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Roles and Activities in Finance department

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Antonin Vinet

on 3 October 2014

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Transcript of Roles and Activities in Finance department

Roles and Activities in the Finance department
The Finance department
Key function?
Recording all the financial matters of a business
Specific responsibilities can vary from company to company. The finance department always evolves in order to bring greater value to the organization which houses it.
Main areas covered by the financial department include:
1) Book keeping procedures
2) Production of Financial statements: Balance Sheet and Profit and Loss Statement (Accounting). Book keeper may do this
3) Providing management information. (Management Accounting)
4) Payroll
5) Raising of finance
1) Book keeping procedures
The Book keeping procedures is the recording of all financial transactions
UK businesses use SAGE
Sales, purchases, income, and payments by an individual or organization. These records today are typically kept on computer files. But we still use the term ledger entries to refer to the days when all financial transactions were carefully recorded in thick books (ledgers).
It includes Accounts Payable (paying bills) and Accounts Receivable (collecting bills due)
Credit control is the process of control over payments coming into and going out of the firm. Firm's creditors (people who the firm owes money to) and the firm's debtors (people who owe money to the firm).
Credit Control
2) Financial Accounting
Production of financial statements Balance Sheet and Profit and Loss Statement (Accounting). Book keeper may do this
Financial accounting IS the preparation of financial statements outlining the financial health and performance of a company in previous time periods.
Need to be produced at given time intervals, for example at the end of each financial year.
Balance Sheet showing the assets and liabilities and capital of a business at the year end. In addition, records of purchases and sales are totaled up to create a Profit and Loss (P&L) account.
For who?
Owners of business
3) Management Accounting
Management Accounting?
Providing management information
Managers require ongoing financial information to enable them to make better decisions.
Information about how much it costs to produce a particular product or service, in order to assess how much to produce and whether it might be more worthwhile to switch to making an alternative product.
4) Payroll Department
5) Raising of finance
First identify what type of financing is needed:
Funding of working capital ? (finance required to fund day to day operations of the business)
Financing of fixed assets ? (items that have long term use eg land buildings and machinery)
Internal / External ? Depends on the nature of the business. Large organisations are able to use a wider variety of finance sources than are smaller ones
Retained profit from sales to customers; advantage no interest to pay or repayments to be made.
Profits = all the costs of production are subtracted from all the sales revenue. Once profits are made tax has to be paid on them.
After tax is deducted the business can decide:
(1) distribute them to the owners of the business,
(2) retain them for the future use of the business. It is these retained profits that provide the internal source of finance.
Sales of assets
Reducing working capital
5) Raising Finance (2)
Bank Overdraft
Banks allow the borrowers to overdraw funds in excess of their bank balance to an agreed total limit.
Trade credit
In business it is common practice to purchase items and pay for them later. The supplier will normally send the purchaser a statement at the end of each month saying how much is owed. The buyer is then given a period of time in which to pay. Normally between 30 and 90 days before payment required.
Debt Factoring
Outstanding debtors are “sold” to a factoring company, which advances up to 80% of the debts outstanding.
Remainder is paid less commission when total debts have been collected. Immediately improves the cash flow of the business and removes burden of credit control which is taken over by the factoring company.
5) Raising Finance (3)
Normally required to fund fixed assets - plant, machinery, vehicles, land
Formalised agreements between borrower and lender (eg bank) Must be repaid over a stated period together with interest in regular instalments.
Repayment is made with interest. (can limit future profit making potential)
Hire purchase
With hire-purchase you put down a deposit on an item and then pay off the rest in instalments. When the last instalment has been paid you become the owner of the item.
Rather than buying expensive equipment the business hires it from a leasing company. This saves having to lay out sums of money and the business does not have to worry about having to carry out major repairs itself. Motor vehicles, machines and office equipment are often leased.
The lender of money needs to know all the business opportunities and risks involved and will therefore want to see a detailed business plan.
Most important form of funds, main advantages the company receives a permanent injection of capital and can raise more funds in the future.
Large amount of money, no interest payments or repayments.
But...ownership and control diluted shareholders will expect growing annual dividends.
Venture Capital
Investment provided in return for part ownership of the business
Petty Cash and Imprest System
What's petty cash?
Petty cash is a small amount of discretionary funds in the form of cash used for expenditures where it is not sensible to make any disbursement by cheque, because of the inconvenience and costs of writing, signing and then cashing the cheque
The most common way of accounting for petty cash expenditures is to use the imprest system.
How does it work?
The base characteristic of an imprest system is that a fixed amount is reserved, which will be replenished at the end of a period or when the circumstances request it.
This replenishment is not credited on the imprest account, but from another source
When a sufficient amount is used, the imprest account will never be credited again
As such, it can be seen as a permanent debt
Oversight of petty cash is important because of the potential for abuse
Petty Cash and Imprest System, exemple
Petty cash imprest system allows only to replenish the spending
So, if you start the month with €100 in your petty cash float and spend €90 of that cash in the month, an amount of €90 will be then placed in your petty cash float to bring the balance of your petty cash float back to €100.
The replenishment is credited to the primary cash account and the debits will go to the respective expense accounts, based on the petty cash receipts
Why use the imprest system?
In this example the maximum amount of petty cash that can be issued (spent) is €100. You can only spend what you have and you are only replenished with what you spend, in this case €90.
In a non imprest system where a fixed amount is issued every month e.g. €100 every time cash is required, there is no incentive to ensure all money issued has been documented because when money is all spent a cheque for a fixed amount is issued.
It is much more difficult to reconcile a non imprest system as you never know how much exactly should be in the float.
In an imprest system the amount requested is documented. The documentation being the petty cash dockets and their associated receipts or invoices. So at all times you can check how much should be left in the petty cash float by deducting the amount spent from the opening petty cash float.
How petty cash imprest system works?
The imprest system ensures that you must document how the petty cash is spent.
In a petty cash system, petty cash dockets are written for each amount issued
So, when all of these dockets are totalled at the end of the month and deducted from the opening petty cash float, the calculated value must agree with what is left in the petty cash float
Under the imprest system, only that which is recorded as spent is replenished
Any shortfalls may have to be replenished by the guardian, usually a bookkeeper, of the petty cash float from their own personal resources.
Let's sum up
Quick reminder:Assets
An asset is an item that will give present or future monetary benefits to a business as a result of economic events. Therefore, an asset is basically an item or money that the business owns
There are two main types of classification of assets:
fixed assets and current assets.
Fixed Assets
A fixed asset is acquired for the purpose of use in the business and is likely to be used by the business for a considerable period of time (more than 12 months).
There are three categories of fixed assets:
Tangible fixed assets (physical items such as land, buildings, machinery, and vehicles, the purchase of which is known as 'capital expenditure').
Intangible fixed assets (non-physical items, which are very difficult to place a value on, such as brand names, goodwill and patents).
Financial fixed assets (investments that the business has, such as shares and debentures in other companies).
Current Assets
A current asset is either part of the operating cycle of the enterprise or is likely to be realised in the form of cash within 12 months.
There are five categories of current assets:
a) cash at the bank
b) Cash on the premises ("petty cash").
c) Debtors (customers who have purchased goods on credit, and have not yet paid).
d) Stock (raw materials, work-in-progress and unsold finished goods).
e) Prepayments (where the business has paid in advance for the use of an item, rent for example).
Let's now do some work on a balance sheet.
Calculating the salaries of employees
Organising the collection of income tax and national insurance for HMRC
Employers also have to pay NICs for each person they employ who is aged 16 or over
NICs Class 1 is paid by employees and employers, these are calculated as a percentage of your wages. Base rate?
This is the most common NIC type. The primary contribution is paid by the employee, the secondary by the employer.
12% after your first 7.5K
+ Petty Cash
What's an IPO?
Full transcript