BUSINESS FINANCIAL MANAGEMENT
ARIZONA STATE UNIVERSITY
ENT 441 - ENTREPRENEURIAL MANAGEMENT
WEEK 4
Introduction:
According to Bambang Riyanto (1995; 4) "Financial management" is in the sense of
management contained the functions of planning, directing and controlling". In connection
with this, it is necessary to have good planning and control in using funds and in meeting
funding needs.
According to Suad Husnan (1992; 4) Financial management is the management of
financial functions. In running its company, the company requires various fixed assets, such
as machinery, factory tools, office equipment, and so on, to obtain it all funds are needed.
From the two definitions above, it can be concluded that financial management is the
most important part of a company because it greatly affects the company's activities.
6.1. Definition of Investment
According to Van Home (1993; 106) "Investment is an ongoing activity that utilizes cash
expenditures at the present time with the aim of generating expected future profits".
According to Fitz (1991; 16) "Investment is an activity related to the effort to withdraw
resources to be used to hold capital goods at the present time and with these capital goods a
stream of new products will be produced in the future".
Definition and importance of capital budgeting
capital budgeting.
Capital budgeting (capital budgeting) is a budget made by the company, if the company
is investing in fixed assets. Where the decision is taken through the process of evaluation or
assessment of whether or not the fixed asset investment is feasible.
According to Bambang Riyanto (1995; 121) "capital budgeting is the whole process of
planning and making decisions regarding the expenditure of funds where the return period
exceeds one year".
Importance of Capital Budgeting
Capital budgeting has an important meaning for the company because it concerns the smooth
operation of the company in the future.
According to Bambang Riyanto (1995; 121) capital budgeting has a very important
meaning for the company, because:
1.
The funds spent will be tied up for a long period of time.
2.
Investment in fixed assets involves the expectation of future sales proceeds.
3.
The expenditure of funds for such purposes usually covers a large amount
4.
Errors in decision-making regarding capital expenditure will have long and severe
consequences.
6.2. Investment Project Analysis
1. Cash flow
In the feasibility study of an investment, cash flow occupies a very important place because
future project expenditures and revenues are always expressed in the form of cash flow.
According to Bambang Riyanto (1995; 122) every capital expenditure proposal always
contains two kinds of cash flow:
1.
Net outflow of cash
Namely cash expenditures required to make new investments
2.
Net annual inflow of cash
That is cash as a result of the new investment, which is often referred to as net cash
proceeds or simply as proceeds.
In the cash flow, depreciation here is taken into account specifically for fixed assets that
have a limited useful life.
According to Weston and Copeland (1992;!21), there are four commonly used depreciation
methods, namely:
1.
Straight line depreciation (straight line method)
That is the process of allocating the costs of fixed assets calculated in accordance with the
process of time, so that the amount of periodic depreciation costs is the same throughout
the life of the assets concerned.
2.
Sum of the years digits method
It is an allocation process to obtain a decreasing amount of depreciation by weighting the
depreciation portion.
3.
Declining balance method
It is a depreciation method that decreases in amount by charging a fixed percentage rate
of the declining book value.
4.
Production unit method
It is a method where there is a depreciable cost (purchase price minus salvage value),
divided by the estimated machine, so as to obtain the depreciation rate per hour.
2. Profit loss forecasting/forecasting profit loss
In making investment decisions, the company will use existing resources at this time
with the expectation that the use of these resources will be able to contribute greater economic
benefits in the future. In connection with this, as a basis for calculating the estimated cash
flow over the economic life, profit and loss forecasting must be made.
That is by taking into account the revenue in the form of sales proceeds and costs incurred,
such as: maintenance costs, interest costs, and others. The formula for forecasting is:
Y = a+bX
6.3. Investment Valuation Method
According to Indriyo (1992; 137) the tools used to analyze investment in fixed assets are as
follows:
a.
Payback Period (P.P)
Payback Period shows the period of time obtained to recoup the money that has been
invested with the results that will be obtained from the investment.
b.
Net Present Value (NPV)
In this method we measure the discount factor. All expenditures and receipts (where the
time of expenditure and receipt is not at the same time) must be compared with
comparable values in terms of time.
c.
Profitability Index (PI)
Profitability index is the ratio of the present value of net cash flow with
present value of initial outlays
d.
Internal Rate of Return (IRR)
The internal rate of return is the discount rate that makes it equal to the present value of
cash receipts and the present value of the investment discount rate that shows the net
present value or equal to zero.
The internal rate of return can be found by trial and error by finding the NPV at our
preferred discount rate.
6.4. Credit Management
Definition of Credit
In everyday language, the word credit is often interpreted as obtaining goods by paying a
number of installments or installments at a later date or obtaining a money loan whose
payment is made at a later date in installments, or installments in accordance with the
agreement, so it can be interpreted that credit can be in the form of goods or in the form of
money. Both credit in the form of goods and credit in the form of money in terms of payment
is to use a certain method of installments or installments.
According to its origin, credit comes from the Greek language (credere) which means
trust (truth or faith). The point is that if someone gets credit, it means they get trust, while for
the credit giver it means giving someone confidence that the money loaned will definitely
come back.
Meanwhile, according to Teguh Pudjo Muljono (1996: 10) the definition of credit is "the
ability to carry out a purchase or make a loan with an agreement, and payment will be
deferred at an agreed period.
Purpose and Function of Credit
Every grant of credit has its own purpose and function, in this case the purpose of granting
credit is:
1). Seeking profit, namely to obtain results and provide credit.
2). Helping customers' businesses, namely to help customers' businesses that need funds, both
investment funds and for working capital.
While the functions of credit include:
1).
Increase the usability of money.
This means that the credit provided is useful for producing goods or services by the
credit recipient.
2).
To increase the circulation and movement of money.
In this case the money given will circulate from one region to another so that, an area
that lacks money by obtaining credit, the area will get additional money from other
areas.
3).
To increase the usability of goods.
Credit provided by the Bank will be used by debtors to process useless goods into useful
or useful ones.
4).
Increase the circulation of goods.
The credit given will increase the flow of goods from one region to another so that the
number of goods increases.
5).
To increase business excitement.
For credit recipients, it will certainly be able to increase business enthusiasm, especially
for customers whose capital is mediocre.
6).
Improve income equality.
Credit provided can absorb a lot of labor so as to reduce unemployment if the credit is
used to establish a factory.
Types of Credit
In general, according to Kasmir (1999: 99), the types of credit can be seen from various
aspects, among others:
1. In terms of usability.
🔾 Investment credit.
Loans that are usually used for the purpose of expanding business or building long-term
projects.
🔾 Working capital loans.
🔾 Credit that is usually used for the purpose of increasing production in its operations for
short-term activities.
2. In terms of the purpose of credit.
🔾 Productive credit.:
Loans used for business improvement or production, investment. This credit is given to
produce goods and services.
🔾 Consumptive credit:
Credit that is used for personal consumption, in this credit there is no increase in goods or
services produced because it is used for a person or business entity.
🔾 Trade credit.:
Credit granted for trading, usually to purchase merchandise with payment expected from the
sale of the goods.
3. In terms of timeframe.
🔾 Short-term credit.
Loans granted with a period of less than one year or a maximum of one year.
🔾 Medium-term credit.
Loans granted with a term ranging from one to three years, usually used for investment.
🔾 Long-term credit.
This is a loan with a repayment period of more than three or five years. This type of loan is
usually used for long-term investments.
4. In terms of Guarantee.
🔾 Credit with collateral,
Loans granted based on certain collateral, which can be tangible or intangible goods or
personal guarantees.
🔾 Unsecured credit.
It is a credit that is given without the guarantee of certain goods or people.
5. Looking at the business sector.
🔾 Agricultural credit.
It is a credit that is financed for the plantation sector or smallholder agriculture. The
agricultural business sector can be short-term or long-term.
🔾 Livestock credit.
In this case, the short term is chicken farming and the long term is goats or cows.
🔾 Industrial credit.
Namely credit to finance small, medium or large business loans.
🔾 Mining credits.
The types of mining businesses it finances are usually long-term, such as gold, oil or tin
mines.
🔾 Education credits.
It is a credit given to build educational facilities and infrastructure or it can also be a credit for
students.
🔾 Profession credit.
Given to professionals such as lecturers, doctors or lawyers.
🔾 Housing loans.
That is credit to finance the construction or purchase of a house. And other sectors.
Credit Analysis
The explanation for the 5C credit analysis is as follows:
1). Character.
A belief that, the nature or character of the people who will be given credit is truly
trustworthy, this is reflected in the customer's background both in terms of work
background and personal characteristics such as: the way of life or lifestyle he adopts,
family circumstances, hobbies and social standing - this is all a measure of "willingness"
to pay.
2). Capacity.
To see the customer in his ability in the field of business which is connected with his
education, business ability is also measured by its ability in understanding government
regulations. Likewise, with his ability to run his business so far. In the end, the "ability"
to repay the credit disbursed will be seen.
3). Capital.
To see whether the use of capital is effective, look at the financial statements (balance
sheet and income statement) by taking measurements such as in terms of liquidity,
solvency rentabililas and other measures. Capital must also be seen from which sources it
is currently available.
4). Collateral.
It is a guarantee given by prospective customers, both classic and non-physical. The
guarantee should exceed the amount of credit given. The guarantee must also be
scrutinized for its validity, so that if a problem occurs, the deposited guarantee will be
able to be used as quickly as possible.
5). Condition.
In assessing credit, economic and political conditions should also be assessed now and in
the future according to their respective sectors, as well as the business prospects of the
sector they are running. Assessment of the prospects of the business field being financed
should really have good prospects, so that the possibility of credit problems is relatively
small.
Then the credit assessment with the 7P analysis method is as follows;
1). Personality.
That is assessing the customer in terms of his personality or his daily and past behavior.
Personality also includes attitudes, emotions, behavior and customer actions in dealing
with a problem.
2). Party.
That is classifying customers into certain classifications or certain groups based on
capital, loyalty and character. So that customers can be classified into certain groups and
will get different facilities from the Bank.
3). Purpose.
Namely to find out the customer's purpose in taking credit, including the type of credit
the customer wants. The purpose of taking credit can vary. For example whether for
working capital or investment, consumptive or productive and so on.
4). Prospect.
Namely to assess the customer's business in the future whether it is profitable or not, or in
other words has prospects or vice versa. This is important considering that if a credit
facility is financed without having prospects, it is not only the Bank that loses but also the
customer.
5). Payment.
It is a measure of how the customer returns the credit that has been taken or from which
sources the funds for credit repayment.
6). Profitability.
To analyze how the customer's ability to make a profit, profitability is measured from
period to period whether it will remain the same or will increase, especially with the
additional credit he will get.
7). Protection.
The goal is to keep the business and collateral protected. Protection can be in the form of
collateral for goods or people or insurance coverage.
In general, the aspects of credit consideration include:
1). Juridical/legal aspects.
What we assess in this aspect is the legality of the business entity and the licenses held by the
company applying for credit. The assessment starts with the deed of establishment of the
company, so that it can be known who the owners are and the amount of capital of each
owner. Then the validity is also examined, such as:
🔾 Trade Business License (S.I.U.P) for the trade sector.
🔾 Company Registration Certificate (TDP).
🔾 Taxpayer Identification Number (NPWP).
🔾 The validity of the collateralized documents such as land certificates.
🔾 And other things that are considered important.
2). Marketing aspects.
In this aspect, what we assess is the demand for the products produced now and in the future
what are the prospects. What needs to be examined in this aspect are:
🔾 Marketing the product at least 3 months ago or 3 years ago.
🔾 Sales and production plan for at least 3 months or 3 years in the future.
🔾 Power map of existing competitors.
🔾 Overall product outlook.
3). Financial aspects.
The aspects assessed are the sources of funds owned to finance the business and how the
funds are used.
In addition, a cash flow of the company's finances should be made.
The assessment of the Bank in terms of financial aspects is usually with an investment
feasibility criteria that includes, among others:
🔾 Financial ratios.
🔾 Payback period.
🔾 Net Present Value (NPV).
🔾 Profitability Index (PI).
🔾 Internal Rate of Return (IRR).
🔾 And Break Even Point (BEP).
4). Technical/operational aspects.
This aspect discusses issues related to production such as the capacity of the machines used,
location issues, room layout and machines including the types of machines used.
5). Management aspects.
To assess the company's organizational structure, its human resources and the background
experience of its human resources. The company's experience in managing various existing
projects and other considerations.
6). Socio-economic aspects.
Analyze the impact on the economy and the general public such as:
🔾 Increase exports of goods.
🔾 Reduce unemployment or other.
🔾 Increase community income.
🔾 Availability of facilities and infrastructure.
🔾 Unisolate certain areas.
7). EIA aspect.
Concerning the analysis of the environment whether land, water or air if the project or
business is carried out, this analysis is carried out in depth whether if the credit is channeled,
the project being financed will experience environmental pollution around it. Pollution that
often occurs includes:
a.
The land becomes arid.
b.
Water, being a foul-smelling, discolored or tasteless waste.
c.
Air causes pollution, noise and heat.
Lending Procedure
The procedure for granting credit in general can be distinguished between individual loans
and loans by a legal entity, then it can also be viewed in terms of its purpose whether
consumptive or productive.
In general, the procedure for granting credit by legal entities will be explained as follows:
1). File submission.
In this case the credit applicant submits a credit application which is outlined in a proposal.
The submission of a credit proposal should contain, among others:
a.
Company background such as a brief history of the company's type of business,
company identity, names of management along with their knowledge and education,
company development and relations with government and private parties.
b.
Purpose and objectives.
c.
Amount of credit and term.
d.
How the applicant returns the credit, explain in detail the ways the customer will return
the credit whether from the sale or other ways.
e.
Credit guarantee, is a guarantee to cover all risks against the possibility of defaulting on
a credit whether there is an element of intent or not. The assessment of credit collateral
must be thorough to avoid disputes, fakes and so on. Usually the collateral is bound by a
certain insurance.
2). Investigation of bail files.
The aim is to find out whether the files submitted are complete according to the requirements
and are correct. If according to the bank it is not complete or sufficient, the customer is asked
to complete it immediately and if until a certain limit the customer is unable to complete the
shortcomings, then the credit application should be canceled.
3). Interview 1
It is an inquiry to the prospective borrower by directly dealing with the prospective borrower,
to ascertain whether the files are appropriate and complete as the Bank wants. This interview
is also to find out the actual wants and needs of the customer. This interview should be as
relaxed as possible so that it is hoped that the results of the interview will be in accordance
with the expected objectives.
4). On the Spot.
Is a field inspection activity by reviewing various objects that will be used as business or
collateral. Then the results of On the Spot are matched with the results of the interview I.
When you want to do On the Spot, you should not notify the customer. So that what we see in
the field is in accordance with the actual conditions.
5). Interview II.
This is an activity to improve the file, if there may be deficiencies at the time after the on-the-
spot in the field. The notes on the application and during the first interview are matched with
those on the spot to see if they are consistent and contain the truth.
6). Credit decision.
The credit decision in this case is to determine whether credit will be granted or rejected, if
accepted then, the administration is prepared, usually the credit decision will include:
a.
Amount of money received.
b.
Credit term.
c.
And the fees that must be paid.
Credit decisions are usually learn or group decisions. Similarly, for loans that are rejected, a
rejection letter should be sent according to the respective reasons,
7). Signing of the credit contract or other agreements.
The noodle activity is a continuation of the loan decision, so before the credit is disbursed, the
prospective customer first signs a credit contract, binds the collateral with a mortgage and a
letter of agreement or statement deemed necessary. The signing is carried out;
a.
Between the Bank and the debtor directly or,
b.
By going through a notary.
8). Credit realization.
The realization of credit is given after the signing of the necessary papers by opening a
current or savings account at the bank concerned.
9). Disbursement or withdrawal of funds.
Is the disbursement or withdrawal of money from the account as a realization of the granting
of credit and can be taken according to the terms and objectives of the credit, namely:
a.
All at once or,
b.
Gradually.
Credit Requirement Calculation
According to Munawir (1995: 249), this calculation depends on the type of credit to be given,
for short-term credit (working capital credit), the credit requirement can be known from the
cash budget or using the gross working capital turnover method.
If the type of credit to be granted is long-term credit (investment credit) then the credit
needs can be known from the capital budget (capital budgeting) or from the credit utilization
plan submitted by the credit applicant. From the assessment of the substantial aspects, it
seems that it has covered the purpose of the assessment of credit granting considerations,
which is to find out to what extent the ability of the credit applicant company is in:
(1) Carry out its operations in the future.
(2) Provide working capital requirements.
(3) Fulfill its financial obligations.
(4) Create/earn profit.
The extent of the analysis or assessment of this financial aspect will depend on how big
the risk that must be faced by the Bank, if the risk is so great then the Bank can conduct a
broader and more thorough assessment.
6.5. Financial Report
According to Mulyadi (2001: 5), the definition of financial statements can be in the form of
balance sheets, profit / loss statements, statements of changes in retained earnings, cost of
production reports, marketing cost reports, cost of goods sold reports, general lists of
receivables, lists of payables to be paid, lists of inventory balances that are slow to sell,
reports contain information that is a family of accounting systems, reports can take the form
of computer printouts and impressions on monitor screens.
The general forms of financial reports include:
(1). Balance Sheet
It is a systematic report that includes the assets and, capital and a company at a certain period
of time.
Assets, are not limited to tangible company assets but also include expenses or costs that have
not or still have to be allocated (intangible assets) such as; good will, patents, and others.
Basically, assets can be classified into two, namely:
•
Current assets, including:
🔾 Cash or cash used to finance the company's operations.
🔾 Short-term investments (marketable securities) (marketable securities), investments that
are short-term temporary with the intention of to utilize cash that is temporarily not
needed in the company's operations.
🔾 Notes receivable, company bills to other parties expressed in a bill of exchange /
agreement regulated by law.
🔾 Accounts receivable, bills to other parties as a result of selling merchandise on credit.
🔾 Inventory, for trading companies what is meant by inventory is all goods traded that until
balance sheet date are still in the warehouse or have not been sold.
🔾 Income receivable/accrued income, income that the company is already entitled to
because the company has services, but has not yet received payment, so it is a bill.
🔾 Persekot/fees that paid in advance, expenses to obtain services/prestige from other
parties.
•
Non-current assets, including:
🔾 Long term investment.
🔾 Fixed assets, wealth that is not physically visible but is a right that has values to be used
and belongs to the company.
🔾 Load that are deferred, shows the existence of expenses that have long-term
benefits or expenditures which will also be charged in subsequent periods.
🔾 Other assets, showing the company's wealth/activities that cannot/do not fit into any of the
classifications Previous. Obligations.
🔾 All of the company's debts to other parties that have not been fulfilled, where this debt is
a source of funds or company capital that comes from from creditors, divided into:
🔾 Current debt/short-term debt, is a company's financial obligation whose
repayment/payment will be made within the next few months.
short-term using the company's current assets.
🔾 Long-term debt, a financial obligation with a long repayment period. Capital is the right /
share owned by the company shown in the capital account (share capital), surplus and
retained earnings or the excess value of assets owned by the company over all its
liabilities.
Based on the arrangement, the book value of total assets on the balance sheet must
equal the book value of total liabilities. The difference between short-term assets (current
assets) and short-term liabilities is called net working capital, as long as short-term assets are
greater than short-term liabilities, the company is said to be in a good liquidity position.
(2). Income statement.
Is a report that is prepared in such a way as to provide an overview of the results of a
company's operations in a certain period, net income reflects all profit and loss items for one
period except past connections presented as an adjustment to the balance.
According to Munawir (1995:26-27), the commonly used income statement is as follows:
a.
The single step form, which combines all income into one group, so that calculating net
profit/loss only requires one step, namely subtracting total costs from total income.
b.
Multiple step form, in this form the grouping is done more thoroughly according to the
principles used in general.
(3). Statement of changes in financial position.
It shows all important aspects of financing and investing activities regardless of whether the
transactions have a direct effect on cash or other elements of working capital.
Users of financial statements include the following:
a.
Shareholders (investors).
They need financial statement information to determine whether to buy, hold, or sell an
investment, as well as to assess a particular company's ability to pay dividends.
b.
Employees.
A group that is interested in information about the stability and profitability of a company
to assess its ability to provide merit pay, retirement benefits and employment
opportunities.
c.
Lenders.
To decide whether or not a company should be granted a loan, determine the maturity
period and the amount of interest that the borrower is willing to pay.
d.
Customer.
Customers have an interest in knowing information about the company's survival,
especially if they are involved in long-term agreements that depend on the company.
e.
Government.
That is, to be able to determine tax policy and as a basis for compiling national income
statistics and other statistics.
6.6. Sources and Uses of Working Capital
Funds as a source of capital include sources and uses of working capital (the difference
between current assets and current debt), namely factors that affect working capital, in
working capital analysis, changes that increase working capital are called sources of funds
and those that reduce are called users of funds.
Sources of funds (working capital) that are in the nature of adding funds (sources of
funds), among others:
a.
Sale of non-current assets.
This is because current assets as a result of the sale increase while short-term debt
remains fixed. The analysis required in this transaction is to determine whether the sale is
accompanied by a profit or loss, and also to determine whether or not the change in
capital cooperates with the change in investment. (the fixed assets that were sold).
b.
Long-term debt growth.
If debt arises or increases, funds will increase this is because current assets (cash)
increase as a result of the loan while short-term debt remains.
The analysis needed is to find out whether or not the amount of increase in funds is equal
to the increase in long-term debt.
c.
Capital gain.
If capital increases (issuance or placement of new shares) then funds increase. This is due
to current assets (cash/payables to shareholders) while short-term debt remains. This
analysis is needed to find out whether the amount of increase in funds is the same / not
with the nominal amount of shares determined.
d.
Net profit operating result (company profit).
If the company makes a profit, the funds will increase. The analysis needed is an analysis
of the income statement, the amount of increase in funds derived from operating profit is
equal to net income plus depreciation and amortization of fixed assets, unless the profit is
partly or wholly taken by the owner of the company.
e.
Gain on sale of securities (short-term investments).
If there is a sale of securities (current assets), the profit obtained from the core transaction
will increase the fund. This is because the increase in current assets (cash) as a result of
the sale is greater than the reduction in current assets.
The sources of funds mentioned above can be classified into three types, namely:
a.
Capital increase,
is an increase in capital either due to profit, additional capitalization or additional
investment from owners.
b.
Decrease in non-current assets.
Represents a reduction in investment due to sale or depreciation.
c.
Increase in short-term debt.
This is an increase in long-term debt in the form of bonds, investment loans, capital
loans, working loans and mortgages.
Use of funds (working capital)
Transactions that reduce funds (use of funds) are as follows:
a.
Increase in non-current assets.
If non-current assets (investments and fixed assets) increase due to purchases, funds will
decrease, this is because the increase in non-current assets is accompanied by a decrease
in current assets (cash) if the purchase is made in cash. Conversely, if the purchase is on
credit, short-term debt increases.
The analysis required to explain the acquisition cost of current assets is mainly in
accordance with the acquisition cost principle
b.
Long-term debt repayment.
When there is a payment of long-term debt, the funds will decrease due to the reduction
in current assets but short-term debt remains.
This analysis is needed to determine whether the amount to be paid is equal to the
amount of the reduction in long-term debt.
c.
Capital reduction.
If there is a reduction in capital, funds will be reduced.
This is because the reduction in capital is accompanied by a reduction in current assets
(cash) or an increase in short-term debt (if payments are not cash).
This analysis is required to determine whether or not the payment amount is equal to the
nominal value of the shares withdrawn.
d.
Payment of fees.
If there is a payment of expenses, the funds will decrease because the transaction
reduces current assets. This analysis is needed to determine the actual amount of
reduction in funds due to the incurrence of these costs.
e.
Loss on sale of securities.
In the sale of securities, the fund will decrease, this is because the increase in current
assets (cash) from the sale of securities is smaller than the reduction in current assets.
f.
Establishment of a fund for a specific purpose.
If there is a fund formation for a specific purpose (bond repayment fund, pension fund,
expansion fund), the fund will decrease. This is due to the change in current assets into
fixed assets. This analysis is important to determine the size and formation of these
funds.
The use of the above funds according to their nature can be divided into four types:
a.
Increase in assets is not straightforward.
That is the increase in non-current assets (investment in non-fixed assets) either through
purchases or the establishment of funds for specific purposes.
b.
Long-term debt repayment.
It is the reduction of long-term debt (bond loans, mortgages, investment loans, working
capital loans) due to payment.
c.
Capital reduction.
That is, the reduction in capital due to withdrawal of capital / taking pn've or due to the
incurrence of losses.
d.
Reduction in current assets.
This is a reduction in current assets due to sales at a loss.
(1). Comparative analysis of financial statements:
By comparing the balance sheet and income statement for two periods.
(2). Ratio analysis:
Used to assess the performance of a company. Ratios can describe the financial condition of a
company, in this study, the authors used the following ratios;
