Businesses run on money, and the financial department of a company is in charge of making sure that funds are available and that your business is able to access cash in sustainable ways. Finance is both an art and a science. Managing it effectively requires judgement calls that are both intuitive and based on careful calculations.
The importance of a finance department lies in its ability to make sure that cash is available for company operations and that your business is managing its money effectively enough to meet its financial obligations.
- General accounting. Day-to-day record keeping and preparation of financial statements falls under the purview of the finance department. In order to make higher-level decisions about financial management, you first need to know where your company stands. Day-to-day record keeping includes bookkeeping and payroll, and preparation of financial statements includes synthesizing and finalizing this information in income statements, balance sheets and cash-flow reports at regular intervals, usually monthly.
- Financial controls. Because the work of the finance department is so important to your company's fiscal health, it is prudent to have checks and balances in place to verify the accuracy of its work. Regular reconciliations compare your actual financial situation with the information on your written reports. These should be done according to standard accounting principles. Verifying accuracy is important for double checking both the thoroughness of the process and also the honesty of the people handling the information and the cash.
- Financing. Few businesses are able to operate entirely on the revenue that they generate through sales and services. There are usually periods when outlays for inventory and capital improvements exceed incoming cash, and conversely, there are times when revenue is abundant enough to make up for these shortfalls. The finance department is responsible for managing this rhythm so your company doesn't run out of cash to pay its bills and also doesn't pay too much in interest expenses.
- Planning. A healthy business is always evolving, and its finance department is in charge of preparing and evaluating budgets that address the issue of how you will pay for new projects. Your business may also have slow times of the year or periods when foreseen and unforeseen circumstances hurt your bottom line. The finance department is responsible for laying out a clear plan for navigating this tricky territory. This plan should involve calculating what funds will likely be needed, providing broad guidelines for how they will be spent and charting a path for repaying borrowed sums.
Part of the importance of a finance department lies in its function of aligning daily financial decisions with longer-term company objectives. Long-term, medium-term and short-term goals should be effectively synced with a broader vision expressing why your company was formed and how it measures success.
Your business may be geared toward making as much money as possible or crafting products that promote a healthier environment. Whatever your vision, your financial activity will be better targeted toward achieving it if this vision is clearly articulated, and your finance department has the tools and authority to manage your money in ways that implement it.
The people who run your finance department probably won't be top-tier managers, but they will be responsible for providing these leaders with the information they need to provide effective leadership.
A general manager evaluating the feasibility of launching a new product line will need finance department information about how the business will find the funds for this venture. Leaders also need to know how a business is performing financially overall in order to make decisions about when to tighten expenditures and when to take risks.