Chapter 7: The Business Finance Function

Question 1

What is the business finance function? What are its four main functions?

Answer 1

The finance function has both an internal and an external function within the business.

The four main functions are:
- Recording financial transactions

Which leads to:

• Financial reporting (external)
• Management accounting (internal)
• Treasury management (internal)

Question 2

What are the tasks of the finance function?

Answer 2

Recording financial transactions
 Books of prime entry
 Ledgers
 Reconciliations

Financial reporting
 Financial statements
 Tax
 Regulatory information

Management accounts
 Costing
 Budgeting
 Pricing decisions
 Investment appraisal
 Performance measurement

Treasury management
 Cash, working capital and foreign
exchange management
 Managing financial risks
 Raising short, medium and longterm finance

Question 3

How do you manage the finance function?

Answer 3

The finance function, like any other investment in the business, is expected to generate a benefit to the business in excess of the cost of funding it.
 The key issue is to assess benefit derived from info produced in comparison to the cost in deriving it.

Question 4

What is business partnering?

Answer 4

Business partnering sees members of the finance function partnering within functional areas of the business in a value adding capacity.

They provide advice and support to drive performance rather than just performing routine reporting activities.

Business partners work closely with other business functions such as marketing, operations and HR.

They use their financial expertise to provide insights to drive operational performance

Question 5

What are some examples of business partnering?

Answer 5

 Marketing – Understanding revenue drivers, analysing sales volumes and mix and advising on pricing decisions.
 IT – KPI monitoring such as system downtime, service desk response times and internal customer satisfaction.
 Procurement – Assessing supplier performance against service level agreements, deliveries on time and monitoring prices across the market.
 Operations – Production efficiency, levels of waste and rejected units, machine downtime and traditional variance analysis

Question 6

What are quantitative measures?

Answer 6

Quantitative measures are objective and must be based on reliable data. These are numerical and can be split into:
 financial measures – based on sales, profit etc.
 non-financial measures – based on production/activity levels etc.

Question 7

What are qualitative measures?

Answer 7

Qualitative measures are subjective, judgemental and cannot be expressed in numerical terms.

Question 8

What are the first two common performance measures?

Answer 8

Profitability – comparisons of income generation and associated costs. Key measures include gross and net margins, return on capital employed, required
returns of investors.

Activity
– physical units, number of customers, time taken etc.
– monetary values.

Question 9

How do you measure productivity (third performance measure)?

Answer 9

Productivity – efficient use of resources
– (e.g. output per employee, number of customers served in one hour).
Good measure of productivity = 3 E’s:
– Economy – control over input costs
– Effectiveness – output measure (against objectives)
– Efficiency – achieving objectives at minimum cost (a combination of effectiveness and economy).

Question 10

What are CSFs?

Answer 10

Critical success factors (CSFs) are those product features that are particularly valued by a group of customers and, therefore, where the organisation must excel to outperform the competition.
A business must identify and measure performance against CSFs.

Question 11

What are KPIs?

Answer 11

Key performance indicators (KPIs) are measures of the level of performance in an area where a target level must be achieved in order for the business to outperform rivals and achieve a competitive advantage.

Question 12

What is benchmarking?

Answer 12

Benchmarking is the establishment of targets and comparatives by which relative performance can be established. By adopting best practices, performance should improve.

Question 13

How do CFSs, KPIs, and benchmarking relate?

Answer 13

• Identify CSFs
• Set and measure KPIs
• Benchmark performance

Question 14

What are some limitations of financial performance indicators?

Answer 14

Financial performance indicators are important but do have a number of limitations if they are used on their own.

 Historical information is not necessarily useful when trying to predict future outcomes.
 Financial information mostly reports internal performance and does not always consider external factors.
 Can encourage short-term decision-making at the expense of long-term objectives.
 Can be easily manipulated with the use of accounting policies etc.
 Does not consider the whole picture. Financial results are only part of the business’s performance.

Question 15

What is a balanced scorecard?

Answer 15

The balanced scorecard approach ensures that a mixture of financial and nonfinancial perspectives are considered when selecting performance indicators.

Kaplan and Norton suggested that performance indicators should consider four perspectives:

• Financial perspective
• Internal Business Perspective
• Innovation and Learning Perspective
• Customer Perspective

Question 16

What are the three main types of sustainability issues to consider?

Answer 16

Social
 e.g. negative impact on society, low paid workers, lack of diversity.
Environmental
 e.g. pollution, use of sustainable resources, climate change.
Economic
 e.g. economic stability, impact on local economy, provision of jobs.

Question 17

What problems does climate change pose?

Answer 17

Risks:
 Legal
 Technology
 Market
 Reputation
 Physical

Opportunities:
 Resource efficiency
 New energy sources
 New products
 New markets
 Resilience

Disclosure:
 Governance
 Strategy
 Risk management
 Metrics and targets

Question 18

What is internal control?

Answer 18

Internal control is ‘a process, effected by the entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance’.

Question 19

What is the ‘control environment’ within internal control?

Answer 19

 Culture.
 Management philosophy.
 Authority.
 Segregation of duties.
 Business ethics, etc.

Question 20

What are the risk assessment processes within internal control?

Answer 20

 Identify/respond to risks (e.g. how the business copes with growth/ technology ∆.

Question 21

What are the IS processes within internal control?

Answer 21

Produce information to assist with control.

Question 22

What are control activities within internal control?

Answer 22

 Specific controls

– manual/physical (e.g. cash in locked safe) and programmed (e.g. checks that mgt a/cs = fin a/cs).

Question 23

What are monitoring controls within internal controls?

Answer 23

Checking controls working as prescribed.