This section examines the role of the finance team in providing the meaningful financial and non financial information to ensure that your senior management team can make informed decisions. The finance team plays a crucial role, as it provides a quantified basis for actions taken at all levels in the company.
Finance teams are responsible for collecting, analysing and presenting information to the rest of the company. This information is required for a number of different purposes:
· Auditable accounts and results
· Annual report to directors, shareholders and investors
· Business plan for approval by the senior management team
· Management accounts monitoring business performance
· Local performance reports for designated areas of the business
· Justifications for investments in facilities, plant, equipment, ICT and such
· Investigations into specific issues that could result in financial claims
For each one of these purposes, the data should be structured to support the planned use.
The provision of this information creates considerable challenges, because it requires the financial team to have a thorough understanding of your company and to be working closely with the managers responsible for running day to day activities. For this reason, the financial team may need to broaden their remit, expanding and improving the quality of the information they provide, so that it can offer a comprehensive appraisal of the business’s financial, commercial and competitive position.
In today’s rapidly changing business environment it is critical to maintain a timely performance overview for monitoring financial achievements, identifying issues and establishing trends. Raw financial figures need to be complemented by key financial ratios and non-financial information to allow managers to make complete assessments of the business’s performance and identify future challenges they may have to address.
Many companies find key ratios very useful in allowing managers to monitor their relative position against past performance and make comparisons with other companies or established benchmarks. The non-financial measures are also vital because they provide managers with information on levels of customer satisfaction, quality trends / issues, on-time delivery performance, price movements and such.
Consistency is a fundamental principle of good financial management, but this can result in some traditional accounting measures being retained until they convey misleading information. Your financial manager and their team will need to routinely appraise the data collected, verify measures are appropriate and provide an accurate interpretation of the situation.
When calculating product contribution, your company will need to think carefully about how you will account for business overheads:
When deciding on prices or assessing your product range for viability, it is important to understand the true cost of producing each of them. How do you apportion the cost of specialist production processes, quality assurance, central management and such between your product ranges?
If you include them in a general manufacturing overhead, this can over-burden your standard products, making them seem more expensive to produce than they truly are. If you are running your production as product-focused modules, this can make apportioning overheads much easier. It allows the actual cost incurred in the manufacture of component to be indentified more accurately and charged directly to specific products.
In taking make/buy decisions you will also need to account for overheads. Having decided which of your parts are strategic and need to remain in-house, you will need to calculate the relative benefits of making the remaining parts or buying them in. To calculate realistically, you need to know which of your overheads will no longer apply if you buy in and which will remain regardless. If the overheads will remain with your company, the contribution from manufacturing the parts is positive. Therefore, if you have the available capacity and there is no better way of using these facilities, then it is economically preferable to make in-house.
The evaluation and justification for making capital investment is a critical business decision. It is advisable to have a rigorous process that must be followed. Expenditure above set limits should require authorisation from your senior management team. Each application should be supported by formal documentation detailing the salient points concerning the investment request. This document should comprise:
· An outline of the proposal, making reference to the business plan objectives
· A breakdown of the costs involved in implementing the proposal
· The business benefits expected from the investment
· The estimated savings, returns and benefits over the life cycle of products
· Cash flow statements and the revenue needed to fund the implementation
· A proposition for the investment, with quantified performance targets
· Full technical and financial risk assessments, with recovery plans
· Personnel issues to be addressed and training requirements
· Detailed financial statements giving a commercial appraisal, investment justification and mandated financial assessment calculations (such as Internal Rates of Return and Discounted Cash Flows)
Risk management has always been a primary task for project managers. Today, all managers must be skilled at identifying and mitigating risks. Financial management teams take particular responsibility for ensuring that the company is not exposed to undue levels of financial risk. Techniques have been introduced that systematically:
· Undertake economic market appraisals at both macro and micro levels
· Prepare cash flow forecasts for all significant business decisions such as introducing new products, opening new channels to market, redesigning manufacturing facilities and capital investment
· Ascertain the level of risk based on the probability of it occurring and the cost of rectification
· Undertake sensitivity analysis on cash forecasts to identify those factors that will have the most significant impact on the financial situation
· Perform credit checks on new customers to guard against the risk of non payment or fraud
Budgeting and compiling financial information for the business plan is a crucial management team responsibility. The accountability for determining and implementing the actions needed to deliver the financial commitments must remain with those managers responsible for the business’s core activities, but the finance team must compile the pertinent figures into a series of standard financial formats. These financial figures represent the management team’s commitment to the company directors for the next financial year and stretched, but achievable, targets for the following two years.