Financial management is one of the key factors that influence the failure and success of business activities. This financial function is very vital because every outgoing and incoming flow of funds must be clear. Plus, achieving profits is the common goal of every company.
Therefore, it is important for those of you who have a business organization to know how good financial management is. Including managing all operational costs, budgets, and incoming money.
If you are able to manage finances properly, the company’s financial condition will be healthy. On the other hand, if money cannot be managed properly, expenses and income will not be controlled properly. As a result, your company’s finances become unhealthy and can even lead to bankruptcy.
For those of you who have a business, of course you must learn how to manage finances well. Understanding good financial management is important for running business processes. Follow the explanation below to understand more about money management.
What is Financial Management?
Financial management is an activity that regulates, plans, directs, and supervises financial activities. Financial management includes all activities related to financial management decisions and financial assets.
An example of this financial management is how to manage spending money to buy equipment, or income from product sales. This decision was taken carefully so as not to cause problems. Decision making in financial management can use accounting data such as information contained in financial reports.
A number of companies still underestimate financial management. Even though finances must be managed properly so that it does not become a problem in the future. Financial management must be done carefully so that corporate and individual funds do not overlap.
Financial management can actually not only be used by companies, but can also be applied in everyday life such as managing household or individual finances. Financial management should not be taken lightly because it affects business continuity.
Financial management also does not only talk about the effective use of funds and their allocation, but financial management also covers a wider range of matters. The scope can also be seen from how the funds were obtained, how they were used, managing assets, and investing.
Benefits of Implementing Financial Management
The app of financial management provides a number of benefits to businesses. The following benefits will be obtained, namely:
Know the Amount of Capital Used
Applying financial management properly will let you know how much money has been used to buy assets. The assets in question are those that will later provide income for the company.
You need to balance the income that will be obtained with the amount of capital that has been issued. This needs to be done so that the business does not suffer losses.
Financial flows will be healthy when spending funds are properly managed, so that they do not require loans from other parties. You can maximize the assets you have to generate more income for the company.
Good Cash Management
The app of good financial management will make cash flow managed regularly. It won’t be difficult for you to think about whether the money you have is in accordance with its purpose, such as paying various kinds of bills such as electricity, water, telephone, insurance, and employee salaries.
Regular cash management can shorten the time you give customers to pay or negotiate due dates with vendors.
You need discipline in doing financial management. The reason is, if you are not successful in managing cash flow effectively, you may experience a default that can disrupt the company’s operations.
Management will keep your business costs as low as possible. This happens because there are a number of things you can do, such as asking vendors to lower prices because of long-time subscriptions, reducing electricity and water usage, or buying massive inventory.
Helping Tax Planning
The app of financial management will assist in managing tax planning. You can estimate how much tax must be paid. You also become calmer because you have arranged taxes, so you don’t have to worry if you are late paying taxes.
If you are late paying taxes, of course you will be fined so you need additional funds to pay the fine. Having financial management will help tax planning run smoothly.
Scope of Environmental Management
Fundamentally, there are two understandings of the concept of financial management, namely the conventional approach and the modern approach.
The conventional approach means understanding the principles of financial management as a system for financial management.
Then, the modern approach means financial management as a broader system, namely a system that influences three strategic decisions, namely investment, dividends, and finance.
These three aspects become a modern approach as a scope for financial management. Here’s a more detailed explanation:
Decisions About Finance
Decisions about finance have a close relationship with the management and improvement of finance that comes from various types of capital. Those decisions affect how the company raises capital and how it spends it.
There are two time periods for financial decisions, namely the long term (capital structure) and the short term (working capital).
Long-term decisions have to do with the funds used for business operations. While working capital is related to the availability of funds related to sources of capital (internal and external).
Investment decisions mean about how the company uses existing assets to achieve targets. Like the financial aspect, investment decisions also have types, namely long term and short term.
Long-term decisions relate to fixed assets or fixed assets, while short-term decisions have a direct influence on company liquidity through current assets.
The decision regarding the distribution of dividends means the distribution of profits to each of the company’s shareholders. Dividend decisions also have to do with the proportion of funds that will be saved for the needs of business expansion or company diversification.
Financial Management Function
Financial management also has the following functions:
Basis for Making Decisions, Planning, and Financial Control
Financial management has a function as a basic material for making financial decisions, planning and control. This is done so that the company is able to achieve its goals effectively and efficiently.
Company officials generally will use a number of methods to carry out financial management such as forecasting, financial ratio analysis, profit and loss analysis, and others.
Maximize Asset Utilization
The app of financial management will enable companies to manage their assets to provide profit value. As a result, the continuity of the company can be maintained in both the short and long term.
Financial management functions to regulate the capital requirements of the company, both short and long term. In addition, financial management is able to track how much estimated capital is needed and find sources of capital.
The surplus must also be managed properly so that the company can continue to progress and develop, or diversify and expand. Basically there are a number of options in managing the surplus. There are those who make it as dividends, sell surplus assets, and make productive investments.
Managing Cash Flow
Financial management helps companies to monitor a number of elements that affect the stability of cash flows, such as installments or company debts.
Knowing Potential Risks
Financial management can predict the potential risks that could occur in the future. This risk could come from outside the financial side.
Principles in Financial Management
Financial management has principles that need to be held consistently. Even in dynamic company or market conditions, these principles need to be maintained. These principles are:
A company needs to carry out a financial management process consistently and does not change even though conditions are uncertain.
Financial management can get an overview from a legal and moral point of view regarding the use of funds or the authority to manage finances. Everyone involved in managing the company’s finances must be held accountable for whatever happens.
The company must be transparent in providing information on financial management activities to every member in the company.
Company management must provide a comprehensive picture of the company’s financial health. This description includes the present and the future so that the company continues to run as it should.
Everyone involved in financial management must be able to work optimally. This can be proven easily, namely through the results of appropriate and accountable financial reports.
Financial management needs to apply accounting standards that have generally been in effect for a long time.
Tips in Implementing Financial Management
You should not apply financial management haphazardly. Here are a number of tips that can be done so that financial management goes well:
Create a Separate Account
It is highly discouraged to create one account for two different purposes. You must create separate accounts between personal accounts and accounts for companies. This strategy is used to find out how the financial condition is and to avoid abuse.
Making Routine Financial Reports
Making periodic financial reports is useful for knowing the company’s financial condition. Financial reports also serve as a measuring tool to find out incoming and outgoing funds.
Financial reports are part of the principles of financial management, namely the principle of transparency. This means that whatever the company’s financial conditions and activities, it needs to be recorded accurately and accountably.
Provide Cash Flow Projection Records
Notes on cash flow projections aim to find out when company funds are issued and when they are received. In addition, records serve to find solutions before there is a loss to the company’s finances.
If you don’t have a cash flow projection record, you will have difficulty predicting the company’s financial condition. As a result, you will be late in taking steps for a solution and bankruptcy may occur.
Based on the explanation above, you have understood various important things about financial management. This explanation also adds to awareness of the importance of financial management for a business. The app of financial management can maintain business continuity, and is the key for businesses to develop in the future.