D. Shape And Structure Of The Finance Function Flashcards
What Is an organisational structure?
It’s formed by the grouping of people into departments or sections and the allocation of responsibility and authority
How did Mintzberg’s effective organisation structure suggest an organisation can be analysed?
Into six building blocks
Effective coordination will be needed to integrate the building blocks into one unit
Building blocks: operating core Middle line Techno structure Support staff Strategic apex Ideology
Draw Mintzberg’s effective organisation and describe the six different building blocks
Building blocks:
operating core-Basic work of organisation. In small or represent nearly all, in large or will require more complex arrangements
Middle line-Link strategic apex to operating core and includes lower and middle level management
Techno structure-Responsible for designing procedures and standards. Techno structure includes accountants, computer specialist and engineers
Support staff-Provide services to the organisation with support operations/production
Strategic apex– High levels of management responsible for formulating the strategy and long-term plans
Ideology-Organisations values and beliefs i.e. culture
Describe the six coordinating mechanisms used to integrate the building blocks into a cohesive unit
- Mutual adjustment – coordination through informal contact
- direct supervision – coordination through for hierarchy
- Standardisation of work processes
- Standardisation of outputs– product and service specifications
- standardisation of skills and knowledge – identifies training needs and the necessary skills base to do the work
- Standardisation of norms – cultural norms and expectations
Mintzberg converted the building blocks and coordinate in mechanisms in different ways and identified which five main structural configurations?
Entrepreneurial structure: direct supervision
Machine bureaucracy: standardisation of work excellent
Professional bureaucracy:Standardisation of skills
Divisionalised: standardisation of outputs
Adequacy/innovative: mutual adjustments
What four structural changes make up various phases of the business?
Entrepreneurial structure
Functional structure
Divisional structure
Matrix structure
What does the entrepreneurial structure and who makes all the decisions?
Built around on a data manager
All key decisions made by a strategic leader who is often the owner/entrepreneur
What are the advantages and disadvantages of the entrepreneurial structure?
Advs – quick decision-making – responsive to market – good control – close bond to work
Disads
-Lack of career structure
– dependent on owner capabilities
– cannot cope with diversification/
What is the functional structure?
Who is the most appropriate for?
Common folks that have outgrown the entrepreneurial structure, therefore need to group together employees to undertake similar tasks into departments
Board of directors and below them different departments
Most appropriate to smaller companies with a few products and locations which exist in a relatively stable environment
What are some advantages and disadvantages of the functional structure?
Advantages – economies of scale thanks – standardisation/efficiency -specialist more comfortable – career opportunities
Disadvantages -Empire building i.e. managers working on their own interest – Slow to adapt market changes – conflict between functions – cannot cope with diversification
What is the divisional structure?
Who takes leadership?
Because when an organisation is split into different divisions – each one autonomously overseeing a product line/brand or geographical location
Board of directors leading divisions which lead to different functions
The general managers take responsibility for their own resources
What are some advantages and disadvantages of the divisional structure?
Advantages
– enables product or geographical growth
– clear responsibility for divisions
– training of general managers
– easily adapted for further diversification
– top management free to concentrate on strategic matters
Disadvantages – duplication of business functions – lack of goal congruence – potential loss of control – allocation of central costs can be a problem - specialists may feel isolated
What is the matrix structure?
Which organisations are usually use it
Structure aims to combine the benefits of a divisional structure and a functional structure
Senior management leads the functional structure
Who lead the different departments for different products
Found in multiproduct and multifunctional organisations with significant interrelationships and interdependencies
What are the advantages and disadvantages of the matrix structure?
Advantages
– same advantages as functional and divisional structures
– flexibility to focus on customers, projects as less rigid than div structure
– encourages teamwork and the exchange of opinions and expertise
Disadvantages
– dual command
– dilution of functional authority I.e who to report to
– time-consuming meetings
Describe Starbucks’s matrix structure
Functional groups: split into a number of functions which are hierarchical
Geographical divisions: based on physical location and which division head has been given flexibility to adjust policies and local market. Has three geographical divisions: America, China and Asia Pacific, and EMEA
Product based divisions: focus on product development. Number of product divisions including coffee and related products, baked goods, merchandise
Teams: most visible in cafés for their organised to deliver goods and services to the customer and the optimal way
What’s the difference between a centralised a decentralised structure?
Centralised: upper levels of an organisation’s hierarchy retain the authority to make decisions e.g franchises
Decentralise: authority to make decisions is passed down to units and people at lower levels
What factors affect the amount of (de)centralisation?
Management style – how much control management want to retain
Ability of management/employees – more able, greater level of decentralisation
Geographical spread – central control more difficult
Size of organisation -small organisations can retain the level of central control easily
AdVantages of decentralisation
Senior management free to concentrate on strategy
Better local decisions due to local expertise
Better motivation due to increased empowerment of employees and a more defined career path
Quicker responses/flexibility due to reduce bureaucracy and increased autonomy
Disadvantages of deCentralisation
Loss of control by senior management and lack of standardisation
Dysfunctional decisions due to a lack of goal congruence
Poor decisions made by an experienced managers
,
Training costs
Duplication of roles within organisation
Extra costs in obtaining information since it stored in several locations
What is the scalar Chain?
Line of authority Which can be traced up or down the chain of command
Therefore relates to the number of levels of management within an organisation
What is the span of control?
How many people report to one superior
What influences the span of control?
Nature of the work – more repetitive equals wider span
Type of personnel – more skilled means wider span
Location of personnel– located locally means wider span
What’s the difference between a tall organisation and a flat organisation?
Tall
- long scaler chain
- many levels of management
- narrow span of control
Flat
- short scalar chain
- few levels
- wider span of control
Are organisations becoming flatter or taller?
Flatter
Encourages initiative
Collaborative environment
What are the disadvantages of talll organisations?
More bureaucratic
Takes longer to make decisions
What are the disadvantages of a flat organisation?
Weaker control
Fewer chances for employees to progress
What did the chairman of General Electric mean by a ‘boundaryless’ organisation
Modern environment is fast changing
Firms need a more flexible managerial approach
Achieved competitive advantage by replacing vertical hierarchies with horizontal networks; linking departments and functions
What is RPA and how is it used in the finance function?
RPA: software based approach that replicates user actions to reduce human intervention in repetitive tasks
Previously used in manufacturing
Now used for data entry, formatting, recs
Finance can refocus on value creation
What did the World Economic Forum ‘future of Job’ 2018 report conclude?
By 2022, each individual within finance will require an extra 101 days of learning
More competencies needed around:
Tech
Business skills
Leadership skills
How has the shape of the finance function changed over the past few decades?
Hierarchical triangle
- traditional shape
- broad base of finance workers
- reporting up to narrower levels
Segregated triangle
- last 20 years
- globalisation/tech meant use of SSC
- bottom half represents service carried out at SSC
Diamond shape
- today’s digital age
- eroded base due to automation
Explain in detail the roles within the traditional hierarchical triangle
Bottom of triangle: broad base carrying out ‘enabling’ roles
Middle: Arrows set of mgmt level who carry out ‘shaping how’ roles
Top: senior finance staff who concentrate on ‘narrating how’
How did the traditional hierarchical triangle evolve into a diamond shape?
Tech automation eroded bottom 2 corners
Central level bulge due to many of the higher value services being offered by centres of excellence
Flat top to show mor collaborative leadership I.e CEO and CFO work together
What are the four levels of the diamond shape?
Level 1 is the top quarter and Level 4 is the bottom
Senior finance team
-lead team to achieve desired org impact
Strategic business partnering
-work with stakeholders to influence and shape how the org creates/preserves value
Digital centres of excellence
-specialists generate further insight about creation/preservation of value in areas of specialism
Smart finance ‘factories’
-assemble and extract data to provide info and preliminary insight
What are the three main reasons that the shape of the finance function is changing?
The change of mandate for finance
– better and able to finance function to focus on ‘strategic business partnering’
Technology
– automation of management information processes
-Increased need for skills at ‘strategic business partnering ‘and ’digital centres of excellence’ levels
Finance function capability
– level to his focal point of tech and competency changes which is another reason for the central bulge
Will the shape of the finance function continue to evolve?
Increasing emphasis on professional level roles requiring support and mgmt skills
Continues emphasis on specialist knowledge leading to formation of interdisciplinary teams
What is outsourcing?
Contracting out aspects of the work of the organisation previously done in house, to specialist providers
Often non-core service outsourced e.g HR, cleaning, catering
What is a Shared service centre I.e internal outsourcing ?
Established for a particular activity of the organisation
A usually large, multinational organisation with processing centres in several countries chooses to consolidate these activities at one site
What are the advantages of outsourcing?
Cost advantages Quality advantages Supplier has specialist knowledge Can focus on core business activities exercise buying power Greater flexibility to switch supplier
Disadvantages of outsourcing?
Cost issues Loss of core competence Transaction costs Finality of decision Risk of loss of confidential info Supplier continuity Agreeing/negotiating terms Damaging to morale if redundancies happen
What is a Service level agreement?
An SLA is a negotiated agreement between the supplier and customer and is a legal agreement regarding level of service
Can help control outsourcing disadvantages
What factors should the SLA include?
A detailed explanation of the service supplies offering
Targets/benchmarks and consequences of failing them
Expected response time to queries
Expected time to recover operations in the event of a disaster
Procedure for dealing with complaints
Information and reporting procedures
Procedures for cancelling the contract
What is the transaction cost theory?
The indirect costs (i.e. non-production costs) incurred in performing a particular activity excellent
E.g. the expenses incurred through outsourcing
Are the three main types of transaction costs?
Search and information costs
– e.g. cost of determining which supply is cheapest
Bargaining costs
– cost of agreeing on acceptable SLA
Policing and enforcement costs
– cost of making sure the other party stick to the terms of the condition
How can you resolve high transaction costs?
By bringing the outsourcing in-house
For low transaction cost for outsourcing it encourages outsourcing
What are the two methods of obtaining control over resources that organisations need to choose between?
What is the decision based on a comparison of?
The ownership of assets i.e. hierarchy solutions
buying in the use of assets i.e. the market solution
Make vs buy
The decision is based on a comparison of the transaction costs of the two approaches
What three dimensions determine transaction costs?
Uncertainty
Frequency with which their transactions occur
Assets specificity
What do you Williamson and Coes argue is the third dimension?
What are the first two?
Third dimension :asset specificity
- most important determinant of transaction
- non specific asset means contracting is more efficient as transaction cost will be low
Other two: in house or buy in
What is asset specificity?
An asset is said to be transaction specific if its value to a given transaction is greater than its value to its best alternative use
The greater the gap, the greater the degree of specificity
I.e. the degree to which it can be adapted for other purposes
What did Williamson and Coase suggest the six main types of asset specificity are?
Site specificity: once sited they might be immobile
Physical assets specificity: may have lower value in alternative uses
Human assets specificity: training needed for particular transaction
Brand-name specificity: becoming associated with a particular brand name e.g. type because
Dedicated asset specificity: investments General-purpose plant made at the behest of a particular customer
Temporal specificity: timing of performance is critical e.g. harvesting
Which finance function activities should be outsourced?
Transactional processes
– e.g. Accounts Payable/receivable, travel and entertainment and cash management
Improvements in provider capabilities have also resulted in outsourcing —statutory and regulatory accounting, forecasting, budgeting
I.e assembly and analysis activities
What are some benefits of outsourcing the finance functions activities?
Cost reduction:Economies of scale
Radical transformation: allowing shift of internal resources
Access to superior capabilities, expertise and resources
Business partnering: balance can focus on business partnering and decision-making
What are some drawbacks of outsourcing the finance functions activities?
Loss of control Managing the outsourced services Cause disruption Risk of intellectual property theft and data breaches Erosion of internal knowledge and skills
What are the benefits of establishing a shared service centre for the finance function?
Cost reduction: reduction of premises, favourable labour rates, headcount reductions, system consolidation and potential tax savings
Opportunity to standardise processes: Low potential for errors, making the design and update of the control environment easier, allowing for consistent reporting
Improved level of service
Better opportunity to compare trans-across organisation
Consolidation of systems
What are the risks associated with the shared service centre in finance?
Organisation must have resources required to spread the major set of costs
Employee issues i.e. redundancies and morale
Lack of systems integration across the business may make migration of diverse systems complicated cost and time-consuming
SSC is often established in a multinational organisation with several operations which have different laws, taxes, languages and cultures
What are some tips on establishing a successful SSC?
Have a clear vision of how it fits into the overall business model
Senior manager in must be committed
Integration with other change initiatives
Clear scope with delineation of responsibilities
Buy in of operating units impacted by the change
ensuring that the organisation that remains after service transfer is robust
Support from those who have experience
Strong customer focused culture
What is an alternative to establishing an SSC? Give an example
Outsourcing the provision of the shared services to a third-party who specialises in these provisions
PWC
– one of the larger providers of finance shared services
– use of robot process automation
– use of enterprise resource planning
– help clients take advantage of new digital tools
At what level of the diamond shape are shared service centres used?
– Mostly used to lower level tasks i.e. level four
– now level three tasks are being offered in SSCs
– this means there is more opportunities for business partnering
Whether in-house or outsourced, SSCs have industrialised the provision of routine management and accounting services and out of scope to expand vertically and offer high value services
Draw the diamond shape and label the different levels:
Senior Finance Team: leadership to achieve impact
Strategic business partnering:influence decisions and implement to achieve impact
Digital centres of excellence:provide further insight about value creation
Smart finance ‘factories’:generate information and preliminary insight
What are the 4 different components of finance operations?
Financial reporting
Management accounting
Treasury management
Internal audit
What is financial/corporate reporting?
production of financial info for external use in accordance with accounting standards and legislation
What kind of financial information do financial reports include?
financial statements
tax reporting (to HMRC)
regulatory reporting
What are the three main financial statements produced by a company?
statement of profit and loss (SOPL)
statement of financial position (SOFL)
statement of cash flows
What is an SOPL?
income and costs incurred for period
allows profit calculation
What is an SOFP?
shows assets and liabilities of firm
shows shareholder equity (stake owners have in business i.e their capital)
What is a statement of cash flows?
cash receipts and payments
shows whether company is solvent and where cash is spent
What is the sequence of steps in the accounting function?
transactions > day books > ledger accounts > financial statements
Which groups of people have interests in a firm’s financial statement?
owners-profitability, management purposes
managers-planning
banks-repayments/loans/overdraft
employees-financial position of company as it affects their jobs/wages
suppliers and customers-check financial stability
government-obeying law and regulation
When do companies send financial statements?
to shareholders at the end of the year
What opinion do auditors give?
How true and fair financial statements are
What is management accounting?
provision of information to help managers and other internal users in their decision making, performance measurement, planning and control activities
What are the most common management reports?
cost schedules
budgets
variance reports
Not legally required
What is a cost schedule?
lists expenses of manufacturing units of a product Standard cost card i.e list of cost per unit
What 3 ratios are investors interested in?
Earning per share
Price/earnings
Dividend yield
EPS formula
EPS = [profit after tax (- preference dividends)]/weighted average number of ordinary shares in issue
measure of the profit attributable to each ordinary shareholder
P/E ratio formula
P/E ratio = share price / EPS
high P/E means investors paying more for today’s earnings in anticipation of future growth
Dividend yield
Dividend yield = [dividend per share/ current share price] x 100
What key business decisions can a cost schedule help a business make?
pricing decisions
break even analysis
key factor analysis
investment appraisal
What are budgets?
Once cost/unit determined, budget produced
shows planned revenue and costs for certain period
based on cost schedule
Why are budgets useful?
CRUMPETS: co-ordination-guidance Responsibility Utilisation-best out of resources Motivation Planning Evaluation-appraisal Telling- 'communication'
What is a drawback of the budget report?
Only an estimate
Variance report?
compares actuals to budgets and identifies variance
What are the time periods looked at in financial and management accounting?
mgmt: historical and forward-looking
financial: mainly historical
What is treasury management?
mgmt of funds of the business
funds include cash, other working capital items, long term investments, short term and long term debt and equity finance
What are the key roles of a treasury function?
working capital management:monitor cash and working cap
cash management:prepare budgets and arrange overdrafts
financing:monitor investments and borrowing
foreign currency:favourable rates
tax:max tax avoidance
What is working capital management?
capital available for conducting day-to-day operations of an organisation, calculated as excess of current assets over current liabilities
[inventory + TR+ cash] - [TP] = working capital balance
What are the advantages of holding large and small balances of each working capital component?
Large vs small
inv: customers get goods immediately vs low holding costs, less risk of obsolescence costs
TR:customers like credit vs risk of irrecoverable debts
Cash:bills paid promptly vs invested elsewhere
TP:preserve cash vs suppliers more likely to compromise
What are the two main types of external finance?
Debt:borrow and pay back later, usually + interest
Equity:selling share to raise cash
Advantages of debt financing?
interest payments allowable against tax
does not dilute ownership
cheaper than equity and secured against assets
takes priority over equity in event of liquidation
Advantages of equity?
no min level of dividend that must be paid to shareholder, can suspend payment if profits are low
bank requires collateral in form of asset before loan given, comp may not have many assets
What is financial gearing?
financial gearing =
[long-term debt/shareholders funds] x 100
high gearing ratio:high level of risk as debt obligations are necessary but dividends are voluntary
What is a forward exchange contract?
exchange at a future date with predetermined rate
What does tax do?
reduce tax liability
What is the difference between tax avoidance and evasion? What is tax mitigation
avoidance: legal, reduce tax, defeat Parliament intentions
evasion: illegal, involves misrepresentation
min tax means max profit and dividends
mitigation:reduce tax without defeating Parliament
How does Parliament react to tax avoidance schemes?
changes law to stop scheme from working
What is internal audit?
independent activity
management examines and evaluates the organisation’s risk management processes and systems of control
makes recommendations to achieve objectives
good corporate governance
What is the role of internal auditors?
helping achieve objectives
helping design and monitor performance measures
How often does the UK Corp Gov state that companies without internal audit fn should review need for one?
annual review of need
Who monitors internal audit function?
audit committee
function requires experienced, qualified staff
How does internal audit evaluate a company’s risk management structures?
manage basic data to identify risks
identify techniques for prioritising and managing risks
report on effectiveness of risk management solutions i.e controls
What is the scope of internal audit?
review internal controls and financial reports
review risk management systems
carry out special assignments e.g fraud investigations
conduct operational reviews e.g efficiency
Who determines scope of internal audit?
management/audit committee
what is the approach for internal audit?
risk based approach
evaluate systems
test operations
make recommendations
what is fraud?
deliberate deception to obtain unjust or illegal advantage
e.g falsification, ignoring errors, suppressing info
what are the 3 required prerequisites for fraud?
dishonesty
opportunity
motivation-feel that rewards outweigh risk
what factors might increase risk of fraud?
dominant manager/group of people
unnecessarily complex corporate structure
poor staff morale
personnel not taking leave- don’t want to pass work over
lavish lifestyles of employees
inadequate segregation of duties
lack of monitoring
unusual transactions
payments for services disproportionate to effort
What is the spectrum of implications of fraud?
from immaterial to critical: loss of shareholder confidence loss of assets financial difficulties collapse of the company fines by tax and other authorities
Who handles fraud in a company after identification?
internal audit: go to dept investigate make recommendations report
Limitations of internal audit?
independence problem
harder to achieve independence in smaller company
will only succeed if staffed and resourced properly
may be unwilling to disclose fraud
How can audit committee reduce limitations of internal audit?
set work agenda for internal audit
receive internal audit reports
ensure internal audit is properly resourced
has ‘voice’ at board level
What are the specialist areas of an organisation?
FP&A
Taxation
Project management
Project appraisal
What role fo FP&A specialists play in organisations?
budgeting, forecasting, data analysis to support decisions
effectiveness of investments and other ways to utilise cash
gauge financial health using key ratios
identify profitability or products or product lines
work with depts to prepare budgets and consolidate overall budget
Which areas do tax specialists focus on?
Tax compliance: minimise risk (follow legislation)
Tax planning: create value (tax efficiency)
How can tax planning lead to reduced tax paid?
lower taxable amount
reduce tax rate
allow greater control of when tax is paid
maximise tax relief/tax credits available
What is project management?
integration of all aspects of a project
ensuring proper knowledge and resources are available
achieve expected outcome in a timely, cost efficient manner
What are the 5 project management stages?
- Initiation
- Planning
- Executing
- Controlling
- Review and close
What is project appraisal?
prior to project management process
assessment and evaluation of decisions and outcome of project
How do you appraise a potential capital project?
estimate the costs and benefits of the investment
select appraisal method and use it to assess it the investment is financially worthwhile
decide whether or not to go ahead with the project
What are the 3 project appraisal methods?
payback
net present value (NPV)
internal rate of return (IRR)
How do you calculate payback period?
Calculate cumulative cash flow
highlight when payback (cost) is achieved
If lower than target period, do not undertake project
How does the finance function work with FP&A?
provides accurate information
validates the analysis presented to decision makers
How have recent changes affected specialist areas?
evolving diamond shape:
- more business partnering opportunities
- increased number of specialist tasks within these areas offered by SSC
- tech improves productivity
- use of advanced tech and creation of SSC resulting in ‘digital centres of excellence’ at diamond shape
What do strategic planners do?
interpret and use financial statements
communicate insight in appropriate format
at required frequency
to internal and external stakeholders
INFLUENCE users of info
What skills are needed by a finance business partner?
people skills
adaptability
identify and win over key stakeholders
What is the desired impact of the CFO?
leading key initiatives that support the organisation’s goals
executing and funding strategies set by CEO
liaising effectively with internal and external stakeholders
How has the CFO’s role changed over time?
Boeing example:
traditionally: navigator and CEO is pilot
modern day:co-pilot to CEO
What are the two main technological changes affecting the finance function?
new data sources and analysis methods
automation and cognitive computing
Opportunities in finance function offered by tech?
AP/AR:AT invoice management systems, more streamlined, they can learn accounting code
Supplier management:vet new suppliers by checking info, set them up
Procurement: paperless system, track pricing
Expense management:review and approve expenses, audit expenses
AI chatbots:efficiently solve queries
How have new data sources and analysis methods provided oppurtunities?
better informed decision making
e.g predictive analysis improved forecasting and reduced need to rely on personal judgement of finance professional
Which functions could be automated according to the 2016 McKinsey report?
Data collection:64% Data processing:69% Applying expertise:18% Stakeholder interactions:20% Managing others:9%
How does McKinsey study side with Diamond shape
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