Financial management is a primary activity of planning, budgeting, checking, managing, controlling, finding, and storing sources of funds owned by an organization or company.
Many think that Financial Management is only the activity of recording money in accounting and is the finance department’s responsibility.
This process has a comprehensive scope and is essential for the continuity of a business.
What is Financial Management?
What is meant by financial management is the activity of planning, organizing, directing, and supervising financial activities such as procurement and utilization of company funds.
Financial management also means applying general management principles to the company’s financial resources.
Even though it sounds trivial at first glance, the word financial management is still taboo for many people to understand.
Financial management is an essential element in life, especially when doing business.
Why is Financial Management Important for Business?
Several things make financial management important for a business. Among others are:
· Knowing Capital Expenditures
With sound financial management, you will know when to buy income-generating assets.
All financial considerations for capital expenditures must balance the income an asset will generate with the amount it will issue.
If you manage your capital expenditures effectively, you’ll be less likely to overwhelm your company by borrowing too much capital for assets that need more income.
· Manage Operational Cash
You’ll always have enough cash to pay your rent, utilities, telephone, insurance, employee payroll, and supplies by managing your cash flow well.
For that, you have to look ahead and see when the age of a business receivable is due and compare it to the due date of the outstanding bill.
You can manage cash flow by shortening the time you give customers to pay and renegotiating due dates with vendors.
You must manage cash flow effectively to pay fees and keep your company operating.
· Lowering Costs
One of financial management’s responsibilities is keeping costs as low as possible.
You can ask vendors for lower prices, reduce the number of employees, use less electricity, or buy supplies in bulk.
If you don’t monitor and manage costs, your company will always have to increase sales dramatically to pay for the rising costs.
· Helping with Tax Planning
The task of managing financial management includes planning for taxes.
This tax planning process can help companies make tax estimates to allocate more funds to carry out tax payment obligations.
With well-allocated funds, companies can pay taxes on time so that delays can be avoided, which can cause extra funds to be spent for payment of tax fines or sanctions.
Sound financial management will help plan business finances properly. Companies can also run smoothly because of sound financial management.
The Main Activities of the Company Financial Management Are
Financial Management has several main activities for a business, as follows:
Obtaining Company Funds
Obtaining company funds is an activity that aims to obtain sources of funds for the company.
Whether it comes from an internal company or sourced from an external company.
There are two sources of corporate funds, namely equity and debt.
The two funding sources are as follows:
· Equity Funding (Own Capital)
One source of funds from within the company is individual savings, friends and relatives, other individual investors, large corporations, venture capital firms, and stock sales.
This is also the company’s internal funds, namely funds originating or fulfilled within the company.
For example, retained earnings, namely the company’s net profit that has been successfully obtained and reused to finance needs or a primary activity of the company’s financial management.
· Funding from Debt (Loans)
The company’s sources of funds can be obtained from friends or relatives, other individual investors, suppliers of raw materials, lenders in the form of assets, commercial banks, government-backed programs, non-governmental financial institutions, large corporations, and companies. Venture capital.
These are also referred to as external company funds from parties outside the company.
For example, new capital or debt. New capital means issuing new shares, while debt means facing long and short-term choices.
- Short-term debt, namely debt with a maturity of less than one period. For example, debt to suppliers of raw materials and trade credit.
- Long-term debt is debt whose repayment period is more than one period, usually five years and over.
- Financial management activities consider how many sources of funds are needed by the company to continue to run and allocate these funds for suitable activities or activities.
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