Every company needs to apply clear rules in every policy-making, especially if the decisions made are related to finance. For this one aspect, every company will apply strict financial management. The reason is, if financial management is not implemented properly, it can have an impact on the overall performance of the company.
Definition of Financial Management According to Experts
In simple terms, financial management is an effort to plan, manage, store and control company assets or funds. The implementation must also be done carefully so as not to cause problems in the future. Therefore, companies need the presence of qualified personnel and supporting equipment.
In addition, there are also several other definitions from several experts related to financial management, namely:
Harry G. Guthmann and Herbert E. Dougall
In the view of Guthmann and Dougall through a book entitled Corporate Financial Policy, financial management is an activity that is closely related to planning, developing, controlling, and administering any funds used in business.
Meanwhile, J.F. Bradley has a different definition regarding the notion of financial management. In a book entitled Administrative Financial Management, Bradley reveals that financial management is an aspect of business management to regulate the use of company capital. Not only that, but the choice of sources of capital must also be considered in order to achieve goals.
Joseph L. Massie
A different definition is explained by Joseph L. Massie, author of The Essentials of Management. Massie said that financial management is a business activity that is responsible for obtaining and using company funds to achieve effective operations.
The Purpose of Implementing Financial Management in Business
There are five main goals of the company when implementing financial management , namely:
1. Maintain smooth cash flow.
The first goal is to ensure that the company has a healthy cash flow. The application of financial management can monitor the amount of income or expenditure. With monitoring, companies can anticipate so that cash flows are not negative.
2. Improve the efficiency of the use of company finances.
The implementation of financial management, which in turn is closely related to efforts to increase the efficiency of the use of company funds. You can not only carry out supervision but also eliminate expenses that are deemed ineffective and replace them with profitable activities.
3. Increase profit
Financial management can also be used when you want to achieve higher profit goals. You can get this condition by doing careful financial planning.
4. Capital structure planning
The use of financial management can also be used for the purpose of planning the company’s capital structure. Here, the company can adjust the capital composition to balance equity and debt.
5. Ensuring investment safety
The last objective is an effort to assess the level of safety of investment activities. That way, a corporate investment can provide positive returns.
Financial Management Functions
Apart from having the objectives mentioned above, there are five important functions in the implementation of financial management by companies, namely:
1. Estimated Capital Adequacy
The existence of financial management enables a financial manager to estimate the company’s capital adequacy. Appraising the right estimate can increase the company’s income capacity.
2. Assessing Capital Composition
When the company has made an estimate, the next step is to determine the capital structure. This stage requires a short or long-term debt to equity ratio (DER) analysis.
3. Choosing the Right Funding Source Options
The next function is the decision to choose the source of company funding. Apart from equity capital owned by the company, there are several choices of sources of funds from third parties that can be obtained. Options for external sources of funds include issuing shares, bank loans or financial institutions, and debt securities.
4. Cash Management
Financial management also has an active role in the company’s cash management efforts. The existence of cash is very important because it can be used for the payment of salaries, monthly bills, liabilities, spending on raw materials, and so on.
5. Financial Control
The last function of financial management is to control the company’s finances. Many ways can be done as a control effort, such as financial forecasting, cost and profit control, ratio analysis, and so on.
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