techniques to find better portfolio combinations.
A passive portfolio strategy that includes information activities on the portfolio that go hand in hand with the performance of market indices

4. Asset Selection

Termin is ultimately the owner of the assets that will be included in the portfolio. This term requires evaluating each security that you want to include in the portfolio.

The purpose of this term is to find an efficient portfolio combination, i.e., a portfolio that offers the highest expected return with an exclusive risk level or otherwise offers an exclusive expected return with the lowest level of risk.

5. Portfolio Performance Measurement and Appraisal

This can be said to be the final and decisive termination. Whether the investment regulations are feasible or not If the term of measurement and performance appraisal has passed and it turns out that the results are not good, then the investment rule process must start again from the first term, and so on until the most optimal investment determination is achieved.

Tips for Choosing the Right Investment Terms

Similar to when you started investing, taking an investment provision also has an exclusive strategy so as not to make a misstep in choosing the right instrument in investing. For those of you who are new to global investment, here are some tips on how to make the right investment decisions:

1. Get to know the investment model first.

Before deciding to invest, you should first find out about an investment style that is profitable and does not cause risk.

You have to determine which investments are good for your financial needs and capabilities and which are not. Because this will facilitate investment goals in the future and, in the future, will not make large losses (low risk).

2. Define the objectives and policies.

Setting investment goals will further maximize the return on investment. Because investment objectives will motivate investors to carry out their best financial planning, which includes investing,

After setting investment goals, the final step is to determine the investment policy. The policies set by each investor correlate with or relate to the goals they have set The policies set by each investor correlate with or relate to the goals they have set. starting from determining asset allocation rules that concern the distribution of funds owned in various existing asset classes, such as stocks, bonds, real estate, or foreign securities.

3. Set Investment Portfolio Tactics

There are two types of portfolio tactics to choose from: active portfolio tactics and passive portfolio tactics. Active portfolio tactics involve actively searching for better portfolio combinations using existing information and forecasting techniques.

Meanwhile, passive portfolio strategies are busy investing in portfolios that are in line with the performance of market indices. That is, the portfolio worked on only follows the existing market indices.

4. Diversify

Diversification is one way to control risk, even though you invest in some investment assets. Diversification is also associated with a tactic to perfect the portfolio. It is suitable for investment types such as mutual funds and stocks.

5. Calculating the Level of Profit and Risk

As a financier, you must be able to carefully calculate these two factors.To get a bigger profit, it means that you must also be prepared to bear large risks as well. But, on the other hand, the lower the risk borne, the lower the level of profit that can be expected.

6. Determine the Investment Period

Determining the investment period at the beginning can help in determining what the range of risk will be. Usually, people who invest for the long term can bear greater risks. This is due to the fact that stock investments experience high fluctuations over time. But long-term investments also have a stable level of profit.

7. Recognizing One’s Own Bearing as an Investor

The nature of investors is generally divided into 3, namely:

Risk-takers are usually militant and speculative. risk-averse individual who avoids news and news sources, as well as other media sources of information, in order to avoid interfering with their investment regulations planning.
Neutrals, who tend to be more flexible but remain cautious when taking on investment terms,
By recognizing yourself as the kind of investor you will be, Investment regulation tactics can be improve because they can be tailore to the firm’s characteristics and needs.

8. Portfolio Performance Appraisal

Performance appraisals need to be done regularly. This is to be able to better measure and evaluate portfolio performance. It would be even better if you did it again when creating a new rule. Well, then, when you have made investment decisions, it would be better for you to use financial controls as your financial management tool when doing financial management. Below we will provide some explanations about financial controls:

Financial Controls

What are financial controls? Financial control is an effort to manage finances, which includes busy planning, arranging, directing, and controlling financial busyness in your business. Financial management is generally about the procurement, allocation, and control of financial energy sources. The objectives are as follows:

to ensure that the existing supply of funds is sufficient to finance business activities.
ensuring that the income earne can finance various obligations of the company.
Ensure that company funds are utilize optimally to avoid waste.
To ensure the safety of investments, funds must be investe in a conducive business so that the level of return obtaine generates profits.
planning a healthy capital structure in order to regulate the composition between debt and capital to be maintain.

Why is financial control so important in business?

Financial control is one of the important responsibilities carrie out by business owners and managers. They must exercise caution when managing their finances and consider the various potential outcomes of the financial rules they follow.

Because various activities in every aspect of the business must have an impact on its financial performance, they must be evaluate and controlle by the business owner. With good financial management, you can ensure the sustainability of your business.

Not only that, in order for financial management to take place properly, you need to know and be clear about your business cycle. In general, most businesses will experience losses and negative cash flow during the initial period of business establishment. This is where financial management is very important to implement.

During this period, you need to ensure that your business has enough cash to pay employees and suppliers. Although the overall money you have to spend is more during the early months of the business,

This means you have to make a negative cash flow projection so that you have an idea of how much money it takes to fund your business to make a profit. When the business has grown and mature, you will need more cash to finance its growth.

For that, you need to compile business plans and budgets. That way, you can decide whether you have to find a source of financing using internal funds or whether you have to take out a loan.

Tips for Implementing Financial Control

Financial management is not an easy matter. However, you can follow some of the tips below so that the management process can be carrie out optimally.

1. Prioritize business financial planning.

Good financial planning includes budgeting, accounting, future business predictions, tax planning, and risk management. With good financial planning, you have a guide and roadmap for running a business. Thus, business activities can be more targete and have strategic goals.

You also need to analyze accounting reports and other business financial statements from time to time. in order to be aware of how your real business is performing. If you are aware of business performance, it is very likely that you will set the right financial goals. Do you have to invest more money or instead keep it as a reserve fund?

2. Create a budget and stick to it.

By budgeting, you can completely change the way you manage your business finances. And assisting you in meeting your revenue targets is more than you expect.

A budget can help you estimate how much revenue you’ll get and identify unnecessary expenses. Ideally, you should first create an operating budget that states what your business projections are. It also includes all the details of expenses, such as fixe costs, variable costs, and operating costs for your business.

So, make an operating budget as a guide for running a business. Ultimately, focus on the cash flow budget to look for cash inflows and outflows. By doing so, you can realize how strong the liquidity position of your business is.

3. Managing and Finding Cash Flow

Cash flow is the amount of money that comes in and out of your business during the exclusive period.Money in and out is nothing but a business activity that will continue to occur as long as your business is still standing.

Cash is income generate by customers or clients who use your product or service.Meanwhile, cash flow is an expense to finance various business activities such as rent and wages.

There are two cash flow models you need to know. First, positive cash flow occurs when you receive more income than expenses. In contrast, negative cash flow occurs when expenses are much greater than income.

The best way to monitor cash flow in and out is to make cash flow reports and estimates. This very simple financial document will give you an image of your actual monthly cash flow and your estimate monthly cash flow.

Finding business cash flow every month is a good idea for small businesses like MSMEs.If you’re just visiting a business or frequently dealing with cash, such as in a restaurant, you may need to find cash every week, if not every day.

Capital Structure

What is the capital structure of the company? The capital structure is a balance or comparison between one’s own capital and foreign capital. In this case, foreign capital is short term debt or long-term debt, and own capital is divide into retaine profits and company ownership.

Capital structure is very important to understand since the good or bad atmosphere of the company’s finances is determine by this indicator. If the company’s long-term debt exceeds its profit, it may suffer severe losses.According to experts, there are several definitions of capital structure, namely:

J. Fred Weston and Thomas E. Copeland (1996)

Weston and Copeland said that the capital structure is permanent financing consisting of long-term debt, preferre shares, and shareholder capital.

Frank J. Fabozzi and Pamela Peterson (2000)

According to Fabozzi and Peterson, the definition of a capital structure is a combination of debt and equity use to finance a company’s projects. The capital structure of a company is a mixture of debt, internally generate equity, and new equity.

J. Keown et al. (2000)

According to Keown et al., the capital structure is a combination of long-term sources of funds use by the company.

Farah Margaretha (2004)

According to Margaretha, the capital structure describes the permanent financing of a company, consisting of long-term debt and own capital. Simply put, the capital structure is the most important part of the company.

The good and bad capital structure will greatly affect the company’s financial situation. With capital structure management, the company can allocate its funds for activities that are adjuste and useful for the sustainability of the company.

Factors That Change the Company’s Capital Structure

The following are some of the factors that can affect the capital structure of an enterprise:

Asset Structure (Tangibility)

Asset structure is a determination of how much funding is allocate for each component of assets, both fixe assets and current assets. Most industrial companies with fixe-asset capital will prioritize capital fulfillment from permanent capital, namely their own capital, while debt is complementary.

Companies that are growing in size and have a high concentration of current assets will prioritize debt to meet their funding needs.This statement states the effect of the asset structure on the capital structure of a company.

Growth Opportunity

Companies tend to make investments to develop the company. The opportunity to develop a company for the better is usually not all profitable, especially if it also changes the company’s capital structure.

Company Size (Form Size)

Large companies tend to diversify their businesses more than small companies. Therefore, perhaps the failure to run a business or bankruptcy will be smaller. The size of the company is frequently use as an indicator of potential bankruptcy for a company, with larger companies seen as better able to face a crisis in running their business.

Profitability

Profitability, or the ability to make a profit, is a measure in percentages that is use to assess the extent to which a company can make a profit at an acceptable level. Companies with high profitability must have more internal funds than companies with low profitability. Companies that have a high rate of return will invest with little debt.

A high rate of return makes it unlikely to finance most funding needs with internally generate funds. This shows that profitability has an effect on the company’s capital structure.

Business Risk

Business risk can be one of the reasons why companies have difficulty funding their external operations. This affects the company’s leverage. Any factor affecting the state of the company’s capital structure will also change the company’s financial situation.

For example, the position of taxation Companies with a healthy financial situation, of course, regularly pay taxes and do not experience tax problems. Conversely, for companies that do not comply with taxes or have an unhealthy financial atmosphere, the tax process may be hampere.

Theory of corporate capital structure: Financial Management

Theory of the Traditional Approach

In the traditional approach, it is assume that there is a change in the optimal capital structure and an increase in the overall value of the company through the use of financial leverage (debt divide by own capital).

Using the traditional approach, an optimal capital structure can be obtaine—that is, one that adds the lowest total cost of capital and adds the highest share price. This is due to changes in the level of company capitalization.

Modligiani and Miller’s Theory of Approach

In this theory, it is argue that the capital structure does not affect the company, where there are two types, namely:

MM Theory Without Taxes

The first modern theory of capital structure is the theory of Modigliani and Miller (MM Theory). They argue that the capital structure is irrelevant or does not affect the value of the company. MM put forward several presumptions to build their theory:

No agency costs
No taxes
Investors can borrow at an interest rate similar to that of a company.
Investors have information similar to that of management regarding the company’s future prospects.
No bankruptcy fees
Earnings Before Interest and Taxes (EBIT) are not affected by the utilization of debt.
Investors are price-takers.
In the event of bankruptcy, the asset can be sold at the market price (market value).

MTH Theory with Taxes

The MM theory without taxes is recognize as unrealistic, so MM incorporates tax invoices into its theory. Taxes are paid to the government, which means it is a cash outflow. Debt can be use to save taxes because interest can be use as a tax deduction.

Trade-Off Theory on Capital Structures

According to the trade-off theory expresse by Myers (2001), “Companies will owe debt to the level of exclusive debt, where tax shields from additional debt are similar to the cost of financial distress.” Financial distress is characterize by bankruptcy costs or reorganization and agency costs that increase the implications of a company’s declining credibility.

Trade-off theory includes several factors in determining the optimal capital structure, such as taxes, agency costs, and financial distress, but still maintains the assumptions of market efficiency and symmetric knowledge as a balance and benefits of debt utilization.

Pecking Order Theory

The pecking order theory explains why companies that have a higher level of profit actually have a smaller level of debt. Specifically, the company has a sequence of preferences for the use of funds. In pecking order theory, the sequence scenario is as follows:

The company chooses its internal views. Internal funds are obtaine from profits generate from the company’s activities.
The company calculates the target payout ratio base on the estimate investment opportunity.
Due to the continuous dividend policy, combine with unpredictable fluctuations in profits and investment opportunities, the cash flow receive by the company will be greater than the investment expenditure at the exclusive moment and will be smaller at other times.
If an external view is require, the company will issue the most conducive securities first. The company will start with debt, then with mixe securities such as convertible bonds, and then possibly with stocks as the ultimate option.

Long Term in Financial Management

Long-term investment is one that is intende to be profitable in the long run. Unlike short term investments that can usually be disburse and the results obtaine in a matter of months, long-term investments can generally only enjoy the results after a few years. This timeframe is typically 5 years or longer.

Chances are you’re wondering, “Why invest that long?” This is because the purpose of the long-term investment is to meet the needs for the foreseeable future.

Long-Term Investment Objectives

As said before, the purpose of long-term investment is to meet the financial needs that will emerge in the coming era. Not only that, what are the long-term investment goals that are different from the short term investment style?

Long-term investment objectives include:

Earn greater passive income over a longer investment period.
fulfilling various personal or family financial goals that require very large costs, such as buying a place to live, financing children’s education, financing marriage, paying for life in retirement, and so on.
Direct special funds to be store for a long period of time so that they are not use prematurely.
protecting the value of money from experiencing important deterioration due to the implications of inflation and other changes in the economic situation.

5 Long-Term Investment Models in Financial Management

In the following, there are 5 examples of the most popular long-term investments:

1. Precious Metals (Gold) Investment

The precious metal gold is the first example of a long-term investment.You must understand how the price of gold continues to rise every year, right? This steady increase in the price of gold makes it one of the long-term types of investment most often use by most people.

Gold is also the right choice for those of you who have just studie to invest. You only need to monitor the price of gold when it starts to decline and store it for a long time—about 5 to 10 years.

2. Stock Investment

Shares are a type of investment in the form of proof of capital ownership of exclusive assets or companies. Many large companies sell shares to a large population so that they can get capital injections to develop their businesses. You can get a high profit from buying stocks. But it also needs to be understood that stocks have a very high risk because the profits obtaine are also high (high risk, high return).

3. Mutual Fund Investment

Mutual funds are a good choice of long-term investment instruments for those of you who have just starte learning about investing.This investment instrument employs a third party to manage the funds that you invest in.Because you don’t need to manage your own mutual fund, the value of this investment tends to be stable compare to stocks.

Later, your investment funds will be manage by an investment manager to be include in the stock market. So, mutual funds will make it easier for you to invest because there are already parties who help manage the funds to be investe.

4. Property Investment

Residences, land, or other buildings are property assets that can serve as long-term investments. Every year, property prices continue to increase, but you can see a vital increase over the last 10 years, so that the return on this long-term investment is quite high.

If you have starte buying property at this time, then the price of that property in the next 10 years will definitely increase. It’s just that you need to understand that, when investing in property, you also need a very large amount of capital.

5. Deposit Investment

One of the easiest long-term investments for novice investors to execute is a deposit. Deposits are investment instruments that require you to put a certain amount of funds into the bank within a predetermine period of time.

One of the most popular deposit models for investing is time deposits. The benefits obtaine through time deposits are also greater than ordinary savings because of the higher interest rates. Not only is the interest rate higher, but time deposits are also more conducive than ordinary savings. With this investment instrument, you can save a certain amount of money within the time period that has been agree upon with the bank.

Within that investment time period, you can’t withdraw the money that has been put in there. If you withdraw money before it is due, there will be a penalty charge. Deposits can be a conducive option for those of you who want to start investing. Not only is the process ime period, you can’t withdraw the money that has been put in there. If you withdraw money before it is due, there will be a penalty charge. Deposits can be a conducive option for those of you who want to start investing. Not only is the process easy, but the risk of this investment is very small, and the returns you get are also very profitable.

Financial Planing (Financial Management)

What is financial planning? Everyone certainly has financial goals in their lives, whether it’s building a new residence, buying a car, organizing a dream wedding, and so on. This necessitates careful financial planning.Financial planning, in other words, is the busyness or tactic of managing finances in a planne manner to achieve life goals.

A person’s financial regulations are guide by financial planning.Because in finance, every regulation certainly has an effect on many things, it is built on a concept that knows how to achieve financial goals in a specific time frame.

For example, you want to have a new car in the next five years; therefore, you set aside savings equal to as much as 30% of your income and stop living extravagantly.

The purpose of making financial planning

As previously explaine, the purpose of financial planning is to achieve the financial goals to be achieve in the era that will end. With careful planning, your financial rules become more targete. While the financial goals themselves are divide into two categories, there are short term goals and long-term goals.

Short term goals themselves include installment payments, purchases of personal goods, vacations, wedding preparations, and others. Long-term goals can include pension funds, children’s education savings, and business capital.

Not only does planning help you achieve financial goals, but it also helps you maintain assets, invest, and encourages you to generate more money.

How to carry out financial planning (Financial Management)

After knowing the meaning and purpose of making financial plans, how do you carry out good and correct planning?

1. Assessment of Your Current Finances

Before planning, the first thing that needs to be done is to make an assessment of your financial situation. The number of dependents, the work environment, your age, and even your health can all be use to assess your financial situation.

The purpose of this assessment is to ensure that the plans you make later do not torture you in the future. For example, if your salary is only IDR 5 million per month, it is definitely not possible to plan to buy a new car within a year. Get your financial analysis and tips here: Apps & A Thousand Google Play Store (for iOS Users) and Sribuu Play Store App (for Android Users)

2. Start making financial goals.

Start to make financial goals. For example, you might want to buy a car in the next five years, get marrie next year, or take out a mortgage in the next two years. Arrange it base on your priority scale.

3. Develop a financial plan to achieve that goal.

Then compile the activities you want to carry out to achieve these financial goals. For example, you want to buy a new car in the next five years at a price of IDR 200 million. From now on, you will set aside your income of IDR 4 million per month until you collect IDR 200 million.

For another example, if you want to take the Hajj, start to connect to Hajj savings and set aside IDR 500 thousand per month so you can get an embarkation number. Make sure that the plan you make is reasonable and does not sacrifice other important expenses.

4. Evaluating and Adjusting to the Latest Financial Circumstances

When you are carrying out financial planning, it will definitely not happen smoothly. Of course, there are sudden needs that require you to spend more money, such as paying for the education of children who start school. Assess that, and you can make adjustments to the planning you’ve done so far.

Cash Flow Base Financial Management

A cash flow report is a record that contains information relate to the expenses and income of a business during a given period. Companies must keep a record of all transaction activities in order to maintain financial stability.

The report needs to be made every period so that it can be evaluate more easily. With detaile information regarding cash in and out, business owners can evaluate the financial structure, including liquidity, solvency, and net assets of the company.

Not only that, the cash flow statement can also be use as an adaptive tactic to be able to face changing conditions and opportunities.

Purpose of Making a Cash Flow Statement (Financial Management)

A good company needs all accounting transactions, including a complete cash flow statement. Through the report, companies can see the various components neede for business planning in the coming era.

The report’s content is not limite to expenses and income; there is also some other information that can be obtained. For this reason, companies are require to have reports that contain the company’s cash flow.

Benefits of Cash Flow Statements for Companies in Financial Management

The creation of a cash flow statement can add several benefits to the company. It will definitely be closely relate to the preparation of business tactics in the era that will end. Not only that, the cash flow report can provide additional benefits as describe below.

1. Seeing the Company’s Capabilities in Various Aspects

The existence of a cash flow report can help companies understand their capabilities in various aspects, one of which is the operational aspect. Through report information, companies can understand their ability to pay employee salaries, pay dividends, and so on.

2. Understand net profit.

Net profit can be known by looking at cash flows in and out. All that information can be found easily on the cash flow report.

The cash flow report will include all activities relate to the company’s operations so that shareholders can see how much income and expenses there are. With the report, the company can realize what the amount of net profit is for the exclusive period.

3. Realizing the Company’s Ability to Manage Cash Flow

Cash flow reports can help companies be more aware of their ability to generate cash flow. This will definitely have an important role because it will be the source of the company’s operations.

Not only that, cash in and cash out can provide information about the company’s financial health. The data can be use to infer whether the company has made progress or not. If you still can’t get results, the cash flow report can be use as assessment material to improve the company’s work platform.

Because of the existence of various benefits, cash flow reports play a critical role for the company.With the report, the state of the company can be known in more detail. This will be the basis for the preparation of steps in the coming era.

Management Practices in Financial Management

What are management practices? Management practices usually refer to the working and discovery methods that managers use to improve the effectiveness of the work platform. Common management practices include empowering staff, training staff, introducing schemes to improve quality, and introducing new forms of technology.

What you also need to know is, what do you mean by management practices? Definition: Management practices are a method of work and invention that managers use to make organizations more efficient.

Furthermore, what exactly is management theory and practice?Management theory discusses how managers and supervisors relate to their organizations within the science of their goals and the application of effective ways to achieve those goals.

8 Best Management Practices (Financial Management)

Practice consistency.
Foster communication that is understanding, thorough, and detaile.
Encourage teamwork.
give credit publicly.
According to the example,
Be flexible.
Practice transparency.
I receive the whole person’s opinion.

8 Best Practices in Business Management (Financial Management)

Engage workers. Estrange workers do not care about carrying out their work.
Award Efforts. No one likes the work they don’t consider.
Be vulnerable.
Stay committe.
Seeking Clarity.
create cultural cohesion.
Team effort is the focus.
Hold a routine rendezvous.

Capital Budgeting

What is a capital budget? A capital budget is a business process that is carrie out to evaluate the potential of large projects or investments. The construction of new investments or outside investments may require a capital budget before it is approve or rejecte.

As part of the capital budget, the company can assess prospective cash flow projects and determine the potential returns that will be generate by sufficient benchmark targets. This process is also known as investment evaluation.

Capital budgeting, also known as capital expenditure budgeting, is a way for company management to plan the sale and purchase of fixe assets. Usually, this budget helps management analyze various long-term tactics that companies can take to achieve expansion targets.

Style Capital Budget in Financial Management

Throughput Analysis: Throughput analysis is the most complicate form of capital budgeting analysis but also the most thorough in helping managers decide which projects to pursue. With this method, all companies are recognize as a single profit-making platform. Throughput is measure as the amount of material that passes through that platform.

Return analysis: return analysis is the simplest form of capital budgeting analysis but also the least thorough. It is still widely use because it is fast and can give the manager a “behind the envelope” understanding of the true value of the propose project.

Purpose and Benefits of a Capital Budget in Financial Management

Capital budgeting aims to make provisions about the long-term investment of the company’s capital into operations. Capital budgets also plan for the eventual return on investment in machinery, real estate, and new technologies, which are all examples of capital budgeting.

Managers can adopt one of several techniques for capital budgeting, but many small businesses rely on the simplest technique, calle the payback period, which simply measures the time it takes for an investment to return its value. Well, that was a complete explanation of financial management and what you can do by following various aspects of it. I hope it is useful. Thank you.