The business finance function

Transcription

1 chapter 7 The business finance function The Finance Function Financial Information Supporting Objectives Reporting Functions and Control Processes The Accountant's role 115

2 The business finance function 1 How the finance function supports the pursuit of business objectives By providing information for management: performance measurement decision making control. By providing information for shareholders and other external parties: published financial accounts. By ensuring there is finance available for the business activities (treasury management): short-term liquidity and cash flow long-term financing and solvency. 2 Finance function The finance function has both an internal and an external function within the business. The four main functions are shown below. 2.1 The finance function Recording financial transactions (internal) Books of prime entry. Ledgers. Asset control. Treasury management (internal/external) Cash, working capital and foreign exchange management. Managing financial risks. Raising short-, medium- and long-term finance. Financial reporting (external reporting) Financial statements. Tax. Regulatory information. Management accounts (internal reporting) Costing records. Budgets. Pricing. Decision making information (e.g. for investment decisions). 116 kaplan publishing

3 chapter 7 Performance evaluation (e.g. KPIs). 2.2 Managing the finance function The finance function is like any other department or element of the business. Funds are invested into the finance function and it is expected to positively contribute to the economic well-being of the business Managing the function effectively The finance function, like any other investment in the business, is expected to generate a return in excess of the cost of funding it. Attention needs to be paid to planning (its human resources, IS needs, targets, objectives) and control (assessing how effective the function has been at meeting its goals). Requires good management and leadership. Illustration 1 Finance function How the finance function is organised depends on the size of the business and its overall organisational structure. In many organisations, particularly large organisations, the finance functions tasks are centralised. Many large companies with branches or offices around the world find it easier to control the finance function if it is located in one central location with one point of communication for suppliers and customers. Test your understanding 1 What might be the advantages and disadvantages of having a centralised finance function? Advantages Disadvantages kaplan publishing 117

4 The business finance function Quality of the information produced Much of the output of the finance function = information (e.g. management accounts, budgets). Key issue = benefit derived from info produced > cost in deriving it g think of chapter 6 points Quality of the decisions made Similarly, the finance function will make decisions affecting the profitability of the business (e.g. negotiating loans from bankers). These decisions need to be assessed for quality as would any other decision in the business. (e.g. favourable terms gained on loan) Financial control processes The finance function faces particular risks which could result in serious pecuniary and other losses. Effective control over the function is critical. Control environment Culture. Management philosophy. Authority. Segregation of duties. Business ethics, etc. Control activities Specific controls manual/ physical (e.g. cash in locked safe) and programmed (e.g. checks that mgt a/cs = fin a/cs). Control processes Risk assessment processes Identify/ respond to risks (e.g. how the business copes with growth/ technology Δ. IS Control over infrastructure, operations, data, staff, etc. Monitoring of controls Checking controls working as prescribed. 3 The accountant's role 3.1 Financial accountants Financial accountants maintain the bookkeeping system of nominal ledger, purchase ledger, sales ledger, etc, and prepare financial statements as required by the law and accounting standards. Information produced from the financial accounting system is usually insufficient for management s needs. 118 kaplan publishing

5 chapter Management accountants Cost accounting provides a detailed analysis of the costs of products and services, activities and responsibility centres of an organisation. Management accounting systems use the cost accounts and other information sources to provide a financial reporting system for management. Management accountants are providers of financial information. 3.3 The roles of the management accountant and financial accountant. Information mainly produced for Purpose of information Legal requirements Formats Nature of information Time period Management accountant Internal use, e.g. managers and employees. To aid planning, controlling and decision making. None. Management decide on the information they require and the most useful way of presenting it. Financial and nonfinancial. Historical and forwardlooking. Financial accountant External use, e.g. shareholders, suppliers, lenders, banks, government. To record the financial performance in a period and the financial position at the end of that period. Limited companies must produce financial accounts. Format and content of financial accounts intending to give a true and fair view should follow accounting standards and company law. Mostly financial. Mainly a historical record. 3.4 Non-financial information Information provided by cost accounting systems is financial in nature. Financial information is important for management, because many objectives of an organisation are financial in nature, such as making profits and avoiding insolvency. Managers also need information of a non-financial nature. kaplan publishing 119

6 The business finance function Illustration 2 The accountant's role The management accounting systems in many organisations are able to obtain non-financial as well as financial information for reporting to management. At a strategic level, management need to know about developments in their markets and in the economic situation. They also need to know about any new technology that emerges, and about the activities of competitors. At a tactical level, they might want to know about issues such as product or service quality, speed of handling customer complaints, customer satisfaction levels, employee skills levels and employee morale. At an operational level, they may want to know about the number of rejects per machine, the lead time for delivering materials and the number of labour and machine hours available. Test your understanding 2 Suppose that you are a manager in a general hospital. Give examples of the cost information that you might want to know about and have reported to you. Solution 120 kaplan publishing

7 chapter 7 Chapter summary The Finance Function Supporting objectives: Provide information Ensure finance. Reporting Functions and Control Processes The accountant's role Financial accountants Management accountants. kaplan publishing 121

8 The business finance function Test your understanding answers Test your understanding 1 Advantages Better cash management. Easier external reporting. Disadvantages Providing local managers with information may prove problematic. Global organisations may have difficulties dealing with exchange rates and different time zones. Test your understanding 2 Here are some suggestions. 1 The cost of each department (e.g. the ear, nose and throat department, accident and emergency, the X-ray unit, and so on). 2 The cost of carrying out different types of surgical operation. 3 The average cost of each type or course of treatment. 4 The daily cost of looking after a patient in hospital (the cost of a patient/day). 122 kaplan publishing