8 Pages, Grade: 1.5 (A)
Traditional roles of the finance department
Modern roles and responsibilities of the finance department
Nowadays the finance department of a firm has a broad range of roles to undertake inside and outside its business and carries large responsibilities especially in fields such as “Shareholder Value” which is increasingly gaining in importance.
The essay focuses on traditional responsibilities such as financial accounting, payroll, estimating and handling cash in- and outflow thus managing liquidity. The second part analyses the newer roles like management accounting, strategy involvement, management information systems, financial analysis and the broader range of responsibilities in the finance department. Finally, a review of the roles and responsibilities will be undertaken to evaluate the importance of the finance department.
The traditional roles and responsibilities of a finance department are important for the smooth operation of the business. However, most of the functions do not have a considerable strategic importance.
The most common function of the finance department comprises the documentation and the controlling of incoming and outgoing cash flows as well as the actual handling of the cash flows.
These two parts played and still play a significant role inside the department, however, due to the computer revolution it is mostly dealt with on computerised systems (such as SAP R/3). The introduction of mass computer systems has made the task less labour intensive and far quicker, even real-time. Cash flows can be displayed on an up-to-date basis every day, performance can be analysed and evaluated straight away. This gives the financial department and the senior management useful tools to see how the company is performing at any given time. This will be discussed later when analysing the new roles.
The finance department is also responsible for the payment of bills, wages and salaries. This as well has been computerised. Wages and bills are paid through electronic systems. Both transactions are outgoing cash flows. On the other hand, payments for goods or services sold will be accounted for in this department.
The area of wages is a very difficult one for the finance department as it underlies strict legal limitations. Data protection is very important for the firm as it is imposed by law.
Financial accounting exists for centuries now in one or another form. It delivers to interested stakeholders such as potential investors, banks, shareholders, suppliers, etc. detailed information about the financial situation such as the financial health of the firm.
It is used to attract capital from the outside. As Boddy and Paton (p.622) state: “The capital markets’ reaction to reports of financial performance affect the ability of the company to raise capital.” The Financial accounting is employed moreover to undertake investment and credit analysis and used for the taxation of the business.
Another major function the finance department assumes is the budgeting and performance evaluation. It could be seen as planning/forecasting and controlling/evaluating. Though budgeting is a traditional role its importance has risen rapidly especially as the companies have grown to huge conglomerates where control is very complex and difficult. The purpose has moved from pure control to a more analytical meaning (Cost-Return).
Certainly, the traditional function of the finance department is important and many modern roles are based on and evolve from them. However, computer systems have made these roles far less important as it is a low level activity in the firm.
In the past the finance department was seen as the “bean counter” and reporter of the past, but due to the computerisation of the firm’s operations it can now deliver up-to-date information on company performance. This made it far more interesting for the senior management to develop new roles and areas of responsibilities for the department, especially in the area of forecasting trends.
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