4M BG

The directors of a company have a legal responsibility for ensuring
that the company keeps appropriate accounting records which enable
them to report the fi nancial position of the business to investors, regulators
and tax authorities.
This responsibility is normally delegated to the fi nance director. Until
recently the fi nance director would be in charge of the “accounts department”,
often a large team of people whose primary role was bookkeeping.
They manually recorded every transaction in ledgers for purchases, sales,
cash and a host of other details.
Today the transaction recording is as much about computer systems
as it is about accounting. Large organisations choose highly integrated
systems that have direct data feeds with customers and suppliers, continually
reducing the need for paperwork and human intervention. The
accounts department has become the “fi nance department” where the
role is about adding value to the numbers by providing decision support
such as cost analysis, trends, investment appraisal and business plans.
The fi nance department is still responsible for record keeping and
fi nancial reporting, but has evolved into a service department that
supports the rest of the business, taking a lead in strategic planning and
putting together the business plan.
Some organisations fi nd they can split these responsibilities into
transactional work (routine record keeping) and transformational work
(the added value services). With so much of the transactional work
being electronically generated and transmitted the location of these
services is no longer required at the centre of decision-making (head
offi ce). Many organisations now outsource this work to locations such
as Bangalore where wages are lower. A robust data connection back
to head offi ce enables the transformational work to continue without
any time lag.
Financial and management reporting
In adding value to the transactional information that is recorded there are
two types of reporting:
_ Financial reporting. Summarising historic information to report externally on how the business performed (for example, the
annual report that is distributed to all investors).
_ Management reporting. Using analysis of historic information and
judgment to provide the basis of future decisions.
What managers need to know
In an organisation fi nancial acumen is a skill that will support any
manager in their career. The skill is not about knowing the intricacies
of transaction recording or the details of fi nancial reporting; it is about
having the ability to do six things:
_ Engage with the business strategy – know the organisation’s
mission, objectives, strategy and tactics at a macro level to make
sure that all actions that are taken align with these overarching
principles.
_ Understand performance indicators – know the portfolio of
metrics that are used to monitor business performance at a
company, department and project level. This includes knowing
how the indicators are calculated to make sure that actions taken
can be translated into how the indicators will be affected.
_ Read and interpret fi nancial reports – be able to read the fi nancial
reports that are generated within the business. This includes
company, department, budget area and projects. The skill is being
able to assess strengths and weaknesses and identify appropriate
actions that will improve performance.
_ Contribute to the budgetary process – participate in the budgetary
process, the setting of budgets and the monitoring of performance
through the budget year. At a detailed level this includes using
variance analysis to interpret the causes of deviation from budget
predictions and producing year-end forecasts that predict the likely
outturn for the year.
_ Know the fi nancial consequences of the decisions – identify
the fi nancial implication of decisions through the creation and
evaluation of a business case that takes into account the likely
fi nancial effects of the changes to the business that will take
place as a result of any decision. This involves venturing beyond
fi nance into judgment, but the judgment is made on the basis of
experience and sound evidence.
_ Seek ways to add value not cost – continually improve the
performance of the products and services by adding customer
value while eliminating cost and waste in their provision.
Although strength in these six abilities is by no means a fast-track
ticket up through an organisation, the opposite is almost certainly true.
Weakness in them will hold back even the most ambitious individual.
Other abilities are important, depending on the role of the manager
in the organisation; for example, sales people may fi nd it helpful to be
able to read published fi nancial statements to complete credit checks, and
those in manufacturing should know cost allocation techniques to be able
to build up a product cost. These other abilities build on the foundation
of the six abilities outlined above.