Financial Management Activities

Financial Management

Activities of Financial Management involves the following -

1. Accounting
2. Compliance
3. Management and control
4. Strategy and risk
5. Funding
6. Management and resourcing of activities
7. Other activities

1. Accounting

The purpose of Accounting is to record the financial consequences of organisational activities. This covers any activity undertaken by or on behalf of an organisation that results in a financial obligation or benefit. Three elements of Accounting are identified as below:

• Transaction processing- Transaction processing involves the recording and settlement of financial transactions arising from organisational activities. Cash obligations, payments and receipts are coded and recorded, usually through a double-entry bookkeeping system including standard ledgers of debtors, creditors, cash book and general.
• Accounting and reporting- The aggregations of financial transactions in general ledgers together with any required accounting adjustments enable the production of trial balances based on charts of accounts. The trial balances in turn enable the production of basic accounts in the form of profit and loss statements and balance sheets. The double-entry system provides a central unifying process and global standard for accounting.
• Financial control- Financial controls are required to ensure the protection of assets and to ensure that all financial transactions are accurately recorded and reported. Activities include inter alia setting internal control policies, reconciling external statements and monitoring payment of invoices.

2. Compliance

The purpose of Compliance is to meet the requirements of governmental and other regulatory bodies. The evidence has been classified to distinguish two elements – regulatory and tax –

• Regulatory- Regulatory compliance covers the range of activities necessary to produce, communicate and verify financial information to meet legal and regulatory requirements (excluding tax which is covered separately below). This would include the completion of statutory accounts. Also included are activities which demonstrate to external parties that governance and control procedures meet externally set standards eg, from the UK Corporate Governance Code and Sarbanes-Oxley.
• Tax- Tax relates to both complying with the tax requirements of the relevant national authority and tax planning. The surveys do not generally identify these two aspects of tax separately in which case they are included here. Tax reporting and compliance involves the analysis and aggregation of financial transactions in order to compute tax liabilities. Negotiation with tax authorities may also be required.

3. Management and control

The purpose of Management and Control activities is to produce and use financial and support information to inform, monitor and instigate operational actions to meet organisational objectives. These activities will also play a part in defining and refining those objectives.

A wide range of overlapping terms are used in relation to Management and Control activities as demonstrated by study. This makes it difficult to analyse the activities involved. However, in order to organise the findings, the following typology is used:

• Processes- ‘Processes’ covered here include the development, production and analysis of the information used for management and control purposes. Some surveys distinguish between financial and non- financial information.

Financial information – Financial information is data about the monetary transactions of a person or business. This information is use to derive estimates of credit risk by creditors and lenders. Examples of financial information are as follows:

• Credit card numbers
• Credit ratings by third party credit analysis firms
• Financial statements
• Payment histories

Anyone using financial information has a duty to keep the information secure, since it could be used by third parties to engage in identity theft

Non-financial information-  relates to information such as carbon emissions, customer feedback and elements of the balanced business scorecard. As it is not financial information it does not strictly fit into the framework of activities.

• Applications- ‘Applications’ relate to how information is used for Management and Control. The context will determine how the information is aggregated and analyzed (eg, profit-based or cash flow-based). The following four principal applications were identified:

• General management and control of operational activities, generally with an implicit focus on profitability or value for money goals. The nature of finance department involvement can vary significantly.
• Cash management and treasury has two aspects. First, as a key performance dimension, for example, through company valuations based on the net present value of projected future cash flow. Second, as an asset class to be managed through treasury activities. These can include raising finance, leasing, working capital management, interest rate and currency risk management.
• Investment appraisal seeks to assess the merits of investment options, potentially using both cash approaches (eg, net present value and internal rate of return) and profit-based appraisals (eg, return on investment).
• Tax management involves the consideration of a range of factors such as decisions on transfer pricing, legal entity structures, operating locations and financing structures. Generally, the focus will be on minimizing tax liabilities, although reputational issues may come into play, eg, with aggressive tax avoidance schemes.
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• Internal Control and auditing-

• Internal control is the process designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity’s objectives concerning the reliability of financial reporting, effectiveness, and efficiency of operations and compliance with applicable laws and regulations. The reasons for internal controls can be seen in the example. They include: Minimizing the company’s business risk, Ensuring the continuing effective functioning of the company and Ensuring the company complies with relevant laws and regulations.
• Internal auditing may involve a range of activities but a key element will be ensuring that controls operate as designed. Clearly all finance and organisational activities may be subject to internal audit.

• Management accounting- Management accounting also is known as managerial accounting and can be defined as a process of providing financial information and resources to the managers in decision making. Management accounting is only used by the internal team of the organization, and this is the only thing which makes it different from financial accounting. In this process, financial information and reports such as invoice, financial balance statement is shared by finance administration with the management team of the company. Objective of management accounting is to use this statistical data and take a better and accurate decision, controlling the enterprise, business activities, and development. Financial accounting is the recording and presentation of information for the benefit of the various stakeholders of an organization. Management accounting, on the other hand, is the presentation of financial data and business activities for the internal management of the organization. In this article, we will learn what is management accounting and its functions.

4. Strategy and risk

The purpose of Strategy and Risk activities is to inform and influence from a financial perspective the development and implementation of strategy, and to manage risk. they are treated as an aspect of strategy.

• Processes- ‘Processes’ covered here include the development, production and analysis of the information used for management and control purposes. Some surveys distinguish
• Strategy- Finance is firmly implicated in the strategy process for three main reasons:

• Financial resources: the effective implementation of strategies requires sufficient financial resources.
• Success measure: for commercial entities in particular a key measure of organisational success is financial performance.
• Cross-organisational visibility: financial information provides a uniform measure of performance across the organisation and is a key means of making organisational activities visible and thus understanding the business.

However, the wide range of terms used to describe strategic activities suggests significant variation in how finance activities are implicated in the strategy process.

• Risk management- Definitions of risk management vary widely and are often ambiguous, although for this paper there is the linking theme of finance. One approach is to focus solely on downside risks and the harm or losses that may arise from organisational action or inaction. Examples might include the risk that cost reduction programs lead to health and safety shortcomings. An alternative approach involves looking at the relationship between risk and upside potential. For example, diversifying into a new business may be high risk but have the potential for greater returns than developing existing businesses. For this reason, we have included risk management alongside strategy. The range of activities is potentially very broad including inter alia the setting of high-level risk policies, the identification of risks across the organisation and the monitoring of action plans designed to manage such risks.

5. Funding

The purpose of Funding activities is to inform and engage with investors and funders, both current and potential, to obtain and maintain the necessary financial resources for the organisation. Engagement includes the provision of information, relationship building, and negotiation. The provision of information enables investors and funders to appraise organisational performance, actual and projected, in relation to their financial interest in the organisation.

• Investor relations- Investor relations are largely concerned with equity investors including individuals, fund management institutions, hedge funds and private equity organizations. Their objective is generally to achieve a financial return. Criterion for guiding their investment decisions include the potential for growth in shareholder value relative to the riskiness of the investment; the level of running returns achievable through dividends, and gains achieved through an exit. Accordingly, their interests are met by providing guidance on the financial prospects of the organisation, how plans will be achieved and the risks involved. The level of information equity investors can obtain will be determined by the extent and nature of their equity holding and their relationship with the organisation and other shareholders. For example, a majority shareholder of a private company is likely to have full access to all available internal information; the information access of a shareholder in a quoted company will be determined by listings requirements.
• Debt financing-Those providing debt finance covered by the practitioner studies are in broad terms commercial lenders (eg, banks). Their focus is to ensure that their loans plus interest and fees are repaid, either from operating cash flow or from the liquidation of collateral. Thus, their requirements are met if an organisation remains solvent, generates sufficient cash to meet repayment requirements and ensures that any security provided retains its value and remains unencumbered. Finance activities include negotiating with debt funders who are aiming to protect their position by negotiating terms and lending covenants that set minimum performance criteria, which, if met, are intended to ensure repayment. Typically, a flow of information will be agreed (eg, monthly accounts, covenant results) which will allow the funder to confirm compliance on an ongoing basis and to take action to recover funds in the event of the agreed terms and criteria not being met.

Other types of funder, not explicitly covered by the practitioner studies, include donors to charities or grant providers (eg, development agencies). Their focus is on ensuring that the funding provided has been spent in accordance with the intended objectives; this will include an interest in the solvency of the organisation to ensure its continuity.

6. Management and resourcing of activities

As part of the organisational activities the finance activities covered in the framework have to be managed, organised and resourced. The surveys cover three main categories: people

management, finance systems and outsourcing and shared services.

• • • Finance systems-The finance activities shown in the framework require the development, implementation and management of finance systems. We have included quite a wide range of related survey items under this heading but have tried to exclude items which relate to managing an organization’s IT function as a whole.
    • People management-The management and development of the people carrying out finance activities will generally be the responsibility of the relevant line managers. Therefore, the questions asked in surveys relate to importance and time allocation rather than responsibility.
    • Outsourcing and shared services- Outsourcing and shared service centers represent a particular way of resourcing finance activities. In the case of outsourcing, responsibilities will relate to managing the relationship and contract with the provider of the outsourced services, whereas shared services responsibilities will relate to managing the people and systems which provide the services.

7. Other activities

In order to ensure completeness, it is important to consider other activities that the surveys indicate may be the responsibility of the finance department. While it could be argued that some are based in financial information eg, pensions and insurance, others are quite separate eg, human resources and legal. The view taken here is that there is no coherent interlinking with the finance activities in the framework which are based in the production and use of financial information.