Total Pageviews

Monday, 2 February 2015

Role of Finance

Last week I got a rather simple question: what does a finance manager actually do? The simplest questions (e.g., why, who, what, when, how) may however be the most dangerous of all. Firstly, I had to smile as I thought that the answer would be so obvious. Then I had a second thought: what if the person who was asking really has no clue what finance management is all about? How would and should I explain this role in layman's terms?

Describing the usual finance output (e.g., producing reports and the annual accounts) or describing the usual finance input (e.g., recording transactions a.k.a. bookkeeping) does not really help explaining the role of finance. It does not explain the vital role of Finance which is underlined by the usual CFO role in the management board.

Organisations create added value by supplying goods or services and in that process they buy, sell, produce, maintain stocks, etcetera. Most departments have a functional role in this process: Procurement, Sales, Operations and Warehouse. The only department that monitors and controls the entire value chain (from order to cash) is Finance.

The Finance department records all the transactions generated by other departments: the Accounts Payable dept records the purchase invoices and prepares payment proposals based upon supplier conditions, the Accounts Receivable dept used to record sales invoices before they were automated, they record incoming customer payments and chase overdue debtors. These are the easy examples.

The Finance manager is thus responsible for the entire value chain but still this is not yet the essence.

Any living organism has the will to survive unless it is terminally ill. As organisations (e.g., companies) are comprised of human beings, the same will to survive is found there. It is called different though. Buzz words like sustainability, profitability, liquidity, return on investment (ROI), and solvency are - ultimately - used to describe the same phenomenon: the will to survive.

Living organisms have an instinct to survive. The instinct automatically knows what to do (e.g., run, hide, defend, attack) and is based on the accumulated genetically stored experience of thousands of years. Organisations do not have one instinct but have the instincts of many but usually only the instincts of a few actually matter.

To some extent the Finance manager is the organisation's instinct as (s)he gathers data and information from every source in the organisation and acts like the organisation's early warning system. The Finance manager actively looks for anomalies of any kind, investigates its causes, and then informs and advises the Boss (e.g., CEO) who - ideally - takes remedial action. Future anomalies have also become an important part of the Finance job. It is usually referred to as (Enterprise) Risk Management.

In more simple words: the Finance manager monitors and controls the organisation's profitability (historic, current and future) on an ongoing basis, and ensures that the organisation is having adequate cash for paying current and future debts and salaries on a timely basis. That's all folks.