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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please contact us at
members.helpdesk@mindtools.com.

Cover image © iStockphoto/ermingut

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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 manager is anyone responsible for making an
have little or no experience in the field. investment or financing decision. And if you think
about it, these types of decisions are made
It’s all about numbers and dollars, pounds, or everyday throughout an organization.
euros and quite frankly that’s often a little
intimidating. This Bite-Sized Training™ feature will help you to
appreciate the breadth and depth of finance
It’s comforting to know that someone is managing management. Over the next hour you will:
the purse strings, though. Otherwise you might
not be able to expand your team, or upgrade to  Learn how finance impacts an
that new and much better version of the software organization.
you rely on.  Understand how financial management is
organized.
But what exactly do the finance people do? Are  Learn about specific deliverables the
they simply the gatekeepers of the bank account, finance department provides.
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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2. Finance 101
Defining finance management is not an easy feat. shareholder value then, is key to financial
There are so many aspects to financial decision- management.
making that terminology can sometimes get in the
way of a good definition. Specifically, finance management is about:

Finance management is used interchangeably  Analyzing the financial situation.

with business finance, managerial finance,  Making financial decisions.
management accounting, and corporate finance.  Setting financial goals and objectives.
These terms themselves have been associated  Developing financing plans.
with specific functions, which in fact fall under the  Providing effective finance systems.
finance management umbrella.
All of these functions ensure that business
Corporate finance typically refers to capital strategy is thought about in conjunction with
investment and is most often associated with financial strategy. Looking at the financial impact
market decisions and maximizing shareholder of management decisions across an organization
value. is a key element of long-term profitability and
sustainability.
Managerial and business finance on the other
hand tend to focus on accounting for, and As you can gather, finance is a function that is not
controlling, financial assets. done in isolation. Top management is
continuously involved in financial decisions. But
However, depending on the size of the what about the production manager who believes
organization and how it’s structured, these can all new equipment would solve his capacity
be one and the same or different functions problems? Analyzing the situation from a financial
completely. perspective and taking a long-term strategic view,
it might be better to increase plant capacity as
For our purposes, we’re going to assume that well as upgrade equipment to earn the return on
finance management refers to both areas of investment desired. This is the type of finance
influence. The definition then becomes: decision department managers should
understand, and be able to make.
Finance management is the reporting, acquisition,
allocation, and utilization of financial resources. Consider too the marketing manager who is
developing a new campaign. The costs
Note that the definition doesn’t say anything associated with the investment need to be
about maximizing profit. Financial decisions are, recorded. Consideration should also be given to
in fact, based upon the organization’s strategic accounting for the intangible, “Goodwill” asset on
direction and its desire to grow and remain the balance sheet. This type of investment has
competitive. So rather than maximize pure profit, financial considerations beyond the strict dollars
what finance is really concerned with is and cents, and the marketing manager should
maximizing the value of the owner’s equity. use that information when making the decision to
go ahead with the investment.
When owners are satisfied that the company is
moving in the right direction, they make finances Action: Think about the role of finance in your
available to carry out the strategy. That may organization. List the first three things that come
mean making decisions in the short term that to mind about what they do, on the next page.
sacrifice profit for investment. Improving

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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?

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3. The Organization of the Finance Department

Depending on the size of a company and how it’s  Insurance.
structured, the top managers working in the  Pension management.
finance department will have different names.
Financial accounting (or control) has to do with
Titles include Chief Financial Officer, Treasurer, how financial resources are managed, budgeted,
Controller (or Comptroller), and Finance and accounted.
Manager. Whether there is just one or more than
one person fulfilling the role, the primary functions It is responsible for:
of the department remain similar.
 Accounting.
In general the finance department has two areas  Financial statement preparation.
of focus:  Internal auditing.
 Payroll.
Financial planning has to do with obtaining  Budgets.
financing, managing the firm’s cash account, and
 Taxes.
making sure that the firm meets its obligations to
investors.
Whether or not there is an actual segregation of
duties, these two functions combine to describe
It is responsible for:
the work of finance management.
 Banking relationships. Action: Think about how these responsibilities
 Cash and credit management. are allocated in your organization. Briefly
 Obtaining financing. describe the split, if there is any.
 Dividend payments.

Planning

Accounting

The Planning Function

Financial planning duties are often referred to as needs include covering payroll, funding sales
“Corporate Finance.” This is the branch of made on credit, and investing in equipment or
financial management that addresses investment market securities.
decisions and financing decisions.
In the longer-term financial planning is also
The goal here is to ensure that enough funding is needed to ensure that funds are available for
available to meet operational needs. Short-term capital investments in the business and other

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business opportunities like mergers and  Finding assets that are worth more than
acquisitions. they cost, and which give a sufficient
return on that cost.
Investment decisions are related to how much
the organization should invest and what specific Financing decisions are related to how to raise
assets to invest in. Activities include: the cash required for the desired investments.
Activities include:
 Capital budgeting – deciding, from a
financial perspective, whether it’s worth  Determining capital structure.
going ahead with projects.  Raising both debt and equity financing.
 Determining interest or dividend policies
 Valuing assets using present value, for investors.
opportunity cost of capital, and future  Working capital management.
value, to make sure that money is well
spent. Action: What decisions has your organization
made in the past year under each of the main
 Assessing the risk of a project, to make functions of financial planning?
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 Financial Accounting

managing the everyday financial activities of the
organization. From creating financial recording Financial accountants provide information that
processes to deriving financial benchmarks and helps managers make decisions related to the
improving financial systems, accounting is an daily management of the organization. The key
integral function of the organization’s operations. deliverables of the financial accountants are the
financial statements. This process includes
The accounting profession can be split into two bookkeeping as well as the actual statement
branches, financial and managerial. Financial preparation.
accountants are the ones who prepare the
financial statements and perform audits on the The three key financial statements they provide
record-keeping process. Managerial accountants are as follows:
focus more on daily financial resource decisions
within an organization.

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1. The Balance Sheet 3. Statement of Cash Flow

This statement captures a company’s financial This statement records inflows and outflows of
position at a specific point in time. The Balance cash during a period of time. Essentially it
Sheet has three sections: converts “accrual based accounting” (don’t worry
if you don’t know what this is), which are used for
1. Assets – the things of future value that the the above statements, to cash. There are three
company owns including items like trucks, sections:
computers, cash, accounts receivable,
and goodwill and trademarks. 1. Cash flow from operations – inflow,
converted to cash, from sale of product
2. Liabilities – the obligations to pay or and/or services, and so on.
provide goods or services at some later
date. Items include loans and accounts 2. Cash flow from financing – inflow from,
payable. and outflow to, investors.

3. Equity – the amount of net assets (assets 3. Cash flow from investing activities –
– liabilities) owing to the owners of the purchase and sale of long-term assets.
business. The total equity is the sum of
the owner’s contributions to the company The other main function of financial accounting is
and the earnings (or losses) that the budgeting. In most organizations, this is a
company records. responsibility that is pushed down to each
department. Using previous year’s data and trying
Tip: to forecast changes in the financial environment,
The balance sheet gets its name because total a budget is created for each department. Those
assets must equal total liabilities and equity. What are then amalgamated into an operational budget.
a company owns must be equal to what it owes to The budgets are closely monitored with “actual”
its creditors and owners. versus “budget” figures analyzed to control
expenditure and support better forecasting in the
2. The Income Statement/Profit and Loss future.
Statement
The financial process can’t run smoothly without
This statement shows the inflow of revenue and quality information to base decisions. Financial
the outflow of expenses for a specific period of accounting is tasked with providing that quality
time. through reliable financial data.

 Revenue is the inflow of assets (in other Tip:

words, cash or accounts receivable) in See our article on Managing a Budget, which
return for services performed or goods provides more detail on this important finance
sold. activity.

 Expenses are the outflow or consumption Management Accounting

of assets (for instance, cash, inventory,
supplies) or obligations incurred (for The goal of management accounting is to support
instance, accounts payable, taxes a dynamic decision-making process and help
payable) while generating revenue. managers make great business decisions. It uses
the numbers received from the financial
The difference between these two is the Net accountants and interprets and modifies it for
Income. practical, internal decision-making.

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It makes sure that:  Generating, communicating, and

interpreting financial information received.
 Assets are being used efficiently.
 Business assets are secure.  Monitoring outcomes against budgets,
 The company is maximizing shareholder plans, and other benchmarks.
value.
 Developing the benchmarks required to
The types of activities you can expect a monitor and control financial and non-
managerial accountant to do include: financial performance data.

 Helping set corporate objectives and  Improving systems by identifying and

deriving strategic plans for the finance managing financial risk and auditing
department, as well as the organization as internal processes.
a whole.
Action: Think about how these accounting duties
 Designing systems for recording events are separated in your organization. How does
and transactions for management each impact you, your role, and your ability to
information systems. meet your objectives?

Financial accounting:

Management accounting:

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4. Trends and Challenges

As with all professions, finance roles are This clearly offers the potential for cost savings.
changing. Most significant is the trend toward The challenge for finance professionals is to
outsourcing many of the controller-related finance develop their general business skills and become
duties. Payroll was one of the first major financial strategic business partners. Instead of just putting
functions to be outsourced on a regular basis. together a financial report and delivering it, they
Even small companies are choosing to use need to learn how to communicate the
payroll service firms. information in ways that non-finance people can
understand.
Using outside accountants is also very popular.
Many organizations retain staff for bookkeeping As part of this, they need to use their financial
functions and have their financial statements expertise to help others understand the impact of
prepared by professional firms. Internal auditing is the numbers. In this way they can support their
another area that is often outsourced, and this peers in making decisions about department
may even be required by law. investments and resource allocation. Financial
managers are being expected to consult on sales
Much of this trend has emerged because of and production issues and help the company
technological advances. Processes that are formulate its overall strategy.
transactional in nature can often be done quicker
and more efficiently by outside parties. This frees Action: How much of these financial functions
up internal financial resources for more valuable does your organization outsource? What do you
activities. see as the benefits and disadvantages of the
arrangement?

What duties are outsourced?

Benefits?

Disadvantages?

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5. Key Points
Finance isn’t just about finance. It’s a function that grasp. In the age of global competition and a
reaches into the nooks and crannies of an need to streamline processes, finance can take
organization. Managers in all departments employ the lead and show other departments how add
many of the skills used by financial experts. value rather than simply providing service. By
Financial decisions have wide reaching impact so combining financial expertise and strategic
it’s important that finance professionals use their thinking, finance management adds significant
expertise to support good decision-making value to an organization and ensures continued
throughout the organization. profitability.

Finance is a truly integrated function that holds

the financial viability of an organization in its

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