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Business: Basic Concepts of Financial Management


In distributing cash and managing assets owned to meet the company's key goals, a basic understanding of financial management and business accounting information is required.

Because if a company does not understand the fundamentals of good financial management, it will find it difficult to run its operations. Money is a crucial tool that must be owned while performing a deal, as you are aware.

As a result, understanding the fundamentals of financial management is critical. So, what does a fundamental financial management concept entail? We'll go over the fundamentals of money management in the sections below.

What is Financial Management?

Financial management is one of the fundamental accounting principles or accounting theory. The science of financial management, on the other hand, is quite wide.

However, some argue that financial management is merely a note-taking activity in a financial report and is solely the duty of the financial sector, when the truth is far more complex.

All organizational operations aimed at obtaining, allocating, and using cash effectively and efficiently are included in financial management. Financial management entails not only obtaining finances, but also understanding how to use and process them.

Principles of Financial Management 

The following are some of the principles of financial management that you need to know, namely:

a. Principle of Accountability

When presenting an explanation of an audit opinion for each use of funds and the duties that have been assigned, this principle is a legal and moral requirement in accounting theory.

As a result, each individual and company must be prepared to explain the usage and implications of these funds in great detail.

The goal of this principle is to show that adjusting the operating cost payment system and the available finances is one strategy to keep your firm healthy and financially viable.

b. Consistent Principle

When it comes to handling a company's finances, it's important to be wise, consistent, and consistent. If a change is made, it must be accompanied by clear and suitable justifications.

c. Principle of Transparency

The purpose of this principle is that management is open to users of accounting information when it comes to delivering information about financial activities. This is done to ensure that there are no future misunderstandings or manipulations.

d. Principles of Accounting Standards

Accounting fundamentals must be used in line with generally recognized accounting principles and standards in an organization or firm.

e. Integrity Principle

Every individual and organization must have high integrity when they want to run a company's operations. This is proven when the company is able to make complete and accurate financial reports.

Financial Management Fundamentals

You should also be aware of some financial fundamentals. Let's have a look at some of the things that will be discussed further down.

Net Income

The first and most important idea in financial management is net income. This is an organization's profit after deducting costs of products sold, expenses, depreciation, amortization, interest, and taxes.

Investors can use net income to determine how much money exceeds the organization's expenses. The value that appears on the income statement of a corporation and is also a measure of its profitability. It is considered that your company's condition is improving if the net income shows a high amount when compared to competing companies.

Level of Liquidity

Liquidity is the next fundamental idea in financial management. The ability to pay all commitments that must be paid off quickly and in a short period of time is defined as liquidity (liquidity).

Liquidity, in general, refers to a company's capacity to pay its short-term obligations and debts. Taxes, accounts payable, dividends, and other sorts of short-term debt owned by a firm are examples.

Each business has a particular level of liquidity that may be quantified. A ratio is a term that is used to define a company's level of liquidity.

High liquidity, on the other hand, indicates that a corporation is performing well in its operating activities.

The benefits of the basic concept of financial liquidity for companies are:

  • As a tool to anticipate the urgent need for funds that must be met by the company.
  • It will make it easier for customers who want to borrow and withdraw funds.
  • Can be a measure of the company's level of flexibility in getting investors or other businesses that are profitable for the company.

Asset Allocation and Diversification

Both have interrelated aspects of risk management. That is, in asset allocation, there is usually a risk of error, this risk can be reduced by diversifying the type of investment. For example by dividing it across several types of different asset classes.

Asset allocation activities can be interpreted as a place where you will save money, depending on the needs of the individual and the company you own. You can buy a house, land, or whatever.

Bear Market Concept 

The bear market concept is usually used to provide information on the period of falling securities prices, for example when the price is 20% or more. The existence of a bear market in stocks is caused when investors sell shares and is usually used to anticipate worsening economic conditions and declining profits.

Tolerance for Risk

Every company that wants to invest must have a tolerance range in the risk that it must face. The definition of risk tolerance in question is a measure of the level of uncertainty accepted by an investor or entrepreneur regarding negative changes to a business or asset.

However, there are several assessments of risk tolerance for a businessman, such as surveys or questionnaires related to investment risk. It's a good idea to have to review the returns on different asset classes. Because this is done in order to get input / ideas about how much money you are willing to sacrifice (potential for loss), if your investment is experiencing bad years.

All the information above, you need to know as a businessman. Not even just knowing in general but applying it in your business.

Of course, if your company carries out the basic concepts of good financial management, the company will enjoy maximum profits. This is done in response to the business challenges out there.

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