Finance is one of the major pillars of any organisation and an essential ingredient to a successful business. Nowadays, a finance department has a broad range of roles to carry out within or outside an organization. The performance and success of any company greatly depend on how well the finance is handled. Keeping a close watch on the financing function is very important for the smooth operation of a company. In this write-up, therefore, I will be reviewing the roles and responsibilities of a finance department in a pharmaceutical industry but before I do so, the meaning of “finance” and “finance department” have to be explained.
- 1 What is finance?
- 2 What is Finance Department?
- 3 Roles and Responsibilities of a Finance Department
- 3.1 a. Bookkeeping
- 3.2 b. Management of company’s cash flow
- 3.3 c. Budgets and forecasting
- 3.4 d. Advising and sourcing longer-term financing
- 3.5 e. Management of Taxes
- 3.6 f. Management of Company’s Investments
- 3.7 g. Financial Reporting and analysis
- 3.8 h. Assist managers in making key strategic decisions
What is finance?
The term, finance has to be understood clearly as it has different meaning and interpretation in various contexts. In the words of Howard and Upton, “finance may be defined as that administrative area or set of administrative functions in an organization which relates with the arrangement of cash and credit so that the organization may have the means of carrying out its objectives as satisfactorily as possible”.
To Fabozzi et al., finance is the application of economic principles to decision-making that involves the allocation of money under conditions of uncertainty.
As put forth by Bhat in his book titled, “Financial Management: Principles and Practice”, finance is defined as those activities which are concerned with the acquisition and conservation of capital funds in meeting the needs and overall objectives of an organisation.
An analysis of the aforesaid definitions made it clear that finance, therefore, is the basic resources used for the creation of and maintenance of other resources in an organization.
What is Finance Department?
Finance Department is the part of an organization that is responsible for acquiring funds for the firm, managing funds within the organization and planning for the expenditure of funds on various assets. It is the part of an organization that ensures efficient financial management and financial control necessary to support all business activities.
Roles and Responsibilities of a Finance Department
The contributions of finance department to any company and how these contributions positively affect organisational performance will greatly depend on factors such as the extent to which the owner/ manager is involved in his company. The roles and responsibilities of a finance department include but are not limited to:
This is the most basic function of the finance department. It involves the day-to-day recording, analysis and interpretation of a company’s financial transactions. This will include the tracking of all expenses (purchases, payments etc.) and sales of finished products. In some startup companies, this role is often carried out by a bookkeeper who might be replaced by more specialized payables and receivables clerks as the company grows or expands its operations.
b. Management of company’s cash flow
It is the duty of the finance department to manage all cash flows into and out of a company and ensure that there are enough funds available to meet the day-to-day running of the company. This area also encompasses the credit and collections policies for the company’s customers, to ensure that vendors and creditors are paid correctly and on time; and that the company is also paid correctly and as when due.
c. Budgets and forecasting
In this function, the finance department works with managers to prepare the company’s budgets and forecasts and also give feedback with regards to the financial standing of the company. This information can be used to fulfil the cash needs of each department, plan company staffing levels, plan asset purchase and expansions at minimum cost before they become necessary. The finance department can also use past records from respective departments to make better budget and forecast over long-term and short-term time horizons.
d. Advising and sourcing longer-term financing
It is the duty of the finance department to advise companies on the best financing mix that could yield the company the best profit and also help them source longer-term financing at the lowest cost such that there is a profit level of liquidity. Some of the many varied paths a company can source funds to finance their business as discussed in one of our articles “10 Most Common Ways to Finance Your Business” include bank credit or private lender debt or, share issues to private investors (where applicable).
e. Management of Taxes
Running a company involves paying tax, and it is the duty of the finance department to handle tax issues. This includes creating good corporate relationships with government by remitting PAYE (Pay As You Earn) to the relevant authority, and ensuring that implementation of tax matters are done within the framed policies.
f. Management of Company’s Investments
Apart from analyzing and selecting new investments, it is also the duty of the finance department to manage company’s existing assets. The finance department should be concerned with current assets apart from fixed assets. The company’s working capital needs to be managed efficiently in such a way as to maximize profitability relative to the amount of funds tied up since it has more implication on the firm liquidity than its fixed asset.
g. Financial Reporting and analysis
Financial reporting and analysis is the function that takes raw accounting entries and transforms them into meaningful, usable and comparable financial statements. The finance department contributes to organizational growth by measuring and reporting on regular bases, key numbers that are vital to the success of the company. This will likely include a summary of all funding sources, expenditures and reserves available for future use (excluding those already committed and budgeted for current period) some non-financial information. And are usually communicated to managers in a logical and understandable format.
h. Assist managers in making key strategic decisions
The finance department provides company management with information necessary to make strategic decisions such as which markets or projects to pursue, the payback periods for large capital purchases, decision on what should be given out as dividend out of the company’s earnings and what to plough back into the business, the best financing mix that could yield the company the nest profit, decision on how to allocate funds to investment etc., thus, making sure that money is being used in the best way.
Having read up to this point, you must have discovered that the importance of the finance department to any company cannot be overemphasized since the financial policy of any company to a greater extent, determines not only its existence, and survival but also the performance and success of that company. Any company aspires to grow and make profit should make sure the activities of the finance department are handled by individuals who have all it takes to be in the department.
- Bhat S. (2008). Financial Management: Principles and Practice. New-Delhi: Excel Books.
- Fabozzi, F. and Drake, P. (2009). Finance: Capital Markets, Financial Management, and Investment Management. New Jersey: John Wiley & Sons, Inc.
- Howard, B. and Upton, M. (1953). Introduction to Business Finance. New York: McGraw-Hill.
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