Getting to grips with business accounts!!

Do you know what the key functions are in your your Finance department? And should you know?

Typically, unless you actually work in finance, most employees only interact with the finance team for specific activities that relate to their role (raising or paying an invoice) or their personal finances (salary or expense queries).

Clearly the core function of the fiancée department is to record all the financial activities and matters for the business. The structure and specific responsibilities will vary with each company, and over time, so that it can provide the best value at that time.

Most finance departments are split in two main areas: management and finance accounting.

Management accounting involves the provision of information to managers for ongoing decision making (i.e. future forecasting), whilst financial accounting is concerned with financial processing and the preparation of financial statements to show the financial health and performance of a company in previous time periods (i.e. historical data).

This article will explain some of the activities that are conducted in each of these areas. In small businesses you may find that most of the finance activity is outsourced as it is a function that is critical to the success of the business.

Management accounting

Managers need ongoing financial information, e.g. how much it costs to produce a particular product or service, so that they can make better decisions such whether to changing suppliers of goods or services or how much they can increase staffing levels or salaries.

In management accounting the regular activities include:

Financial Accounting: Activities include the production of financial statements e.g. the balance sheet (assets and liabilities and capital of the business) and the profit and loss statement (records of sales and purchases).  These show the financial health and performance of a company in previous time periods to assist with budgeting and forecasting (see below). The data is usually produced at given time intervals e.g. the monthly statements and at the end of each financial year.

Budgeting & Forecasting: This involves producing and assessing the budget, calculating the variance between planned and actual costs and forecasting the revenue and expenses of certain groups or functions. Data is then issued allowing budget 'owners' to plan and prioritise their spending. The forecasting group also produces 'what if' scenarios in order to be prepared for a variety of possibilities.

Raising finance: Whilst the finance department is responsible for the process of raising finance e.g. through loans, bank overdrafts, shares etc. The decision to raise finance and the method will be decided at a more strategic level and usually involves other, non-finance, members of the management team

Financial accounting

As we said earlier financial accounting involves recording and reporting what has actually happened. This information is used by managers, shareholders (if a limited company) to help assess and analyse the success of the company. The information is also used for tax purposes.

In financial accounting the regular activities include:

Financial Control: This activity governs the management of the company’s ‘books’ to make sure that all business transactions are properly recorded and managed. These include the general ledger which is the main record of all of the company’s financial reports. These records are also used to show compliance with legal, financial and tax rules. The controller also handles cost accounting and fixed assets accounting.

Financial control has several elements. First is Book Keeping which is the act of recording all financial transactions, as part of the financial controls of the organisations, and refers to the days(before computers!) when all records were noted in books or ledgers. It includes sales, purchases, income, and payments by an individual or organisation.

Also included is Accounts Payable (paying bills); Accounts Receivable (collecting bills due) and Credit Control (the process of control over payments coming into and going out of the firm.

The Payroll (or wages) section of the finance department is be responsible for calculating the wages and salaries of employees and organising the collection of income tax and national insurance for the Inland Revenue.

Because of the direct link to employees you might find that parts of this activity are carried out by the HR department, e.g. the administration and documentation of salaries, wages and bonuses. The actual payroll transaction is then handled by the finance department or outsourced to a third party.

Expense Management: This area is sometimes part of the financial control area or payroll. It involves outlining and enforcing expense policies and paying, monitoring and auditing all employee-initiated expenses e.g. travel, accommodation, entertainment and food.

If staff incur regular expenses they may be issued with a company credit card. For ad hoc expenses staff may have to use their own funds and reclaim them through the expenses process. Some organisations may provide petty cash i.e. a small amount of discretionary funds in the form of cash where it is not sensible to make any disbursement by cheque, although this is becoming extremely rare.

Treasury: This is also known as cash management, and is where the company's assets are managed to maximise liquidity and reduce risk e.g. exploring investment options for excess cash. It also makes sure that the company has a steady cash flow and may be responsible for securing any funding that may be needed.

Tax: The increase in responsibilities and liabilities for tax has raised the importance of this function. It is responsible for managing and planning all tax-related expenses which, for global organisations, can be quite complex. It is critical that all tax payments comply with the government requirements to avoid interest fees or penalties.

Internal Audit: The amount of internal and external policies and regulations surrounding finance is rigorous. Responsible organisations will check that the financial operations are compliant with the rules.   Because of the sensitivity of the work an internal audit function may be an independent group existing outside of the finance department or an external auditor may be utilised.

I hope that this very brief description gives you a better understanding of finance and may even spark an interest that leads to a possible career option.

If you want to know more take a look at our Business section on the website.