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Financial Management :Definition, Objectives, Scope and Functions

A. Definition of Financial Management

Financial management is any activity or activities of the company related to how to obtain working capital financing, use or allocate, and manage assets to achieve the main goals of the company.

B. Objectives of Financial Management

The main objective of Financial Management is to maximize the value of the company or provide added value to the assets owned by shareholders.

C. Scope of Financial Management

Scope of Financial Management consists of:
  • Funding decisions, covering the management policy of fundraising companies, for example, issued a number of policies and policy bonds short and long-term debt the company sourced from internal and external companies.
  • Investment decisions, policy venture capital investment to fixed assets or Fixed Assets such as buildings, land, and equipment or machinery, as well as financial assets in the form of securities such as stocks and bonds or activity to invest in various assets.
  • Decisions Asset Management, Policy-owned asset management efficiently to achieve the objectives of the company.

D. Functions and Objectives of Financial Management

The main function of Financial Management are as follows:
  • Planning or Financial Planning, Cash Flow Planning covers and Income.
  • Budgeting or budget, reception planning, and budget allocation cost-efficient manner and maximize the funds held.
  • Controlling or Financial Control, evaluation and improvement of finances and financial systems of the company.
  • Auditing or the Auditing, conduct internal audits on existing corporate finance to comply with the rules and accounting standards to prevent deviation.
  • Reporting or Financial Reporting, provide information reports about the company's financial condition and ratio analysis of financial statements.

E. Analysis of Financial Ratio

The analysis tool that is often used to determine the company's financial condition and achievements. Benchmark typically by comparing the increase or decrease in achievement between the two statements of financial position at two specific time periods.

Financial Ratio Analysis commonly used are grouped as follows:
  • Liquidity Ratio, the ratio value to assess a company's ability to meet all the financial obligations in the short term. Reports in the form of analysis Current Ratio and Working Capital to Total Assets (WCTAR).
  • Leverage Ratio, the ratio to assess the extent of the funds provided by the shareholder or owner as compared with funds obtained from loans from the creditors. Reports in the form of Total Debt to Assets (DAR), Total Debt to Equity Ratio (DER).
  • Activity Ratio, this ratio is used to measure the effectiveness of management in the use of its resources. All the activity ratio involves a comparison between the level of sales and investments in various types of assets. The report analyzes the form of Total Asset Turn Over (ATO), Working Capital Turn Over (WCTO), Total Equity to Total Assets (EA).
  • Rentability Ratio, this ratio is used to assess the effectiveness of management views on the profit generated on sales and investment companies. The report analyzes the form of Return on Equity (ROE), Return on Assets (ROA), Earning Power of to Total Investment (EPTI), Gross Profit Margin (GPM), and Operating Income (OI).