Finally the business may need to obtain more money from time to time. It may want to finance expansion, buy additional raw materials or buy expensive equipment so that it can remain competitive. Obtaining extra finance, called capital, at the best rates possible is the job of the finance section. Senior staff will also give advice on planning large amounts of expenditure in line with what the business can afford, and when.
The purpose of the finance function, therefore, is to:
- Keep all the financial records required by the organization, detailing all the receipts and payments that have been made.
- Prepare final accounts from those records as required by law.
- Monitor the income and expenditure of different departments against their budgets.
- Provide continuous, up-to-date financial information for managers about business performance.
- Pay salaries and wages to staff.
- Pay amounts owing to suppliers.
- Control the levels of debts owed to the company.
- Obtain additional finance when required, from the most appropriate source.
- Advise senior managers on the financial implications of major decisions.
The activities of the finance function
The overall activities of the finance function can be grouped into three main areas:
- Preparing accounts.
- Paying wages and salaries.
- Obtaining capital and resources.
These are described in more detail bellow.
Job roles in finance
The type of job roles you will find in finance will vary depending upon:
- The size of the organization.
- Whether the payment of wages and salaries is undertaken by company staff or by an agency.
Investigating finance activities
Preparing accounts
Every day millions of financial transactions take place in business throughout Britain. Money flows in from the sale of goods and services to customers who may pay in various ways. Supermarkets, for instance, accept payments form individuals in cash, by debit or credit card, or by cheque. People paying a telephone, gas or electricity bill may choose to pay by direct debit, when the money is automatically transferred from their bank account to that of the service provider at regular intervals. Most businesses settle the majority of their bills by cheque, usually at the end of the month, after they have received a statement showing how much they owe.
Allowing businesses to settle their bills same time after they have received the goods is known as allowing them credit. Because this relationship evolves an element of trust, the supplier will check that the new customer is creditworthy by obtaining a credit reference either from the agency or the customer’s bank. It will than make a decision as to how much credit the customer is allowed.
Every business also has to pay it’s own bills. It will owe money for raw materials used in the manufacture of the product and also for the services it uses and for general items-from food from the canteen to stationary in offices. Again, it will usually buy these goods on credit and will have an account with all it’s suppliers. After the goods have been supplied an invoice will be issued for the total amount due. At the end of the month, a statement will be received listing all the amounts owing to that organization. At that stage it is normal for the account to be paid by cheque.
The finance staff have no perform a range of activities relating to the checking and recording of all amounts received and paid. In each case these are entered into particular accounts. Each customer will have an account and so will each supplier. There will also be accounts covering sales, purchases and expenses.
- Money received is checked carefully and recorded against each item sold and against each customer’s account.
- All monies received are banked as soon as possible.
- At the end of each month all the accounts are balanced so that any outstanding amounts are highlighted.
- Statements will be sent to customers who buy on credit.
- Customers with overdue accounts will be sent reminders to pay.
In addition, a range of activities are undertaken which relate to the payment of money by the company.
- Goods received are carefully checked when they are received to ensure no goods are faulty or missing. This is normally done by the staff who actually receives the goods, not the finance staff.
- The invoice is checked to make sure the items and amounts are correct and any promised discounts are included.
- Cheques are made out, normally only by authorized individuals. There is usually more than one signature on a company cheque for security.
- The amounts paid are recorded in the correct accounts, either against purchases or expenses.
- Finally, all the banking documents are checked and are surplus money is transferred into an interest-bearing account so that it will not be lying ‘idle’.
Today many of these operations are computerized. As amounts paid in or out are entered then the accounts are automatically adjusted. As money is banked the company banking records are also updated. A summary of all the important figures can be obtained quickly and easily and this gives a continuous flow of information, which is very important to managers.
Imagine you have a shop selling 50 different lines of clothing. You want to know which items are selling well and which are not. This affects your plans for buying new stock. It may also make you decide to hold a sale to periodically get rid off all ‘slow’ items. You could only make decisions like this if you knew exactly which lines were the most Profitable. This would be possible if you had access to records on sales which were always up to date. This is possible with a computer package.
The information you obtain is known as management information because your managerial decisions would be based on it. In a large organization, it is a job of the management accountant to ensure this type of information is constantly available for managers.
The financial accountant, on the other hand is the person responsible for assembling all the accounts information into the format required for the statutory accounts which must be prepared at the end of each financial year. Statutory means required by law. Companies must provide a profit and loss account shows how much profit or loss the company made in the year. The balance sheet shows all the assets (belongings) of the company and their value and all the liabilities (debts) on a specific date. Many companies also produce their cash flow statement as well.
These accounts provide information for those who have a financial interest in the company-as well as for the inland revenue which can then check the amount of tax to be paid by the company is correct. Note that the individuals pay income tax on their earnings, where as companies pay corporation tax on their net profit. Calculating the tax liability of the company is also the task of the financial accountant.
Small businesses are more likely to have this work carried out by a firm of registered chartered accountants. There will be dozens in your home town. They prepare the financial accounts for local businesses which would not find it’s cost –effective to employ their own specialist financial accountants.
Paying wages and salaries
This is usually a computerized operation and virtually all organizations pay their staff monthly, direct into their bank account, using a system known as credit transfer. The companies bank transfers the money from the company accountant to all employees’ accounts each month.
However, the bank has to know how much to transfer to each individual. In addition, payroll records must be kept which show how much each person earned in gross pay, how much they earned in overtime or bonus payments, how much tax and national insurance was deducted and the net amount paid to them. Individuals may make other payments, as to the company pension scheme or for union dues. They may receive special allowances for clothing or travel or expenses to be paid. These, too, must all be recorded.
Every employee has the legal right o receive an itemized pay statement this must show all the current payments and deductions and give a running total for that tax year, which runs from 6th April to 5th April the next.
Some pay records rarely change. An individual on a monthly salary with no special payments or deductions would only need to be entered once into the system, along with he’s or hers tax code, which is determined by the Inland Revenue. The computer than makes all the necessary calculations. However, other individuals receive variable amounts of pay, through overtime, bonuses e.t.c, and in these cases the pay role staff have to make the correct entries each month. The tax code may change for any individual and this would have to be amended. People fall sick and may receive sick pay. Women may take maternity leave and be paid maternity pay. Temporary staff may be hired than leave. Other employees may even be paid hourly, and their hours may vary each week or month. In other cases, employees change their address or bank account details.
All the differences mean that there is a considerable amount of work for the payroll staff – besides paying out the money! Before paying out the money all the entries must be checked carefully they are sent to the bank for processing, so that each person will always receive the correct amount of money on the due date.
Obtaining Capital and Resources
Capital is the money an owner puts into their business. Most of this will be needed when the business first starts trading. The initial capital buys all the basic requirements for a lease for buying premises. Purchasing a company van, stock, shop, fittings and basic items such as a cash register, telephone and fax machine.
The business then starts to trade, hopefully, makes a profit. The profit can be used to buy additional stock or it can be saved and retained as further capital in case the owner needs to buy new equipment or to move to larger premises. In a sense. This additional capital is the ‘savings’ of the business. You may remember it is usually referred to as ‘reserves’. Businesses are similar to people. You probably know that your savings don’t always cover the cost of special items you want to buy, especially if these are expensive. Businesses can experience the same thing, no matter how large they are. A company may not have enough capital in reserve to buy something it needs. In this case it may have to borrow the additional money or raise it in some other way.
Banks are an important source of finance for business. High street banks-known as commercial banks-lend money to a range of businesses. Other banks, called investment banks, deal with much larger companies. They will lend greater sums of money. There are also specialist lending companies which will lend money to businesses . A company can also apply for special funds. For example, a company that wants to open a factory in a redevelopment area may get a grant from the local council or even from a European fund. The sources available usually depend upon:
- Who wants the money
- What they want it for
- How much they need
- What security they can offer, e.g. in assets (items owned) that could be converted to money if the loan couldn’t be repaid.
Large companies have a wide choice of options and will be advised by a financial manager, who will assess all the different ones. Generally a company will want ‘cheap’ money, that is, it will want the lowest interest rates possible and the best repayment terms it can find. The financial manager also needs to assess whether interest rates are likely to rise or fall in the future. This will influence the length of time over which the loan will be taken out. The length of time in which the money is paid back is crucial. If it’s too long the overall interest rates will be higher. If it’s too short the company will be short of money trying to meet all of it’s commitments, in other words, it’s cash flow will suffer.
Other resources may be acquired in different ways. Instead of borrowing money to buy a building, for example, a company could rent it instead. Rather than buy dozens of new computers, a business could lease them. Leasing is often preferred in cases such as company cars. The lease states the amount of money which is paid at regular intervals. At the end of the leasing period the cars are replaced wit new ones and new lease is negotiated. The leasing company will also replace cars that are damaged and pay for repairs and servicing. This can be better value for money than buying cars, which depreciate (fall) in value and need money spent on them for repairs and servicing.
Finance and it’s affect on other functional areas
All functional managers are concerned with the finance of their own areas, not just at budget preparation and agreement stage, but also day-to-day checking whether they are meeting their budget forecasts. Because financial staff are responsible for controlling the money, they will advise managers when the company is over spending. This can mean cutting back on expenditure. The effect of this could be that new equipment cannot be purchased; the sales department may have to stop a proposed advertising campaign; production may have to reduce overtime; human resources may be told that no mare new staff can be hired or replaced for a while; administration may have to defer the purchase of new photocopier.
Finance is also responsible for paying the employees’ wages or salaries. So any queries about those payments will be made to the finance department.
Different functions need finance to pay for goods that they have bought. Authorized personnel can sign orders to buy goods up to a pre set-level of expenditure. The canteen, for example, will need finance to pay invoices for telephone services, photocopiers and stationary to finance; production will submit invoices for raw materials. Remember that the items ordered should be within the limits of the budget, it may find it’s future orders are scrutinized, and may be refused.
Finance depends on the buyers of goods checking them on arrival and notifying them if there are any changes or if any deliveries are incorrect. In return, the functional areas are dependant on finance paying their bills relatively promptly. Production doesn’t want to telephone a supplier to be told nothing else can be delivered because the last bill still hasn’t been paid.
Administration
The purpose of the administration function
The main purpose of administration is to make sure that the organization is to make sure that the organization operates as effectively as possible by performing a wide range of support activities promptly and efficiently. If you think of business as a large engine which is constantly trying to move forwards, then administration represents all the couplings that hold it together. Unless these function properly, then no amount of energy produced in making and selling goods will work, and the business will grind to a stop. If you study the option unit ‘administrative systems’, you will learn about this function in more detail.
Many large organizations traditionally centralized their administration function. In these cases a large administration department provided all the support services needed by the other functional areas. Today administration is often decentralized and each functional area has it’s own administrative staff to serve it’s own needs. This provides greater flexibility for the organization and better job opportunities for staff, who can transfer between departments to gain more experience and improve their skills.
The following are the key areas with which administrative staffs are concerned.
- Information handling-the creation, storage, retrieval and transmission of all the documents used by the organization, the receipt, safe storage and monitoring of all the documents received by the organization and all the records held by the organization.
- Communications-sending and receiving messages by telephone, fax, email; sending and receiving mail; dealing with customers, collogues and other visitors face-to-face.
- Making arrangements-from booking parking spaces for visitors to organizing a foreign trip for a senior manager, from preparing for a small meeting to organizing a large conference.
- Obtaining resources-providing stationary stock and other basic office items.
