Finance department in a firm
Finance function is critical to the success of other functional areas in an organization and the organization as a whole. Finance department is tasked with the responsibility of managing a company’s financial resources. The activities of the finance department can be broadly classified into accounting, compliance, management and control, strategy and risk and funding.
Accounting involves collecting, summarizing, measuring, recording, reporting, presenting and interpreting financial information about transactions made by a firm. The finance department records the financial effects of business transactions. It also prepares financial statements and other management reports to enhance management decision in the firm. Information provided by the finance department is applied by the marketing department in determining the price of a commodity, production department to determine the optimal profitable quantity or mix of products to produce, among other applications. For instance, financial data on fixed costs and variable costs is used to determine the quantity of a product a firm needs to produce in order to achieve a desired profit level (Kotabe, 2002 64).
Compliance role involves ensuring the firm complies with rules and regulations made by the government as well as other regulatory bodies. For instance, the finance department of a company ensures the company prepares its financial statements in compliance with the relevant corporations act or any other regulations. It ensures the company’s financial statements are audited by an independent auditor, complete, reliable and exhibit a true and fair view of the financial condition of the firm.
Management and control function are aimed at ensuring efficient and effective utilization of resources in the company. This is achieved by proper allocation of resources to the various functional areas in the organization. Control of resources is achievable through production of financial information to monitor the operations. This includes preparation of budgets and variance analysis. A budget is a plan of action, and its outcomes quantified in monetary terms. It includes expected activity level and outcomes, expected costs and expected benefits. A budget is prepared for each functional area in a firm as well as the master budget for the whole firm. Variance analysis involves comparing the actual results with the budgeted or standard results. For instance, if the actual cost incurred in producing a product differs from the expected cost, finance department will analyze this disparity to identify the possible causes. Necessary actions are then taken depending on whether the variance is adverse or favourable. Functional heads are held accountable for any variations from the standard or expected outcomes. This ensures effective and efficient utilization and control of the firm’s financial resources (Kotabe, 2002 66).
Finance function is also critical in risk analysis and strategic decision making in the firm. The finance department provides useful financial information that is applied in determining the financial consequences of a strategic action. By conducting cost-benefit analysis and risk analysis, finance function helps an organization to formulate cost-effective strategies. Activities in this case include capital budgeting and rationing through techniques such as net present value, Internal rate of return, profitability index, payback period, among other tools. This enables a firm to determine whether a project is worth investing and whether the firm has the resource capability to undertake such a project.
In conclusion, the finance department is responsible for sourcing and maintenance of funds in the firm. It communicates to current and potential funders by providing financial information that meets their needs. It also determines the most economical method for funding capital requirements of the firm. For instance, it determines whether the company should borrow money or raise capital through the issue of shares (Kotabe, 2002 67).
Finance department in a firm