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Financial Management

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Financial Management can be defined as:

The management of the finances of a business / organisation in order to achieve financial objectives

Taking a commercial business as the most common organisational structure, the key objectives of financial management would be to:
• Create wealth for the business
• Generate cash, and
• Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested

There are three key elements to the process of financial management:

(1) Financial Planning

 Management need to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.
In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.

 (2) Financial Control
Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as:
• Are assets being used efficiently?
• Are the businesses assets secure?
• Do management act in the best interest of shareholders and in accordance with business rules?

 (3) Financial Decision-making
The key aspects of financial decision-making relate to investment, financing and dividends:
• Investments must be financed in some way – however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers
• A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

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Accounting Concepts and Conventions

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In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation.
The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities.
To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.

Accounting Conventions
The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.
The other conventions you will encounter in a set of accounts can be summarised as follows:
Monetary measurementAccountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.
Separate EntityThis convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business.
RealisationWith this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms.
MaterialityAn important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts.

Accounting Concepts
Four important accounting concepts underpin the preparation of any set of accounts:
Going ConcernAccountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities.
ConsistencyTransactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.
PrudenceProfits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs will be incurred in the future.
Matching (or "Accruals")Income should be properly "matched" with the expenses of a given accounting period.

Key Characteristics of Accounting Information
There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria:
CriteriaWhat it means for the preparation of accounting information
UnderstandabilityThis implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities
RelevanceThis implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?)
ConsistencyThis implies consistent treatment of similar items and application of accounting policies
ComparabilityThis implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability.
ReliabilityThis implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor).
ObjectivityThis implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest
 

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Financial Accounting

23.57 |


Financial accounting is a system that accumulates, processes and reports information about an entity's performance (i.e. profit or loss), its financial position (i.e. assets, liabilities and shareholders' equity) and changes in financial position.
Every entity, whether for-profit or not-for-profit, aims at creating maximum value for its stakeholders. The goal of maximum value addition is best achieved when there is a mechanism to monitor the management and the board of directors. Financial accounting helps in such monitoring by providing relevant, reliable and timely information to the stakeholders.
Inputs to a financial accounting system include business transactions which are supported by source documents, such as invoices, board resolutions, management memos, etc. These inputs are processed using generally accepted accounting principles (GAAP). The processed information is reported through standardized financial statements.

Users of the Financial Statements

The most basic objective of financial accounting is preparation of general purpose financial statements, which are financial statements meant for use by stakeholders external to the entity, who do not have any other means of getting such information, i.e. people other than the management. These stakeholders include:
  • Investors and Financial Analysts: Investors need the information to estimate the instrinsic value of the entity and to decide whether to buy, hold or sell the entity's shares. Equity research analysts use financial statements to conduct their research on earnings expectations and price targets.
  • Employee groups: Employees and their representative groups are interested in information about the solvency and profitability of their employers to decide about their careers, assess their bargaining power and set a target wage for themselves.
  • Lenders: Lenders are interested in information that enables them to determine whether their loans and the interest earned on them will be paid when due.
  • Suppliers and other trade creditors: Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due and whether the demand from the company is going to increase, decrease or stay constant.
  • Customers: Customers want to know whether their supplier is going to continue as an entity, especially when they have a long-term involvement with that supplier. For example, Apple is interested in long-term viability of Intel because Apple uses Intel processors in its computers and if Intel ceases operations at once, Apple will suffer difficulties in meeting its own demand and will loose revenue.
  • Governments and their agencies: Governments and their agencies are interested in financial accounting information for a range of purposes. For example, the tax collecting authorities, such as IRS in USA, are interested in calculating taxable income of the tax-paying entities and finding their tax payable. Antitrust authorities, such as Federal Trade Commission, are interested in finding out whether an entity is engaged in monopolization. The governments themselves are interested in efficient allocation of resources and they need financial accounting information of different sectors and industries to decide on federal and state budget allocation, etc. The bureaus of statistics are interested in calculating national income, employment and other measures.
  • Public: the public is interested in an entity's contribution towards the communities in which it operates, its corporate social responsibility updates, its environmental track record, etc.

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Accounting, Corporate Finance & Shareholder

18.32 |


Shareholders


Sejak abad ke-17, para pelaku usaha mulai memperkenalkan yang namanya LLC (=Limited Liability Company) yang di Indonesia dikenal dengan Perseoran Terbatas (PT), dimana tanggung jawab (kewajiban) pelaku usaha di dalam aktivitas usahanya hanya sebatas jumlah modal (yang diwujudkan dalam bentuk saham) yang ditanamkan saja. Tidak lebih.

Pemilik usaha (read:shareholders) menunjuk seorang director (terkadang beberapa director) untuk mengelola usahanya. Direktur lah yang kemudian mengangkat manager untuk membantunya me-manage usaha yang dikelolanya. Mulai dari membuat perencanaan opersional, pemasaran, sumber daya manusia, accounting dan keuangan, dan meng-execute rencana yang telah dibuat, hingga mengevaluasinya.

Shareholder berkuasa penuh untuk memilih (menentukan) director, menunjuk auditor independent dalam Rapat Umum Pemegang Saham, dan berhak atas laporan tahunan yang berisi kinerja keuangan perusahaan, yang kita kenal dengan Laporan Keuangan.

Okay, terkait dengan accounting & financial market ada 2 macam, yaitu:
[1]. Capital Market
[2]. Product/Services Market

Selanjutnya kita bahas, satu persatu apa itu capital market dan apa itu product/services market. Di akhir pembahasan nanti kita akan memperoleh gambaran hubungan antara capital market dan product market, terkait dengan masalah keuangan.


Capital Market

Capital Market (Pasar Modal) adalah pasar dimana para investor (shareholders) memperjual-belikan saham yang kemudian kita kenal dengan “Stock Exchange (Bursa Saham)”. Di Indonesia so far baru ada 2, yaitu Bursa Efek Jakarta dan Bursa Efek Surabaya.

Perusahaan biasanya memperoleh dana (baik initial maupun tambahan) dari shareholders memalui penerbitan saham (equity), terkadang juga dari institusi keuangan yaitu berupa pinjaman (debt). Atas dana yang diperoleh tentu menimbulkan cost. Cost yang timbul akibat penggunaan dana dalam menjalankan usaha (business) ini lah yang disebut dengan Cost of Capital (Beban atas Modal).

Cost of Capital terdiri dari:

[-]. Cost Of Equity, berupa: Dividen dan Capital Growth, yaitu bagian keuntungan yang dibayarkan (read:dikembalikan) kepada shareholders.

[-]. Cost Of Debt, berupa: interest (bunga), yaitu jumlah tertentu (read:price) yang dikenakan oleh pemberi pinjaman (institusi keuangan/financier).


Product Market

Setelah memperoleh dana untuk beroperasi, tentunya perusahaan akan menginvestasikan (read:memutar) dana tersebut pada raw material, sumber daya manusia serta technology guna dapat melakukan jual beli atau serah-terima barang maupun jasa. Inilah yang disebut dengan product market.


Critical Question: So apa hubungan antara Capital Market dengan Product Market?

Hubungan Capital Market & Product Market

Focus dari para pemilik usaha (shareholders) didalam mengumpulkan kekayaan-nya adalah: MEMPEROLEH TINGKAT RATE (COST OF DEBT)YANG TER-RENDAH DARI CAPITAL MARKET UNTUK KEMUDIAN DIINVETASIKAN DENGAN MENGEKSPLOITASI KETIDAK SEMPURNAAN PRODUCT MARKET.

Apa yang dimaksudkan dengan ketidak-sempurnaan product market? yaitu kesenjangan antara supply dan demand pada berbagai sources (raw material, sumber daya manusia, technology and all its circumatnces). Dari sanalah nantinya diharapkan diperoleh selisih, (selisih surplus tentunya) yang kemudian dikenal denganLABA (profit), yang pada laporan keuangan nantinya akan terakumulasi pada retained earning, lalu dibagikan (read:dikembalikan) kepada shareholder dalam bentuk dividen.

Jika saya gambarkan dengan bagan, hubungan antara capital market dengan product market adalah seperti dibawah ini:


Semua shareholder tentu mengharapkan gain yang tertinggi secara consistent dan continuously baik itu dari equity (berupa dividen) maupun dari peningkatan harga sahamnya di pasar modal dari waktu ke waktu.

Jika perusahaan (dimana dana di invetasikan) berhasil mewujudkan objective (goal) yang ditetapkan oleh shareholder, maka shareholder akan memperoleh gain tertinggi melalui perolehan dividen. Keberhasilan shareholder memperoleh dividen yang tinggi serta kenaikan nilai saham (harga saham) dari waktu ke waktu itulah Pengelolaan hubungan antara perusahaan dengan Capital Market inilah dikenal dengan FINANCIAL MANAGEMENT atau CORPORATE FINANCE. Dan sejak tahun 1990-an accounting roles mengambil peranan yang semakin dominant di dalam menyediakan tools-tools bagi para manager untuk mengambil keputusan-keputusan guna mengahasilkan profit (return) yang tinggi, serta tools dan informasi keuangan yang akurat bagi corporate finance untuk melakukan pengelolaan keuangan (financial management) guna dapat memberikan sharareholder value added (SVA) tertinggi.


Peranan Accounting didalam menyediakan tools bagi pengaturan strategy keuangan dan business guna mencapai maximum shareholder value added sangat penting.

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