Chapter 4: What each level of the finance
function does
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the finance function leads the
team to achieve organizational
impact.
Introduction
The finance function can be understood
through an "information to impact"
framework and is often visualized as a
diamond shape, representing different
levels of activity and strategic
importance. This chapter breaks down
these levels: Finance operation
● Level 4: Finance Operations: (level 4)
Focuses on generating
information and preliminary
insight. This is the foundation of
the finance function's work. Introduction
● Level 3: Specialist Areas:
Experts who provide further
insight derived from the
information at Level 4. These
insights are crucial building
blocks for value creation.
● Level 2: Strategic Partnering for
Value: Finance professionals
interpret insights from Level 3 Financial reporting
and communicate them to
This involves producing financial
influence decision-making.
information for external users,
● Level 1: Strategic Leadership of
adhering to accounting standards and
the Finance Team: The head of
legislation.
Chapter 4: What each level of the finance
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● Purpose: To inform external 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑 =
stakeholders (owners, investors, 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑥 100
𝐶𝑢𝑟𝑒𝑛𝑡 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
creditors, government) about
the business's financial
performance and position, and
to assess management's Management accounting
stewardship.
● Key Outputs: This focuses on providing information
○ Statement of Profit or to internal users (managers) for
Loss (SOPL): Details decision-making, performance
income and costs over a measurement, planning, and control.
period to determine
profit or loss. ● Purpose: To aid internal
○ Statement of Financial planning, control, and
Position (SOFP): Shows decision-making.
assets, liabilities, and ● Key Outputs:
equity at a specific point ○ Cost Schedules (e.g.,
in time. Standard Cost Card):
○ Statement of Cash Flows: Details the costs involved
Summarizes cash receipts in producing a unit of
and payments over a product.
period, indicating ○ Budgets: Total planned
solvency. revenues and costs for a
● Process: Transactions ->Day future period. Useful for
Books -> Ledger Accounts -> co-ordination,
Financial Statements. responsibility, utilization,
● Users: Owners, managers, banks, motivation, planning,
employees, suppliers, customers, evaluation, and
government. communication (CRUMPET
● Earnings per share(EPS) acronym).
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥(𝑙𝑒𝑠𝑠 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑡𝑠) ○ Variance Reports:
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑖𝑠𝑠𝑢𝑒 Compare actual results to
● Price/Earnings(P/E) ratio budgeted amounts to
𝑆ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 identify differences
𝑃/𝐸 𝑟𝑎𝑡𝑖𝑜 = 𝐸𝑃𝑆 (variances) and their
● Dividend yield causes.
Chapter 4: What each level of the finance
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● Key Differences from Financial ○ Financing: Arranging debt
Reporting: and equity to fund growth
○ Purpose: Internal vs. and investments.
External. ○ Foreign Currency
○ Format: Flexible vs. Management: Minimizing
Standardized. losses due to exchange
○ Information: Financial and rate fluctuations.
non-financial vs. Mostly ○ Tax Management: Legally
financial. minimizing tax liabilities.
○ Time Horizon: Historical ○ Working Capital: Current
and forward-looking vs. Assets - Current
Mainly historical. Liabilities. Management
involves balancing the
advantages of holding
large vs. small balances of
Treasury management inventory, trade
receivables, and cash.
This involves managing the
● Financing Options:
organization's funds, including cash,
○ Debt Finance: Borrowing
working capital, investments, and
cash with an obligation to
financing.
repay with interest.
Advantages include
● Key Roles:
tax-deductible interest
○ Working Capital
payments and no change
Management: Managing
in ownership.
the balance of current
○ Equity Finance: Selling a
assets and liabilities to
stake in the business.
ensure smooth day-to-day
Advantages include no
operations.
mandatory dividend
○ Cash Management:
payments and no
Monitoring cash balances
requirement for security.
and preparing cash
● Financial Gearing: A measure of
budgets to avoid
financial risk, calculated as
shortages. 𝐿𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐹𝑢𝑛𝑑𝑖𝑛𝑔
𝑥 100. High gearing
indicates higher risk.
Chapter 4: What each level of the finance
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● Shared Service Centres (SSCs):
Increasingly manage rule-based
finance operations, often
Internal audit handling processes end-to-end.
Quality and value are becoming
An independent activity established by
more important than cost.
management to evaluate risk
● Technology: Automation (e.g.,
management processes, systems of
Robotic Process Automation -
control, and make recommendations.
RPA) and cognitive computing
are creating "smart finance
● Purpose: To provide assurance
factories" at Level 4.
to management on internal
controls, risk management, and
operational efficiency. Supports
corporate governance.
● Scope: Can include reviewing Level 3: Specialist
internal controls, risk areas
management systems, financial
reports, and conducting special
assignments (e.g., fraud
investigations).
● Role in Fraud Financial Planning and
Prevention/Detection: Internal Analysis(FP&A)
audit tests control systems,
recommends improvements, and ● Role: Performing budgeting,
investigates suspected fraud. forecasting, and data analysis to
Fraud requires dishonesty, support major organizational
opportunity (often due to weak decisions.
controls), and motivation. ● Activities: Evaluating current
● Limitations: Potential investments, assessing financial
independence issues (as health using ratios, identifying
employees of the company), profitable products, and
resource constraints. These can consolidating departmental
be mitigated by an audit budgets.
committee. ● Impact of Technology:
Recent Changes in Finance Operations Automation of routine reporting,
Chapter 4: What each level of the finance
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self-service dashboards, ensure it is
advanced data visualization, and feasible.
analytics improve forecasting. ○ Planning
This shifts focus to higher-value ■ The drawing up of
analysis. detailed plans. For
example,
communication of
what has to be
Taxation done, when and by
whom, identifying
● Role: Minimizing tax risk and
the resources
creating value through tax
needed and
compliance and tax planning.
establishing
● Activities: Ensuring timely tax
measures of
return filings, structuring
success for the
operations to be tax-efficient,
project.
and maximizing available tax
○ Executing
reliefs.
■ The project team
members will
perform the tasks
Project Management they are
responsible for and
● Role: Integrating all aspects of a the project
project to ensure timely and manager will
cost-effective completion. provide leadership
● Stages: and co-ordination.
○ Initiation ○ Controlling
■ A project is ■ Projects progress,
initiated when a costs and
need or performance will
organisational be tracked against
objective is the project plan
identified. The and any corrective
project identified action necessary
is appraised to will be taken.
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○ Review and Close ● Payback Calculation: Payback
■ Once the project occurs between Year 4 and Year
work is finished, 5. Since the target payback is 4
the project will be years, and the actual payback is
signed off and the longer, the advice would be not
team disbanded. A to proceed.
project review ● Recent Changes: Technology and
meeting will be SSCs are creating "digital
held. centers of excellence" at Level
3, enabling experts from
different disciplines to
collaborate.
Project Appraisal
● Role: Assessing the feasibility
and financial viability of
potential projects, especially Strategic
capital investments. partnering for
● Methods: Payback period, Net
Present Value (NPV), Internal value(Level 2)
Rate of Return (IRR).
● Example (Payback Period):
○ Investment: $550,000
○ Annual Cash Flows: Year 1:
Communicating insight to
$40,000, Year 2: $65,000,
Year 3: $140,000, Year 4:
influence users
$175,000, Year 5: ● Role: Interpreting and
$160,000, Year 6: $70,000 communicating insights from
○ Cumulative Cash Flows: Level 3 to internal and external
■ Year 0: −$550,000 stakeholders.
■ Year 1: −$510,000 ● Purpose: To influence
■ Year 2: −$445,000 decision-making, implementation,
■ Year 3: −$305,000 and control activities.
■ Year 4: -−$130,000 ● Key Activities: Using financial
■ Year 5: +$30,000 statements and other data to
communicate insights in an
Chapter 4: What each level of the finance
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appropriate format and
frequency.
● Evolving Finance Function: Strategic
Requires more personnel at this
level and the development of leadership of the
new competencies. The finance team (Level
budgeting process, even if the
output is flawed, can add value 1)
by encouraging strategic
This is the highest level, led by the
thinking.
Chief Financial Officer (CFO).
● Role: Leading the finance team
Business Partnering to achieve organizational impact
by executing strategies, leading
● Role: Acting as a partner to key initiatives, and liaising with
influence organizational stakeholders.
decisions and support their ● CFO's Evolving Role: Moving from
implementation to achieve a "navigator" to a "co-pilot"
desired impact. working alongside the CEO. This
● Focus: Shifting from historical requires broader skills beyond
reporting to challenging traditional finance, including IT,
management and driving future regulation, and business
performance. transformation.
● Skills: Commercial acumen, ● Technology's Impact: CFOs
analytical skills, relationship increasingly rely on automation
building, effective and technology to transform
communication, and persuasion. data into actionable insights.
Finance professionals act as
trusted advisors and critical
friends.
● Structure: Can involve individual
finance employees embedded in
departments, centers of
excellence, or a hybrid model.
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● Improved Communication: AI
chatbots can handle common
The impact of queries.
technology on the
activities of finance Threats
professionals ● Automation of Roles: Repetitive
tasks, data entry, and even
accounting/auditing roles are at
risk of automation.
● Need for New Competencies:
Introduction
Finance professionals must
adapt and acquire new skills to
work with technology and focus
on higher-level activities.
Opportunities
● Increased Efficiency and
Productivity: Automation of
routine tasks frees up Technology and the
professionals for higher-value information to impact the
work. framework
● Enhanced Decision-Making: New
data sources and analytical ● Technology has the largest
methods (e.g., predictive impact on "Assemble" (data
analysis) improve forecasting collection) and "Analyse"
and insights. activities.
● Streamlined Processes: ● This frees up finance
AI-powered systems for professionals to focus more on
accounts payable/receivable, "Advise" and "Influence/Impact"
supplier management, activities.
procurement, and expense ● This shift necessitates
management. developing competencies in
using new technologies and
providing influence and impact.
Chapter 4: What each level of the finance
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● The trend is towards narrowing skills and roles may
Level 4 activities and increasing emerge).
the need for skills at Level 2
(business partnering) and Level 3
(specialist insights).
Automation and Cognitive
Computing
● Robotic Process Automation
(RPA): Automates routine,
clerical activities.
● Cognitive Computing (AI,
Machine Learning, Natural
Language Processing):
Automates advanced data
analytics, report writing, and
decision support.
● Less Automatable Activities:
Applying expertise, stakeholder
interactions, and managing
others. These are more likely to
remain human-centric roles.
● Advantages of Automation:
○ Reduced human error.
○ Reduced paperwork and
increased sustainability.
○ Faster processing and
real-time information.
○ Improved data integrity.
○ Potential for cost
reduction (though new