Chapter 7 - The business's finance function Flashcards
What is the role of recording financial transactions in the finance function?
ensuring an accurate record of its revenue, expenses, assets, liabilities and capital
What are the 2 dilemmas of business partnering?
- a compromise of objectivity and independence
- a lack of time (divert their time to tasks they feel more comfortable with)
What is the structure of the finance function?
Centralized finance function
What is the advantage of a centralized finance function?
helpful with the overall management of cash and external reporting
What are the disadvantages of centralized finance functions?
- Not helpful with respect to making sure that local operational management get all the information and support they need (internal reporting)
- More problematic when the business operates in global markets (exchange rates and time differences)
What are the factors affecting the finance function?
- Business structure
- Organizational structure, size and geographical dispersion
- Markets
- Technology
- History and Ownership
- Its culture
Name out types of performance measure
- Qualitative measure
- Quantitative measure
What is the characteristic of qualitative measures?
subjective and judgmental, and are not expressed in numerical terms
What is the characteristic of quantitative measures?
objective and based on data that must be reliable. They are expressed in numerical terms
What are the forms of quantitative measures?
- Financial measures
- Non-financial measures
What are the 3 points of reference for quantitative measurement?
- Profitability
- Activity
- Productivity
What is the profitability reference measure?
cost and revenue
What is the activity reference measure?
- number of orders
- number of machine breakdown
(physical numbers, monetary value. time spent)
=> cause costs
What is the productivity reference measure?
the quantity of the service or product produced in relation to the resources put in.
How to measure profitability?
absolute terms (profit) = revenue - cost
relative terms (profit margin) = (revenue - cost)/ revenue
If profit is to be the business’s primary objective, it must be specified in _______. Effectively, this rate can only be determined by examining the ___________ of investing in the business
- quantified terms (specific target rate of profit)
- opportunity cost (the rate of profit available on alternative investments with similar characteristics)
What are the 3 criteria to measure resource use?
- Effectiveness
- Economy
- Efficiency
What is the economy considered in terms of resource use?
the reduction or containment of cost and can be measured against the target
What is the effectiveness considered in terms of resource use?
the measure of achievement and is assessed by reference to objectives
What is the efficiency considered in terms of resource use?
being effective at minimum cost or controlling costs without losing operational effectiveness
Efficiency is a _____________ effectiveness and economy
combination
How to assess whether the objectives of strategic business units (SBUs) or the whole business are being met?
- Productively: what is output relative to what is input?
- Effectively: how far are targets and objectives achieved?
- Efficiently: what is the gain that the business has achieved?
What is the concern of critical success factors (CSFs)?
concern not only the resources of the business but also the competitive environment in which it operates.
Once the business has identified its CSFs and the things it must be good at to succeed, it must identify ____________
key performance indicators (KPIs)
What is key performance indicators (KPIs)?
A measure of the level of performance in an area where a target level must be achieved for the business to outperform rivals and achieve competitive advantage.
What is benchmarking?
the way of deciding on which KPIs to measure and what targets to set for them
What are the 4 specific tasks of the finance function?
- recording financial transactions
- management accounting
- financial reporting
- treasury management
What is the role of financial reporting in the finance function?
Providing information about a business to external users that is useful to them in making decisions and for assessing the stewardship of the business’s management.
What is the role of management accounting in the finance function?
Providing information to help managers and other internal users in their decision-making, performance measurement, planning, and control activities.
What is the role of treasury management in the finance function?
Managing the funds of a business (eg: cash and other working capital items, plus long-term investments, short-term and long-term debt, and equity finance)
What is the stewardship theory?
a framework which argues that people are intrinsically motivated to work for others or for organizations to accomplish the tasks and responsibilities with which they have been entrusted.
What is a steward?
one who takes on the responsibility of caring for something on behalf of another person or group of people, eg: directors, managers
What is business partnering?
the finance function working alongside other business functions rather than being a separate function on their own.
What is the main role of business partnering?
Providing advice and support to the other areas of the business
What are other roles of business partnering?
- strategy formulation, implementation & communication
- commercial decision-making and negotiations - business analysis
- sounding board
- trusted adviser
- critical friend and facilitator.
What is the role of the accountant in measuring sustainability and natural capital?
- Responding to uncertainty and risk
- Developing existing and new markets
- Innovating processes, products, and services that can provide benefits to society
- Improving operational efficiency and lowering costs by way of sustainable operations
- Engaging employees, customers, and suppliers in the drive toward sustainability
Name some measure for sustainability and natural capital
- SEE (social, environment, economic)
- GRI
What are some limitations of financial measures?
- Information problems: out-of-date, historical data, summarized information, symptoms
- Comparison problems: trends & different business
What is the balanced scorecard?
An integrated set of performance measures linked to the achievement of strategic objectives.
What are the 4 important perspectives on the balanced scorecard?
- Customer: how do customers see us?
eg: satisfaction ratings, returns rate, retention rate - Internal business processes: what we must excel at?
eg: product quality, failure rates - Innovation and learning: how we can continue to improve and create value?
eg: employee retention rates, time to market for new products - Financial: how do we look in our stakeholders
eg: gross margin, net margin, interest cover…
What is internal control?
A process, effected by an entity’s BOD, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.
According to COSO, what are the 5 components of effective internal control?
- Control environment
- Risk assessment
- Control activities
- Information and communication
- Monitoring activities
