An Overview of

Financial Management
Hardo Basuki

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Topics
 Financial Statements
 Forms of business organization
 Objective of the firm: Maximize wealth
 Determinants of fundamental value

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 FINANCIAL STATEMENTS

Four financial statements are prepared from

the summarized accounting data:
 Income Statement
revenues and expenses and resulting net income or net loss
for a specific period of time
 Owner’s Equity Statement
changes in owner’s equity for a specific period of time
 Balance Sheet
assets, liabilities, and owner’s equity at a specific date
 Statement of Cash Flows
cash inflows (receipts) and outflows (payments) for a
specific period of time
 FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS

SOFTBYTE, INC.
Income Statement
For the Month Ended September 30, 2005
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
 $ 2,750
Net income

Net income of $2,750 shown on the income statement is added to the

beginning balance of owner’s capital in the owner’s equity statement.
FINANCIAL STATEMENTS AND
THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.
Owner’s Equity Statement
For the Month Ended September 30, 2005
Retained earnings, September 1, 2005 $ -0-
Add: Investments $ 15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
Retained earnings, September 30, 2005 $16,450

Net income of $2,750 carried forward from the income statement to the
owner’s equity statement. The owner’s capital of $16,450 at the end of the
reporting period is shown as the final total of the owner’s equity column of the
Summary of Transactions (Illustration 1-8).
FINANCIAL STATEMENTS AND THEIR
INTERRELATIONSHIPS
SOFTBYTE, INC.
Balance Sheet
September 30, 2005
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $ 18,050
Liabilities and Owner’s Equity
Liabilities
Account Payable $ 1,600
Owner’s equity

R. Neal, capital  16,450

Total liabilities and owner’s equity $ 18,050

Owner’s capital of $16,450 at the end of the reporting period shown in the
owner’s equity statement is shown on the balance sheet.
FINANCIAL STATEMENTS AND
THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.
Statement of Cash Flows
For the Month Ended September 30, 2005
Cash flows from operating activities
Cash receipts from revenues $ 3,300
Cash payments for expenses (1,950)
Net cash provided by operating activities 1,350
Cash flows from investing activities
Purchase of equipment (7,000)
Cash flows from financing activities
UTANG BANK $ 15,000
Payment of cash dividends (1,300)
Net cash provided by financing activities 13,700
Net increase in cash 8,050
Cash at the beginning of the period –0–
Cash at the end of the period $ 8,050

Cash of $8,050 on the balance sheet and statement of cash flows is shown as
the final total of the cash column of the Summary of Transactions (Illustration
Why is corporate finance
important to all managers?
 Corporate finance provides the skills
managers need to:
 Identify and select the corporate strategies
and individual projects that add value to
their firm.
 Forecast the funding requirements of their
company, and devise strategies for
acquiring those funds.

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Business Organization from Start-
up to a Major Corporation
 Sole proprietorship
 Partnership
 Corporation

(More . .)

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Starting as a Proprietorship
 Advantages:
 Ease of formation
 Subject to few regulations
 No corporate income taxes
 Disadvantages:
 Limited life
 Unlimited liability
 Difficult to raise capital to support growth

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Starting as or Growing into a
Partnership
 A partnership has roughly the same
advantages and disadvantages as a
sole proprietorship.

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Becoming a Corporation
 A corporation is a legal entity separate
from its owners and managers.

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Advantages and Disadvantages of
a Corporation
 Advantages:
 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital
 Disadvantages:
 Double taxation
 Cost of set-up and report filing

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Becoming a Public Corporation
and Growing Afterwards
 Initial Public Offering (IPO) of Stock
 Raises cash
 Allows founders and pre-IPO investors to
“harvest” some of their wealth
 Subsequent issues of debt and equity

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Agency Problems and
Corporate Governance
 Agency problem: managers may act in their
own interests and not on behalf of owners
(stockholders)
 Corporate governance is the set of rules
that control a company’s behavior towards its
directors, managers, employees,
shareholders, creditors, customers,
competitors, and community.
 Corporate governance can help control
agency problems.
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GOOD CORPORATE
GOVERNANCE
&
AGENCY THEORY
 WHAT IS GOVERNANCE ?
Model Ekonomi Neo-klasik VS Realitas
Model Ekonomi Neo-klasik
Asumsi : Di dunia ini ada pasar sempurna
- perfect competition, - free entry and exit,
- symmetrical information, - zero transaction cost
- -invisible hand

Realitas dunia nyata:

tidak sama dengan alam ideal
- Asymmetrical information - Imperfect competition
- Absence of zero transaction cost

- Indivisibility of resources - Visible hands

Kesimpulan: di dunia nyata diperlukan adanya

“pengaturan / tata kelola / Governance”.
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WHAT IS CORPORATE GOVERNANCE (CG)?

Dari disiplin Finance: Agency Theory

Perusahaan Perseorangan Perusahaan Korporasi
Pemodal(Investor)=Pengelola(Manajer) Pemodal  Pengelola

Terpisahnya kepemilikan (ownership) dengan pengendalian (control)

Perbedaan kepentingan (Conflict of Interests) antara

PRINSIPAL (Pemodal/Investor) VS AGENT-nya
(Pengelola perusahaan)
Konflik kepentingan tadi merupakan inti
Teori Prinsipal—Agensi

Corporate Governance pada intinya:

Segala sistem & upaya untuk mengatasi konflik-konflik kepentingan
(masalah-masalah Agensi) yang terjadi di dalam perusahaan.
(c) Buyung W. Samudro, SE., MBA. 4

Page 18
Masalah Agensi
Dilihat dari Model: Pemodal & Pengelola

ILUSTRASI:
Kepentingan Pemodal / Pemilik:
• Laba tinggi Nilai perusahaan naik
Ingin COST rendah
• Bagian laba / dividen

Kepentingan Pengelola/manajemen
• Gaji, tunjangan, fasilitas terbaik
COST naik • Reputasi
• Job security, dll.

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 YANG BERKEPENTINGAN TERHADAP
PERUSAHAAN
BUKAN HANYA PEMODAL & PENGELOLA!
Stakeholders: Pihak-pihak yang secara langsung atau tidak langsung menerima
keuntungan-keuntungan atau menderita beban yang disebabkan oleh tindakan-
tindakan perusahaan  memiliki KEPENTINGAN di / pada perusahaan.

Pelanggan
Pemilik Manajemen
& Karyawan

Value
Kreditur (nilai)
Korporasi Pemasok

Pemerintah

Masyarakat
Kelompok lainnya
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 DEFINISI GCG:
Kementerian BUMN (Kep-117 tahun 2002 psl.1):
CG adalah suatu PROSES dan STRUKTUR yang
digunakan oleh organ BUMN untuk meningkatkan
keberhasilan usaha dan akuntabilitas perusahaan
guna mewujudkan nilai pemegang saham dalam
jangka panjang dengan tetap memperhatikan
kepentingan stakeholders lainnya, berlandaskan
peraturan perundangan dan nilai-nilai etika

Yang mudah dicerna menurut BPKP:

GCG adalah komitmen, aturan main, serta praktek
penyelenggaraan bisnis secara sehat dan beretika.

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What should be management’s
primary objective?
 The primary objective should be
shareholder wealth maximization, which
translates to maximizing the
fundamental stock price.
 Should firms behave ethically? YES!
 Do firms have any responsibilities to
society at large? YES! Shareholders are
also members of society.

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Is maximizing stock price good
for society, employees, and
customers?
 Employment growth is higher in firms
that try to maximize stock price. On
average, employment goes up in:
 firms that make managers into owners
 firms that were owned by the government
but that have been sold to private
investors

(Continued)
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Is maximizing stock price good?
(Continued)
 Consumer welfare is higher in capitalist
free market economies than in
communist or socialist economies.
 Fortune lists the most admired firms.
In addition to high stock returns, these
firms have:
 high quality from customers’ view
 employees who like working there

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What three aspects of cash flows
affect an investment’s value?
 Amount of expected cash flows (bigger
is better)
 Timing of the cash flow stream (sooner
is better)
 Risk of the cash flows (less risk is
better)

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Free Cash Flows (FCF)
 Free cash flows are the cash flows
that are available (or free) for
distribution to all investors
(stockholders and creditors).
 FCF = sales revenues - operating costs
- operating taxes - required investments
in operating capital.

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What is the weighted average
cost of capital (WACC)?
 WACC is the average rate of return required
by all of the company’s investors.
 WACC is affected by:
 Capital structure (the firm’s relative use of debt
and equity as sources of financing)
 Interest rates
 Risk of the firm
 Investors’ overall attitude toward risk

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 What determines a firm’s
fundamental, or intrinsic, value?

Intrinsic value is the sum of all the future

expected free cash flows when converted
into today’s dollars:

FCF1 FCF2 FCF∞

Value = + +…+
(1 + WACC)1 (1 + WACC)2 (1 + WACC)∞

See “big picture” diagram on next slide.

(More . .)

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 Determinants of Intrinsic Value: The Big Picture
Sales revenues

− Operating costs and taxes

− Required investments in operating capital

Free cash flow

=
(FCF)

FCF1 FCF2 ... + FCF∞

Value = + +
(1 + WACC)1 (1 + WACC)2 (1 + WACC)∞

Weighted average
cost of capital
(WACC)

Market interest rates Cost of debt Firm’s debt/equity mix

Market risk aversion Cost of equity Firm’s business risk

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Cost of Money
 What do we call the price, or cost, of
debt capital?
 The interest rate
 What do we call the price, or cost, of
equity capital?
 Cost of equity = Required return =
dividend yield + capital gain

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