Financial Management: Definition, Functions, Purpose, Principles, and Tips

Financial Management – ​​Is Sinaumed’s someone who keeps an eye on personal monthly expenses, be it through the widely available apps or manual tables?

If so, then Sinaumed’s includes managing personal finances. Management or financial management is not only limited to calculating ordinary expenses, but also helps us plan good spending and savings in the future.

In a company or organization, finance is also considered as the most important aspect. In order to generate successful business and growth, a company needs to prioritize good financial management. Because, there are a myriad of benefits and functions related to business survival.

Definition of Financial Management

In business, financial management is essentially the practice of making a business plan and then ensuring its implementation for each department. With good financial management, it is possible for companies to obtain data to create visions, make investment decisions and have insights to fund investments, control liquidity, profitability, cash, and so on.

Financial management in the system combines several financial functions, including accounting, fixed asset management, revenue and payment processing.

If these components are successfully integrated, companies can achieve financial visibility in facilitating day-to-day activities.

Tactical VS Strategic Financial Management

Tactical-level financial management includes procedures that govern how we process daily transactions, close monthly finances, compare actual expenses to budgeted money, and meet auditor and tax requirements.

Meanwhile, strategic financial management includes financial planning and analysis activities, investment planning by financial leaders using data, finding opportunities, to building a formidable company.

The Importance of Financial Management

Why is financial management important? Previously, we need to understand the three pillars of sound fiscal governance.

  1. Develop a strategy, or identify the things that are needed by the company financially to achieve its goals, both short and long term. For example, a company leader needs insight regarding current performance for future planning.
  2. Make decisions, or assist business leaders in deciding the best way to implement plans through the provision of up-to-date financial reports and relevant data.
  3. Controlling or ensuring the contribution of each existing department to the company’s vision and operations according to the budget and in line with the strategy.

Well, these three pillars can be achieved through effective financial management. This is because every employee knows the direction of the company and can see progress.

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Financial Management Objectives

Based on the pillars above, companies need to be assisted with good financial management. Here are some of the objectives of financial management:

  • Maximize profits by providing insight. For example, insight into the increase in raw material costs that can trigger an increase in cost of goods sold.
  • Track liquidity and cash flow to ensure that the company has enough cash to meet obligations.
  • Ensuring the company complies with state and industry regulations.
  • Develop financial scenarios based on current business conditions and predictions regarding various outcomes based on possible future market conditions.
  • Effective interaction with investors and directors.

This objective can certainly be achieved by applying effective management principles to the company’s financial structure.

Scope of Financial Management

Sinaumed’s, financial management also has its own scope regarding its fields. Let’s look at the four main areas!

1. Planning

This area tasks financial managers with projecting the amount of money a company will need to maintain positive cash flow, allocating funds for growth, adding new products or services, dealing with contingencies, and sharing that information with business partners.

Planning can be broken down into several categories, including capital, labor, indirect, and operational costs.

2. Budgeting

In the area of ​​budgeting, financial managers allocate available company funds to meet expenses, such as mortgages or rent, wages, materials, employees, and other obligations. Ideally, there will be some remaining funds set aside for emergencies and to fund new business opportunities.

Companies generally have separate master budgets and sub documents. This includes, for example, cash flow and operations; Budgets may be static or flexible.

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3. Manage and Assess Risk

This field sees financial managers as assessors and compensators for various risks, including:

  • Market risk: Affects business investment, reporting and stock performance. It may also reflect specific financial risks to the industry, such as a pandemic affecting restaurants or a direct-to-consumer retail shift.
  • Credit risk: For example, the effect of customers not paying their bills on time and thus the business not having the funds to meet obligations. This can affect creditworthiness and ratings, which determine the ability to borrow at a rate that is profitable for the company.
  • Liquidity risk: The finance team must track current cash flow, forecast future cash needs, and be prepared to free up working capital as needed.
  • Operational risk: This is a general and new category for some finance teams. For example, this could include cyberattack risk and consideration of buying cybersecurity insurance, disaster recovery and business continuity plans, and crisis management practices that are triggered if a senior executive is accused of fraud or misconduct.

4. Procedure

Finance managers, in this field, establish procedures for how the finance team processes and distributes financial data: invoices, payments and reports safely and accurately. These written procedures also outline the people who are responsible for making financial decisions in the company.

Financial Management Function

Financial management has a very important function for procuring funds, allocating financial resources, and utilizing funds. Here are the details of the function, Sinaumed’s!

1. Controlling and Making Decisions

The financial manager bears primary responsibility for making decisions and controlling finances. Through various techniques, they prepare for potential threats.

2. Financial planning

Decision making also includes planning activities and financial resources. Managers can use available information to gauge business priorities and needs. They also analyze the overall economic situation to plan budgets and make decisions accordingly.

3. Allocating Resources

Managers need to ensure that all financial resources are used in an appropriate way. They also need to oversee business investments in an effective and efficient manner. Proper allocation of financial resources leads to long-term profitability.

4. Manage Cash Flow

Managers have a responsibility to ensure cash management. In other words, they need to ensure that the organization is able to meet operational costs and emergencies. This is done by checking whether the business has sufficient working capital and cash flow.

5. Acquisition and Merger

A company can take critical strategic turns to maintain relevance in a competitive marketplace. Businesses can expand by acquiring new businesses or through mergers, when they enter into a new business. Such decisions relate to complex securities valuations, and the financial manager is the one who oversees the process.

6. Capital Budgeting

Capital budgeting refers to decisions that involve investing in stocks or bonds, such as building new factories and buying new equipment. Financial managers need to identify opportunities and challenges before a company decides to invest a large amount of capital.

In short, financial management functions to help businesses maximize their wealth. Even so, this is a continuous process that is interrelated. Financial management must also be fast and efficient.

Financial Management Principles

Here are 7 principles of financial management that Sinaumed’s needs to know before implementing them:

1. Consistency

System and financial policies within the company must be consistent at all times. Even so, this does not mean that the financial system cannot be adjusted when there are changes in the company’s internal affairs. An inconsistent approach to financial management is a sign that manipulation is taking place.

2. Accountability

Accountability is a moral or legal obligation. Do not tend to certain individuals, groups or organizations over property rights granted to third parties as they have been used. There are operational, moral and legal obligations for companies to explain all decisions and actions that have been taken.

In other words, companies must be able to explain how they use resources. This is because stakeholders have the right to know how their funds or rights are used.

3. Transparency

As we know, companies have obligations related to transparency. Companies must be open in providing information related to their activities. This also includes providing financial reports that are accurate, easily accessible to stakeholders , and show profits. If the company is not transparent, it means that something is being hidden, including regarding its finances.

4. Survival

A financial manager must be able to plan the finances assigned to him so that the company can continue to run, aka live. Even good financial management will have the right financial strategy for the company, Sinaumed’s.

5. Accounting Standards

Every company must have the same accounting system. This system must also be enforced. That is, all accountants internationally can understand and understand this same accounting system.

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6. Management

This is a very general principle for many things. In accounting management, financial management must also be carried out by the company properly and effectively.

7. Integrity

The integrity of records and reports related to the company’s finances must also be properly maintained. In other words, these records must be understandable, complete, and accurate.

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Financial Management for Startups

In the beginning, the responsibility of financial management in a startup was to create and stick to a budget that aligns with the business plan, evaluates what to do with the profits achieved, and ensures that bills are paid.

When a company grows and adds employees or finance and accounting staff, financial management becomes more complicated. We need to ensure our employees are paid with accurate deductions, file taxes and financial statements correctly, and watch for errors and fraud that may occur.

By drawing up a plan, startup entrepreneurs can answer the big questions: Will the goods and services they create be profitable? Can we launch a new product or make it happen? What might the next few years bring to the business?

Well, solid financial management provides systems and processes to answer these questions.

Financial Management Tips

Sinaumed’s, here are tips for those of you who want to start managing your finances personally, let’s take a good look!

1. Track spending to improve finances

If Sinaumed’s does not know what and where he spends his money each month, there is a good chance that Sinaumed’s’ personal spending habits need to be corrected. Better money management starts with spending awareness.

For a simple start, use a money management app to track expenses across categories, and see for yourself how much money we spend on non-essentials.

Once we familiarize ourselves with these habits, we can make plans to improve them.

2. Create a realistic monthly budget

Use your monthly spending habits and monthly salary that you’ve done to set a budget that you can stick to. There’s no point in setting a strict budget based on drastic changes like never eating out. Make a budget that fits your lifestyle and spending habits, Sinaumed’s.

We should look at budgets as a way to encourage better habits, like cooking at home more often. Even so, give yourself a realistic chance to meet this budget. That’s the only way this money management method will work.

3. Increase savings even if it takes time

Create an emergency fund that can be used when unforeseen circumstances occur. Even if the contribution of these tips is small, these funds can save us from risky situations when we are forced to borrow money at high interest rates or may not be able to pay our bills on time.

In addition, Gramds must also make a general savings contribution to strengthen financial security in the event of job loss. Use automatic contributions to strengthen the habit of saving money.

4. Pay bills on time every month

Paying your bills on time is an easy way to manage your money wisely and comes with great benefits: It helps you avoid late fees and prioritize important expenses. A strong history of on-time payments can also boost your credit score and increase your interest rates.

5. Reduce recurring costs

Does Sinaumed’s subscribe to services that are never used? It’s easy to forget about the monthly subscriptions or streaming services and mobile apps that weigh on our bank accounts even if these services are never used regularly.

Try reviewing spending on bills like these, and consider canceling unnecessary subscriptions to save more money each month.

6. Save cash for big purchases

Certain types of loans and debt can be helpful when making big purchases, such as a house or even a car that we currently need. Even so, for other large purchases, cash offers the safest and cheapest buying option.

When buying in cash, Sinaumed’s avoids interest and creating debt that can take months, often years, to pay back. Meanwhile, the money saved can be deposited in a bank account.

7. Start an investment strategy.

Even if our ability to invest is limited, a small contribution to an investment account can help in using the money previously earned to generate more income.

The path to better finances starts with changing our own habits. Some of these changes will be easier than others, but if Sinaumed’s stays committed, you will gain powerful money management skills that will help you throughout life. Meanwhile, we will have more money in life!

Financial Management Conclusion

Financial management is very important in personal and corporate life. Of course, we need to study financial management in general beforehand to be able to implement it in company activities.

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