1 - ROLE OF THE FINANCE FUNCTION Flashcards
Organisation
a special arrangement which pursues collective goals, which controls its own performance and which ha a boundary separating it from its environment. Boundaries physical or social.
Private sector org
aka businesses = owned and operated by private individuals or institutions
public sector org
owned by the state
2 types of private sector org
- Profit seeking
2. Other objs = not for profit orgs
2 types public sector orgs
- Provide public services like hospitals, schools
2. stated owned industrities
2 types profit seeking orgs
- Sole trader / partnership
2. Companies
Main Sole trader / partnerships characteristic
- Unlimited liability
Main characteristic of companies
limited liability - limited to amount paid for shares
Diff between private and public companies
Private = can only trade shares privately Public = shares traded on stock mkt
MNCs definition
companies producing in >1 country, by either owning or controlling foreign subsidiary
EGs of not for profit orgs
charities, local clubs, societies, gov depts & services such as hospitals and schools
Aim of not for profit orgs
Provide public service or benefit - main aim isnt profit, use surplus to further their objs. Still need to be profitable to keep running.
Mutual organisations are AKA and are defined as…
AKA Co-operatives
special type of not for profit org. Commercial operations owned by their customers (members). So customers benefit from the service & profit made. Pursue objs other than max profit.
EG of cooperative
Building society - operate similar to banks but surplus goes to members through higher IR for savers and lower IR for borrowers
Aim of public sector orgs
make good use of taxpayer money and deliver goods and services cost effectively to the public. Rarely aim to make profit, but still need to prevent waste of resources.
How do gov control public sector orgs?
Gov define & regulate activities
One important feature of public sector orgs is…
they have little control over their income - depends on Gov and can change depending on public opinion, econ climate, gov in power etc.
NGO definition
Private orgs that operate in the public sector by e.g. providing services to the community or protecting environ
2 key features NGOs
- Profit not primary goal - instead focus LR objs
2. NOT directly linked to gov or gov depts
2 types NGOs & their names
- Influence gov policy through lobbying & PR = campaigning NGOs
- Direct +VE impact through undertaking projects = operational NGOs
Another type of NGO
Quasi autonomous NGO = QUANGO
Similar objs to public sector orgs but are private independent of gov, but gov has devolved authority for running public svcs. E.g. Ofsted - gov money but operate independently.
5 effects of org type on finance function
- Diff owners & stakeholders = diff objs
- Sources of funding
- Overall goal - profit orientated?
- How perf is measured
- Use of tech impacts how finance operates
Vision =
The desired future state of the org - very high level and timeless
Mission =
Expression of overall purpose and scope of org in line with values and expectations of stakeholders. What sort of bis are we or do we want to be?
Objectives
Specific targets that are set and control the overall functioning and progress of org.
How do objs differ from vision/mission?
Quantifiable and specific. Translate a mission into more specific milestones which can be tracked.
4 aspects of mission statement
- Purpose
- Areas in which operate = scope
- General statement on culture
- Guide to develop future direction
SMART
Specific, measurable, achievable, relevant, time related
5 functions of objs
- Planning
- Defines responsibilities of managers and depts
- Integrates efforts of org
- Motivates managers
- Benchmarks for perf eval
3 types of objs
- strategic / corporate
- tactical
- Operational
Strategic / corporate objs
Set overall LR objs for bis as a whole
Tactical objs
Plan and control individual functions within the org
Operational objs
day to day perf targets to ensure operations carried out efficiently and effectively
Financial vs non-financial objs
Financial = something find on balance sheet/PnL accounts Non-financial = unlikely to be reported in financial statements but still important to org
CSFs
break objs into smaller goals, things that the org must do well in order to succeed.
KPIs
Specific, measurable ways to set performance standards and track CSFs for control purposes. can be financial or non.
Define digital world
The increasing levels of digital tech in everyday lives. Data is collected, stored and communicated about orgs and ind in many diff ways.
Bis environ
Everything surrounding an org, physically and socially.
2 levels of bis environ
Macro aka general
Micro
define macro environ
All factors influencing orgs INDIRECTLY.
What model can we use to analyse macro environ?
PESTEL
PESTEL stands for
Political Economic Social Technological Ecological Legal
Define micro environ
Areas which have a DIRECT impact on org - factors relating to competitors, industry, suppliers, customers.
What model can we use to analyse Micro environ?
Porters 5 forces
Name porters 5 forces
- Threat of new entrants
- Bargaining power of customers
- Threat of substitutes
- Bargaining power suppliers
- Rivalry among existing firms
Porters 5 forces can be…
weak, strong, medium which impacts profit.
Technological connectedness refers to + impact on rules of bis
How data is created, stored, retrieved and synchronised. Caused rules of bis to change and be more dynamic.
3 consequences of Technological connectedness on orgs (Farrar)
- Increasing competition
- Communication faster &easier = quicker product dev
- Changes who competitors and stakeholders are
3 roles of finance wrt value
create, preserve and narrate value
The concept of what value if depends on…
Type of org & its objs
Value is added to orgs through processes which follow what 3 principles?
- Economy
- Efficiency
- Effectiveness
Define economy
Perform an activity for min cost.
Define efficiency
Perform an activity by consuming min inputs. Fewer inputs to produce same output.
Define effectiveness
achieving max output given inputs. Higher output for same inputs.
How do economy, efficiency and effectiveness relate?
Economy + efficiency = effectiveness
Summarise how tech has changed role of finance?
Traditional roles been automated = focus more on value add tasks by acting as internal bis consultants
Farrar’s 4 basic finance activities
- Assembling info
- Analysing for insights
- Advising to influence
- Applying for impact
Assembling info =
collecting, cleaning and connecting data into assembled info
Analysing for insights =
analysing info to draw out patterns and relevant insights
Advising to influence=
Communicating insights & contributing to an obj. Aim to influence senior decision making.
applying for impacy =
guiding actions to help orgs achieve goals. Strategic planning, perf measures, perf reviews.
Farrar’s finance function value matrix: axis + 4 areas from top left to bottom right
Y axis = whether source/analyse or communicate/use info
X axis = whether creates or preserves value
- stewardship
- Value enabling
- Data integrity
- Value analysis
data integrity
finance act as trusted source of mgmt info
Value analysis
provide insights into drivers of org value
stewardship
SME and contribute to strategic decision making and developing business model (BAU)
Value enabling
Partner with other functions to use insights to address perf issues and enable solutions that create value
Farrar: 5 key areas that finance bring to an org
- Reporting accuracy (data integrity)
- Partnering & decision support (value enabling & stewardship)
- Controllership & risk (data integrity)
- Enterprise wide cost mgmt (value analysis/enable)
- Analysis & insight (value analysis)
3 aspects of value creation
Enable/create value
Shape value
Narrate value
3 activities that create value
- Planning
- forecasting
- Resource alloc
2 activities that shape value
perf mgmt & control systems
1 activity that narrates value
financial reporting
Budgets focus on 2 areas
- Areas org can directly control e.g. costs
2. Factors cannot entirely control e.g. demand
Corporate governance =
the system by which companies are directed and controlled. It considers how directors can be held accountable to shareholders.
Principal in an org =
Owners aka shareholders
Agent in an org =
Managers - company directors
What problem does corp gov try to solve?
Agency problem
8 egs of poor corp gov
- domination by single ind
- lack of involvement by board
- lack of adequate control - internal audit function
- lack of supervision of employees
- lack of independent scrutiny
- lack of contact with shareholders
- focus on SR profitability
- Misleading accounts and info
Purpose of OECD corp gov principles
to guide govs and other orgs when developing corp gov frameworks
6 principles OECD corp gov
- promote transparent & fair mkts
- protect shareholders’ rights
- sound incentives throughout investment chain
- Recog rights of stakeholders
- Timely and accurate reporting and audit
- Strong controls and supervision of mgmt
What 5 company/board roles should be identified in annual report?
- Chairman
- Deputy chariman
- CEO
- Senior independent directors
- Members and chairs of board committees
Which 2 company roles should be separated to preven too much power?
Chairman (leads board) and CEO
The board needs to consist of what 2 groups?
Executive & non executive directors (NEDs)
Define NEDs
Individuals not involved in day to day running of bis - they attend board & committee meetings. Independent individual on a contract who advises and receives fees in return for their time
6 things NEDs must NOT
- Have been employee in last 5 years
- In last 3 years have material bis interest in company
- Have company shares, perf related pay or company pension
- Close fam who are company directors/senior emp
- Serve >9 years
- Hold cross directorships
What’s cross directorship?
Person A exec for company 1 & non exec company 2
Person B non exec company 1 & exec company 2
Appointments to board and succession plans should be based on…
merit & objective criteria, promote diversity
Nomination committee consists of & function
50% NEDs
Makes appointments to board & review perf
% board that must be NEDs for big & small companies
Big: half excluding chairman NEDs
small: 2 NEDs - one appointed senior indep director
Audit committee consists of & function
100% NEDs (3 for large & 2 small orgs), 1 who must’ve had recent financial experience.
Monitor and review financial controls and integrity of financial statements.
Internal audit function report into audit committee.
How involved are directors in remuneration?
They should NOT be involved in deciding their own remuneration outcome.
Remuneration committee consists of & function
At least 3 (2) NEDs for large (small) orgs.
Chairman can be a member but not chair.
Aim = attract, retain and motivate quality directors but not pay more than necessary. Mostly based on perf.
Is UK corp gov code the law?
NO - advisory, not the law.
Listed companies are required to make 2 general disclosures…
- Narrative statement on how applied corp gov code principles
- Whether or not complied, justify non-compliance
Sarbanes Oxley Act 2002 - law or advisory?
LAW IN US
SOX act is applicable to….
In USA and subsidiaries of USA based companies
5 key points of SOXact
- auditor independence
- US stock exchange regulations
- Must have an audit committee
- Internal control report included in annual report
- increased financial disclosures
3 advs of rules based corp gov
- consistent application
- breaches easy to identify
- rules for specific outcomes
3 disadv of rules based corp gov
- cannot learn every rule
- removes member discretion
- long and lengthy rulebooks
4 advs of framework/ethics based approach to corp gov
- Encourages proactive actions
- Treats members as ind
- Flexibility in complex situations
- \Harder to find loopholes
4 disadvs of framework/ethics based approach to corp gov
- Subjective interp
- Inconsistency
- Ambiguity confusing
- Guidelines eventually become rules anyway
Ethics definition
code of moral principles that people follow to respect what is right or wrong. Not necessarily enforced by law, although the law incorps moral judgements
4 factors to consider when determining if something is ethical
- Values from society
- Principles
- Motivation - why
- Consequences - ends justify the means?
Egoists ethical approach
look after own needs when making decisions
Pluralists ethical approach
Consider whether other stakeholders are compromised by a decision
Absolutists ethical approach
Whether the course of action is fundamentally incorrect, regardless of outcome.
Consequentialists ethics
consider consequences of action before making a decision.
Utilitarian ethics
maximise overall benefit to society
Corporate ethics statement vs code
Statement = broad generalisations Code = specific rules
Ethics officers AKA
compliance officers
3 principles of CIMAs code of ethics
- Highest standards of conduct & integrity
- Uphold good standing & reputation of the profession
- Refrain from conduct that discredits profession
A key role of a CIMA member is to….
act in the public interest
CIMA PIPCO ethics principles stand for…
Professional competence & due care Integrity - nothing deceptive or misleading Professional behaviour Confidentiality Objectivity
4 considerations when dealing with ethical dilemma
- Do I need more info/evidence?
- IS there an internal system to deal with this concern?
- Necessary to pass info up hierarchy?
- Obtain professional advice/consult CIMA?
CSR =
a set of actions which an org is not obliged to take but takes them anyway for wellbeing of stakeholders and public.
Carroll & Buchholtz 4 types CSR responsibilities
- Economic - return to shareholders, pay staff, customers value for money.
- Legal
- Ethical e.g. pay living wage
- Philanthropic - charity
Proactive CSR strategy
org prepared to take full responsibility for actions. If discover a fault, recall product without before forced to - get ahead of the situation.
Reactive CSR strategy
Allow a situ to continue unresolved until public, gov find out about it.
Defence CSR strategy
Minimise or attempt to avoid additional obligations arising from a particular problem - modify behaviour not because think it’s right but to avoid gov additional laws.
Accommodation CSR strategy
org take responsibility for actions when one of following happens:
- encouragement from special interest groups
- perception that failure to act results in gov intervention
i. e. act before forced to but only when pressure building.
6 pros of CSR strategy
- Customer expectations
- Brand
- Lower environ costs
- Trade opportunities
- Access to staff
- Investment and funding
What was Friedman’s argument against CSR?
Bis should only conform to rules of society (law + ethical custom) & bis does not have responsibilities - only individuals do. If managers donate bis money to charity, they are donating owners’ money. Bis should pay dividends then ind decide to donate.
Corporate digital responsibility =
expands CSR concept to cover data and digital devices
5 corp digital responsibilities
- Digital stewardship - use data responsibly
- Digital transparency
- Share info with customers to help them make better decisions
- Customers should be offered chance to benefit from data
- Digital inclusion - use insights for good of society e.g. share with research orgs/charities
