Chapter 7 The business’s finance function

Question 1

1.1 Finance function

Answer 1

This has both an internal and external function in the business. The four main functions include recording financial transactions which leads to the other functions of financial reporting (external), management accounting (internal) and treasury management (internal).
- Recording financial transactions: books of prime entry, ledgers, reconciliations
- Financial reporting: financial statements, tax, and regulatory information
- Management accounts: costing, budgeting, pricing decisions, investment appraisal
- Treasury management: cash, working capital and foreign exchange management, managing financial risks, and raising short, medium, and long-term finance
The finance function 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 2

1.2 Business partnering

Answer 2

This 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. Business partners work closely with other business functions to provide insights to drive performance, such as:
- Marketing: understand revenue drives, analyse sales volumes
- IT: KPI monitoring such as system downtime, service desk response time and internal customer satisfaction
- Procurement: assessing supplier performance against service level agreements
- Operations: production efficiency, levels of waste and machine downtime

Question 3

2.1 Measuring performance

Answer 3

The types of performance measure include:
- Qualitative measures: subjective, judgemental and cannot be expressed in numerical terms
- Quantitative measures: objective, must be based on reliable data. Numerical and split between financial measures (based on sales and profit) and non-financial measures (based on production/activity levels)
- Profitability: comparisons of income and costs. Gross and net margins, return on capital employed, required returns of investors
- Activity: physical units, number of customers, monetary values
- Productivity: efficient use of resources such as output per employee. Economy (input costs), effectiveness (output measure) and efficiency (achieving objectives at minimum cost).
Critical success factors are product features valued by a group of customers. A business must identify and measure performance against CSFs. Key performance indicators are measures against performance in an area where a target level must be achieved for the business to outperform rivals. You identify CSFs, set and measure KPIs and benchmark performance. Benchmarking is the establishment of targets and comparatives by which relative performance can be established.

Question 4

2.2 Limitations of financial performance indicators

Answer 4

• 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
• Easy to manipulate with the use of accounting policies
• Does not consider whole picture, financial results are only part of the business’s performance

Question 5

2.3 Balances scorecard

Answer 5

This approach ensures a mixture of financial and non-financial perspectives are considered when selecting performance indicators. Indicators should consider four perspectives: financial, internal business, innovation and learning and customer perspective.

Question 6

2.4 Measuring sustainability

Answer 6

This is the ability to meet the needs of the present without compromising the ability of future generations to satisfy their own needs. There are three issues to consider: social (negative impact on society), environmental (pollution, climate change, sustainable resources) and economic (impact on local economy and economic stability).

Question 7

2.5 Climate change

Answer 7

Risks are legal, technology, market, and reputation. The opportunities are resource efficiency, new energy resources, new products, and markets. The disclosure is governance, strategy, risk management and metrics and targets.

Question 8

3.1 Internal control

Answer 8

Is a process effected by the entity’s board of directors, management, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance. Control processes involve risk assessment processes (identify and respond to risk with growth and technology), IS (produce information to assist with control), monitoring of controls (check controls work), control activities (specific controls such as manual and physical and programmed) and the control environment (culture, segregation of duties and business ethics).