The financial management system is the most important aspects in business activity. A business will run smoothly when it is supported by the right financial and accounting system. Like when we start a new business, planning a good financial system will bring positive effects for the business development. As the business grows, we can review if the prepared accounting system has already run well or not. In other words, the health of financial system is shown in the business cash flow.
Financial management is the activity related to an effort to obtain funds and use it. The functions of financial management are to to obtain funds and use it effectively and efficiently in order to achieve the goal, to set investment or funding .
The functions of managing the use of funds include planning and controlling assets usage, either current or fixed assets. Minimizing the use of funds will determine the amount of the profits. As for funding, it is crucial to obtain the necessary funds with minimal cost and favorable terms, and of course, the results of the funding should be used efficiently. Any funding obtained will determine the amount of company’s capital to start a business.
Capital can be divided into Active Capital and Passive Capital.
Active Capital is an activity of using funds into various assets, both current and fixed assets. This capital consists of current capital and fixed active capital. Current assets are assets that are discharged in one production process, and the rotation process is in the short term (generally less than a year). Capital of fixed assets is a long-lasting asset (eg land on which a factory building is built) or gradually run out (eg factory buildings, equipment vehicles) involved in the production process.
Passive Capital is an activity to obtain funding sources, both internal and external sources of funds.
Why is funding preparation required?
Preparing funding should be taken thoroughly as it will affect the the business cash flow in the future. Some important points to note are:
- Determine the Break Even Point (BEP) period: When a business is just started, the balance sheet has not shown the profit due to the amount spent to start the business. Therefore, we must set the target to achieve BEP or return capital.
- .Determine sales targets: In the first 3 months will be helpful to forecast and calculate the operational cost . Thus we can set the sales target to cover the operational cost and even earn profits.
- Determine the amount of capital: Having determined the sales target, we need to take into account the funds to cover the business operational costs when business has not achieved the BEP. The new business certainly will not directly generate sales and profits that cover operating costs. Therefore it is necessary to prepare operational funds when the sales has not covered the cost.
Most business failures occur due to financial business factors: (1) spending a lot of capital, and (2) not spend the fund wisely.
As mentioned above, capital should be used as efficiently as possible. During the business development stages, we have a lot of capital. However, making priority should be taken to avoid un-needed expenses. Poor financial planning, mismanagement of funds or budget expenditures are the common causes of business failure.
The first thing we need to know as the main rules of business is earning money. Sometimes we spend money to earn money. In other words, we make investments by spending big money to earn double gain bigger than investment. For example, to get marketing advice (if we have not had much practical marketing experience), we should hire a marketing strategist or attend a marketing seminar / workshop.
As the first step for new business owners, they can start it by managing their personal finance. The key is how our commitments to be disciplined in managing personal finances and make the report. If it is already become our habits, then it will be easier to implement it in business.
