Role Of Finance In Business
Finance is the lifeblood and nerve center of a business, just as circulation of blood is essential in the human body for maintaining life; finance is a very essential to smooth running of the business. It has been rightly termed as universal lubricant that keeps the enterprise dynamic. No business, whether big, medium or small can be started without an adequate amount of finance. Right from the very beginning, i.e. conceiving an idea to business, finance is needed to promote or establish the business, acquire fixed assets, make investigations such as market surveys, etc., develop product, keep men and machine at work, encourages management to make progress and create values. Even an existing concern may require further finance for making improvement or expanding the business. Thus the importance of finance cannot be over-emphasized and the subject of business finance has become utmost important both to the academicians and practicing managers. The academicians find interested in the subject because the subject is still in its developing stage and the practicing managers are interested in the subject because among the most crucial cdecisions of a f
The functions of finance that includes tax, treasury, risk management which will contribute to the achievement of the strategic objectives and goals of the company.
Importance of finance functions:
The importance of finance has arisen because of the fact that present day business activities are predominantly carried on company or corporate form of organization. The advent of corporate enterprises resulted into:
- The increase in size and influence of the business enterprises
- Wide distribution of corporate ownership and
- Separation of ownership and management.
The above factors have further increased the importance of corporate finance. As the owners in a corporate enterprise are widely scattered and the management is separated from the ownership, the management has to ensure the maximization of owner’s economic welfare. The success and growth of a firm only by maximization of principles and procedures as lay down by corporation finance.
The knowledge of the discipline of corporation finance is important not only to the practicing managers, but also to others who deal with a corporate enterprise, such as investors, lenders, bankers, creditors, etc., as there is always a scope for the management to manipulate and ‘window dress’ the financial statements.
In the present day capitalistic regime, the size of the business enterprises is increasing resulting into corporate empires empowered with a lot of social and political influence. This makes corporate finance all the more important.
Further, if we refer to corporate finance as the financial management practices by business firms, the importance of financial management can well be described as the importance of corporate finance.
Role of finance:
The role of finance has been emerging from a conventional viewpoint to an innovation viewpoint in current competitive business world.
Conventional view – It is operational and risk focused.
- Number crunching quantitative
- Risk averse
Innovation view – It is lateral and forward thinking skills
- Vision – oriented
- Opportunity and growth focus
Impact of finance function:
In ever changing competitive business environment, its vital to re-examine the role of finance function due to the following change drivers:
- Gaining importance of finance in strategic role
- Higher volatility
- Financial evaluation of Mergers & Acquisitions
- Information economy
- Mitigation of evolving business risks
- New organizational hierarchy roles and requirements
Issues – Finance role:
In today’s competitive world, the roles and responsibilities of finance and accounting functions are facing key knowledge and skills related issues such as:
- Lack of consistency in the current process which in turn will impact the transparency of financial reporting abilities
- Ever growing demand for knowledge workers in finance and accounting field in the market place
- Lack of focus on internal compliances and control issues like Sarbanes-Oxley and Basel II law framework
- Focus on aligning the finance and accounting role as a strategic advisors and also business partners in order to understand clearly operational realities to identify future growth and opportunity in the business.
Modern finance function :
There are 4 key roles in any organization in present day scenario:
- Steward – Has control over assets of the organization with meeting all compliance standards to mitigate business risks involved in the process
- Operator – Create a strategic framework to monitor the efficiency of finance process which in turn will drive cost effectiveness factor across the organization
- Strategist – Acting as a strategic advisor to align the organizational goals in tandem with achieving the operational realities by means of measuring and analyzing organization performance with interpretation of financial information in the organization.
- Catalyst –Acting as change agent to execute and monitor necessary changes to achieve the overall strategic objectives of the organization be means of aligning all the above 3 key roles in tandem
Case study – A Multinational Pharmaceutical Group:
A multinational pharmaceutical group has undergone M&A to derive the synergies in R&D, Sales, Marketing and other support service function in its line of business. The result of mergers made them to drive few changes like.
- Outsourcing its IT support to third party vendor
- Started integrating business with other businesses that lead to a complex organization structure in its area of operations.
The finance department has taken initiatives to respond to this situation in a following ways:
- Had set –up three back office processing centers in Europe to cater to its different operation across the world
- Integrated finance roles with the business units to achieve the overall strategic objectives of the organization
- Rolling out ERP applications to create global business framework to integrate all its functional processes such as HR, Operations, Productions, Marketing and Finance.
The challenge for finance role in any global organization is to revamp the entire working styles to be mapped to meet the desired strategic goals of the business. The finance and accounting professionals will play different key roles like strategy, steward etc., to be a forward and later thinker for the welfare of the organization in future.