CH12 - The Finance Function And Managing Its Relationships Flashcards
How has the role which finance function cover changed over time
Historically -
Cost control
Variance analysis
Reporting past performance
Now
More proactive role, value adding, changed from reporting performance to enhancing performance
What is included in the current roles of the finance function?
Assisting formulation of corporate objectives and strategy
Strengthening management and understanding risk of funding costs associated with particular products and strategies
Dealing with increasing product complexity, unprecedented market instability and exacting regulatory requirements.
Dealing with pressure from senior management to cut cost, while providing more effective advice.
Turning data into a valuable source of information. Eg analysing customer sales of a period to highlight the customers which add the most value to the organisation.
What does “lean operations” mean
Focus on efficiency. Striving to ensure all expenditure incurred can be seen to add value. All unnecessary activities, expenditure or waste is eliminated.
What is finance relationship with procurement?
Procurement is responsible for placing and following up orders for goods and services required by the organisation. It coordinates with finance as follows
Establishing acceptable credit terms
Prices - finance can advise on maximum price which should be paid to maintain margins
Payments - approve by procurement, but are made by finance
Data capture eg orders input by procurement and details passed to finance
Inventory- procurement will consult with finance to determine inventory levels and orders required.
Budgeting - finance will consult with procurement on likely costs in preparation of budgets
What is finance relationship with production?
Production department plans and oversees production of goods. Liaises with finance as follows
cost measurement, allocation and absorption. (Quantities of material and time used, given monetary value by finance, cost then allocated and absorbed to calculate production costs.
Budgeting - costs of producing items/how many items determined by production and accounting departments together, and incorporated into overall budget.
Cost v quality - features of product, which raw materials to use. How to maximise quality and profit.
Inventory-production liases with finance to determine stock levels required for planned production.
What is finance relationship with marketing?
Marketing attempts to identify, anticipate and supply customer needs efficiently and profitability and liases with finance as follows-
Budgeting- finance will discuss likely sales volume of each product with marketing department, in order to produce the sales budget.
Advertising - finance helps in setting budget and monitoring whether its advertising campaigns are cost effective.
Pricing - Finance will have input into price charged, often cost plus. Even if marketing determines prices based on market forces they need to consult with finance to ensure costs covered.
Market share - Finance can provide marketing with actual sales volumes for each product, helping marketing determine market share.
What is Finance relationship with Human Resources?
HR attempts to anticipate human resource needs- how many staff, adequately trained. Co-ordinates with finance as follows
Budgeting - finance analysis of likely number of employees required throughout the organisation and the total staff budget. HR will have to operate within this budget, plan recruitment and consider salary offers to new starts.
Training - finance will set the training budget for the organisation in conjunction with HR which will be aware of training and development needs.
Payments- finance arranges the payment of salaries to each employee, but must be verified by hr and checked by finance.
Performance measurement - finance will work with HR in target setting for each employee and measurement of performance.
Above e.g are not exhaustive, in modern business environment finance is involved in all areas of business and plays an integral part decision making and adding value to the business.
When deciding on structure, organisations need to decide where to position the finance function to allow them to play the fullest role in driving the business forward. What options are available?
Finance function is embedded within the business area as a business partnering role.
Finance function is consolidated as part of a shared service centre (SCC)
Finance function is carried out by an external party - Business process outsourcing (BPO)
In relation to finance function positioning, what is Business partnering role?What are the benefits / drawbacks?
A dedicated finance function set up within each business area. Accountants hands on in all areas of business.
Benefits:
Decision making - info can be provided as and when needed. As a dedicated resource, the Accountant can play a stronger role.
Increased knowledge of business area and it’s needs.Accountant involved in all decisions and will build up local knowledge and understanding of business and its information needs.
Strong relationships can be built up between accountants and the management of the business area.
Drawbacks:
Duplication of effort across business area - Similar work will be carried out across various business areas.
Lack of best practice - no sharing of knowledge across Business areas. Practice in some business areas may become outdated.
Accountants can feel isolated in the business. With each area they may be only one or two dedicated resources, leaving them to work more or less alone. Without larger team around them they may not be able to develop the required skills or knowledge
In relation to finance function positioning, what is a shared service centre? What are the benefits / drawbacks?
The finance function across the organisation is consolidated and run as a central unit, where that service has previously been found in more than one part of the organisation. Sometimes called internal outsourcing.
Benefits:
Headcount reduction. Economies of scale
Reduction in premises and associated costs
Potential favourable labour rates in chosen geographical location.
Quality of service provision. Learning and sharing of knowledge within the SCC should lead to this.
Consistent management of business data. Standard approaches can be developed across the organisation.
Drawbacks:
Loss of detailed business knowledge gained from having staff in each area.
Further from everyday decision making.
Business relationships are not as strong. SCC may not be able to build strong relationships with the business areas.
In relation to finance function positioning, what is Business process outsourcing ? What are the benefits / drawbacks?
Giving a third party responsibility of what would otherwise be an internal system or service. When the outsourced function is in Another country it is called offshoring.
Benefits:
Cost reduction through economies of scale - Suppliers can perform finance function more cheaply and efficiently.
Access to capabilities- a specialist provider can bring best practice expertise and new investment in resources.
Release of capacity- allowing retained finance to concentrate on their role of business partner.
Drawbacks:
Loss of control- Business areas may not be able to dictate what info they need and when they need it
Over reliance on external providers - Outsourcing partner may dictate what information is to be provided and how. This may not exactly match business needs. Expensive and difficult to bring function back in house.
Confidentiality and risk to intellectual property. And may process info for competitors.
Risk of unsatisfactory quality. Info provided may not be as required for decision making purposes.
What is transaction cost theory?
Provides a means for making declines about which activities to outsource. It suggests a choice of 2 approaches.
Hierarchy solutions- direct ownership of assets and staff, controlled through internal organisation policies and procedures.
Market solutions- asserts and staff bought in form outside under terms of contract.
It’s a more complex make or buy decision. It looks beyond unit costs of product or service, and is specifically interested in the costs of control (together with the unit costs) that make up transaction costs.
Give examples of market solutions and hierarchy solutions costs
Hierarchy solutions costs-
Staff recruitment and training
Provision of management supervision
Production planning
Payments and incentive schemes to motivate performance
Development of budgetary control systems to coordinate activity
Divisional performance measurement and evaluation
Provision and maintenance of non current assets, such as premises and capital equipment.
Market Solutions costs -
Negotiating and drafting legal contract with supplier
Monitoring suppliers compliance with contract(quality,quantity,reliability)
Pursuing legal actions for redress due to non performance by supplier
Penalty payments and cancellation payments if firm finds it needs to change its side of the agreement.
What risk factors make external control costs arise?
Bounded rationality- limits on the capacity of individuals to process information, deal with complexity and pursue rational aims.
Difficulty in specifying/measuring performance. Eg terms like normal wear and tear may have different interpretations.
Asymmetric information- one party better informed than the other, who cannot get same info without incurring substantial costs.
Uncertainty and complexity
Opportunistic behaviour- each agent pursuing own economic interest, taking advantage of loopholes in contract to improve position.
What is asset specificity?
Degree to which assets are of use only in one specific range of operations.
Most important determinant of transaction cost.
The more specific the assets the greater the cost.
