Bite-Sized Training™

Finance Management
 Finance Management Bite-Sized TrainingTM | Mind Tools

What is Finance
Management? Bite-Sized
Training
This e-book is published by:

Mind Tools Ltd.

Copyright © Mind Tools Ltd, 2008-2012. All rights

reserved.

Version 1.3

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Cover image © iStockphoto/ermingut

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 Finance Management Bite-Sized TrainingTM | Mind Tools

Contents

1. Introduction .................................................................................................................................... 4

2. Finance 101 ................................................................................................................................... 5

3. The Organization of the Finance Department ................................................................................. 7

4. Trends and Challenges ................................................................................................................ 11

5. Key Points.................................................................................................................................... 12

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1. Introduction
Finance is something of a mystery to those who
have little or no experience in the field.
It’s all about numbers and dollars, pounds, or
euros and quite frankly that’s often a little
intimidating.
It’s comforting to know that someone is managing
the purse strings, though. Otherwise you might
not be able to expand your team, or upgrade to
that new and much better version of the software
you rely on.
But what exactly do the finance people do? Are
they simply the gatekeepers of the bank account,
or is their job more strategic than that?
Finance management is indeed much more than
controlling the flow of money. It’s also not
confined to a special department. A finance
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Finance Management Bite-Sized TrainingTM | Mind Tools
manager is anyone responsible for making an
investment or financing decision. And if you think
about it, these types of decisions are made
everyday throughout an organization.
This Bite-Sized Training™ feature will help you to
appreciate the breadth and depth of finance
management. Over the next hour you will:
 Learn how finance impacts an
organization.
 Understand how financial management is
organized.
 Learn about specific deliverables the
finance department provides.
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2. Finance 101
Defining finance management is not an easy feat.
There are so many aspects to financial decision-
making that terminology can sometimes get in the
way of a good definition.
Finance management is used interchangeably
with business finance, managerial finance,
management accounting, and corporate finance.
These terms themselves have been associated
with specific functions, which in fact fall under the
finance management umbrella.
Corporate finance typically refers to capital
investment and is most often associated with
market decisions and maximizing shareholder
value.
Managerial and business finance on the other
hand tend to focus on accounting for, and
controlling, financial assets.
However, depending on the size of the
organization and how it’s structured, these can all
be one and the same or different functions
completely.
For our purposes, we’re going to assume that
finance management refers to both areas of
influence. The definition then becomes:
Finance management is the reporting, acquisition,
allocation, and utilization of financial resources.
Note that the definition doesn’t say anything
about maximizing profit. Financial decisions are,
in fact, based upon the organization’s strategic
direction and its desire to grow and remain
competitive. So rather than maximize pure profit,
what finance is really concerned with is
maximizing the value of the owner’s equity.
When owners are satisfied that the company is
moving in the right direction, they make finances
available to carry out the strategy. That may
mean making decisions in the short term that
sacrifice profit for investment. Improving
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shareholder value then, is key to financial
management.
Specifically, finance management is about:
 Analyzing the financial situation.
 Making financial decisions.
 Setting financial goals and objectives.
 Developing financing plans.
 Providing effective finance systems.
All of these functions ensure that business
strategy is thought about in conjunction with
financial strategy. Looking at the financial impact
of management decisions across an organization
is a key element of long-term profitability and
sustainability.
As you can gather, finance is a function that is not
done in isolation. Top management is
continuously involved in financial decisions. But
what about the production manager who believes
new equipment would solve his capacity
problems? Analyzing the situation from a financial
perspective and taking a long-term strategic view,
it might be better to increase plant capacity as
well as upgrade equipment to earn the return on
investment desired. This is the type of finance
decision department managers should
understand, and be able to make.
Consider too the marketing manager who is
developing a new campaign. The costs
associated with the investment need to be
recorded. Consideration should also be given to
accounting for the intangible, “Goodwill” asset on
the balance sheet. This type of investment has
financial considerations beyond the strict dollars
and cents, and the marketing manager should
use that information when making the decision to
go ahead with the investment.
Action: Think about the role of finance in your
organization. List the first three things that come
to mind about what they do, on the next page.
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 Finance Management Bite-Sized TrainingTM | Mind Tools

1.

2.

3.

Now, think about your role and how it relates to the financial management of the organization. Answer
the following questions:

What decisions do you make that are related to finance management?

How will understanding the finance function help you perform better?

© Mind Tools Ltd, 2008-2012 6


3. The Organization of the Finance Department
Depending on the size of a company and how it’s
structured, the top managers working in the
finance department will have different names.
Titles include Chief Financial Officer, Treasurer,
Controller (or Comptroller), and Finance
Manager. Whether there is just one or more than
one person fulfilling the role, the primary functions
of the department remain similar.
In general the finance department has two areas
of focus:
Financial planning has to do with obtaining
financing, managing the firm’s cash account, and
making sure that the firm meets its obligations to
investors.
It is responsible for:
 Banking relationships.
 Cash and credit management.
 Obtaining financing.
 Dividend payments.
Planning
Accounting
The Planning Function
Financial planning duties are often referred to as
“Corporate Finance.” This is the branch of
financial management that addresses investment
decisions and financing decisions.
The goal here is to ensure that enough funding is
available to meet operational needs. Short-term
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 Insurance.
 Pension management.
Financial accounting (or control) has to do with
how financial resources are managed, budgeted,
and accounted.
It is responsible for:
 Accounting.
 Financial statement preparation.
 Internal auditing.
 Payroll.
 Budgets.
 Taxes.
Whether or not there is an actual segregation of
duties, these two functions combine to describe
the work of finance management.
Action: Think about how these responsibilities
are allocated in your organization. Briefly
describe the split, if there is any.
needs include covering payroll, funding sales
made on credit, and investing in equipment or
market securities.
In the longer-term financial planning is also
needed to ensure that funds are available for
capital investments in the business and other
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business opportunities like mergers and
acquisitions.
Investment decisions are related to how much
the organization should invest and what specific
assets to invest in. Activities include:
 Capital budgeting – deciding, from a
financial perspective, whether it’s worth
going ahead with projects.
 Valuing assets using present value,
opportunity cost of capital, and future
value, to make sure that money is well
spent.
 Assessing the risk of a project, to make
sure that the project is likely to return
enough of a profit to justify that risk.
Investment decisions:
Financing decisions:
The Accounting Function
The accounting function is responsible for
managing the everyday financial activities of the
organization. From creating financial recording
processes to deriving financial benchmarks and
improving financial systems, accounting is an
integral function of the organization’s operations.
The accounting profession can be split into two
branches, financial and managerial. Financial
accountants are the ones who prepare the
financial statements and perform audits on the
record-keeping process. Managerial accountants
focus more on daily financial resource decisions
within an organization.
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 Finding assets that are worth more than
they cost, and which give a sufficient
return on that cost.
Financing decisions are related to how to raise
the cash required for the desired investments.
Activities include:
 Determining capital structure.
 Raising both debt and equity financing.
 Determining interest or dividend policies
for investors.
 Working capital management.
Action: What decisions has your organization
made in the past year under each of the main
functions of financial planning?
Financial Accounting
Financial accountants provide information that
helps managers make decisions related to the
daily management of the organization. The key
deliverables of the financial accountants are the
financial statements. This process includes
bookkeeping as well as the actual statement
preparation.
The three key financial statements they provide
are as follows:
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1. The Balance Sheet
This statement captures a company’s financial
position at a specific point in time. The Balance
Sheet has three sections:
1. Assets – the things of future value that the
company owns including items like trucks,
computers, cash, accounts receivable,
and goodwill and trademarks.
2. Liabilities – the obligations to pay or
provide goods or services at some later
date. Items include loans and accounts
payable.
3. Equity – the amount of net assets (assets
– liabilities) owing to the owners of the
business. The total equity is the sum of
the owner’s contributions to the company
and the earnings (or losses) that the
company records.
Tip:
The balance sheet gets its name because total
assets must equal total liabilities and equity. What
a company owns must be equal to what it owes to
its creditors and owners.
2. The Income Statement/Profit and Loss
Statement
This statement shows the inflow of revenue and
the outflow of expenses for a specific period of
time.
 Revenue is the inflow of assets (in other
words, cash or accounts receivable) in
return for services performed or goods
sold.
 Expenses are the outflow or consumption
of assets (for instance, cash, inventory,
supplies) or obligations incurred (for
instance, accounts payable, taxes
payable) while generating revenue.
The difference between these two is the Net
Income.
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3. Statement of Cash Flow
This statement records inflows and outflows of
cash during a period of time. Essentially it
converts “accrual based accounting” (don’t worry
if you don’t know what this is), which are used for
the above statements, to cash. There are three
sections:
1. Cash flow from operations – inflow,
converted to cash, from sale of product
and/or services, and so on.
2. Cash flow from financing – inflow from,
and outflow to, investors.
3. Cash flow from investing activities –
purchase and sale of long-term assets.
The other main function of financial accounting is
budgeting. In most organizations, this is a
responsibility that is pushed down to each
department. Using previous year’s data and trying
to forecast changes in the financial environment,
a budget is created for each department. Those
are then amalgamated into an operational budget.
The budgets are closely monitored with “actual”
versus “budget” figures analyzed to control
expenditure and support better forecasting in the
future.
The financial process can’t run smoothly without
quality information to base decisions. Financial
accounting is tasked with providing that quality
through reliable financial data.
Tip:
See our article on Managing a Budget, which
provides more detail on this important finance
activity.
Management Accounting
The goal of management accounting is to support
a dynamic decision-making process and help
managers make great business decisions. It uses
the numbers received from the financial
accountants and interprets and modifies it for
practical, internal decision-making.
9

It makes sure that:
 Assets are being used efficiently.
 Business assets are secure.
 The company is maximizing shareholder
value.
The types of activities you can expect a
managerial accountant to do include:
 Helping set corporate objectives and
deriving strategic plans for the finance
department, as well as the organization as
a whole.
 Designing systems for recording events
and transactions for management
information systems.
Financial accounting:
Management accounting:
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 Generating, communicating, and
interpreting financial information received.
 Monitoring outcomes against budgets,
plans, and other benchmarks.
 Developing the benchmarks required to
monitor and control financial and non-
financial performance data.
 Improving systems by identifying and
managing financial risk and auditing
internal processes.
Action: Think about how these accounting duties
are separated in your organization. How does
each impact you, your role, and your ability to
meet your objectives?
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4. Trends and Challenges
As with all professions, finance roles are
changing. Most significant is the trend toward
outsourcing many of the controller-related finance
duties. Payroll was one of the first major financial
functions to be outsourced on a regular basis.
Even small companies are choosing to use
payroll service firms.
Using outside accountants is also very popular.
Many organizations retain staff for bookkeeping
functions and have their financial statements
prepared by professional firms. Internal auditing is
another area that is often outsourced, and this
may even be required by law.
Much of this trend has emerged because of
technological advances. Processes that are
transactional in nature can often be done quicker
and more efficiently by outside parties. This frees
up internal financial resources for more valuable
activities.
What duties are outsourced?
Benefits?
Disadvantages?
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This clearly offers the potential for cost savings.
The challenge for finance professionals is to
develop their general business skills and become
strategic business partners. Instead of just putting
together a financial report and delivering it, they
need to learn how to communicate the
information in ways that non-finance people can
understand.
As part of this, they need to use their financial
expertise to help others understand the impact of
the numbers. In this way they can support their
peers in making decisions about department
investments and resource allocation. Financial
managers are being expected to consult on sales
and production issues and help the company
formulate its overall strategy.
Action: How much of these financial functions
does your organization outsource? What do you
see as the benefits and disadvantages of the
arrangement?
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5. Key Points
Finance isn’t just about finance. It’s a function that
reaches into the nooks and crannies of an
organization. Managers in all departments employ
many of the skills used by financial experts.
Financial decisions have wide reaching impact so
it’s important that finance professionals use their
expertise to support good decision-making
throughout the organization.
Finance is a truly integrated function that holds
the financial viability of an organization in its
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grasp. In the age of global competition and a
need to streamline processes, finance can take
the lead and show other departments how add
value rather than simply providing service. By
combining financial expertise and strategic
thinking, finance management adds significant
value to an organization and ensures continued
profitability.
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