Evolution of the Finance Function - Click To Get Solution

Question: How the finance function has evolved over time from playing a traditional role to a more advanced role? Answer: In this era of 21st century, where internet has become part and parcel of our life. Globalization, new forms of competition, and higher investor expectations has expanded the roles of finance function. The growing range of business and organization opportunities has contributed to the need to reassess what finance staff does. It is highly needed as to what finance staff should do and how they can add value to the business. Nowadays CFOs are required to create more proactive and forward looking agenda so that business can survive in this competitive world. It is highly required by accountants to move their roles from score keepers to a more proactive score maker role. Traditionally, in many businesses, the role of finance function has been in the background keeping track of the money. They used to do functions like payroll, payables, receivables. They used to handle matters like controlling costs and budgets and reporting on all of this. But top management is demanding more and better data production faster with more consistency. This led to the development of bigger and better ERP systems led by the finance function. Still, the problems were not solved as because top management wants the finance function to focus on greater and greater details. More and more data does not give valid information for better business decisions. Finance function should provide data which will provide judgment on performance of the whole system. They should provide information on profit centers and cost centers and also on make and buy alternatives. Hence the role of finance functions has become very wide. There is lot of challenges in the finance sector but with the upcoming of globalization that has affected the finance sector a lot. During the past two decades, financial markets around the world have become interconnected. It has brought lot of benefits to the investors and savers. But on the other hand lots of challenges and risks has emerged in the economy. In todays world of globalization lot of financial options are there. Three decades ago, borrowing of loan from domestic bank was restricted but today we have many more option to choose from. We can shop around the world for loan with lower interest. There are lot of forces which is driving globalization of finance. Today there is also globalization of national economies. In this competitive world for eg. if someone is manufacturing television sets then also there are lot of competition like manufacturing can be done at one place and distribution at other place. So this has led to the increase in the demand of cross-border finan ce. There are lot of changes in the capital market also. The finance function is trying hard to adapt to the challenges in order to serve management in the better way. Managing global organizations has been a business challenge for centuries. Leaders of todays finance functions continue to work hard so that they can boost their relevance. They are also trying hard to add value to the business. They have also started working on strengths, weaknesses and critical capabilities across core finance process areas. Finance function is working on proactive basis like what will be the changes in the finance operating models, control and systems in the coming years. It has become the role of finance to examine how much amount it is going to invest in future with efficiency and effectiveness. Finance function is also trying hard to shift its focus from basic transaction processing and financial reporting and control activities to strategic and forward looking performance. They are also learning from senior finance executives so that their knowledge c an lead to greater success. Being global brings clear strategic benefits. It has brought ability to access new customer markets, new suppliers and new partners. There is lot of scale and scope benefits also. Finance function is also trying hard risk can be diversified and loss can be avoided. Finance leaders are trying to do lots of research and development work so that proper investment can be made by them which can yield greater returns. Large companies enjoy economic leverage. They are trying to achieve economies of scale. After lot of research works The International Monetary Fund confirms that the ten fastest growing economies during the years ahead will be in the emerging markets. Working capital can be calculated by subtracting Companys current liabilities from liquid assets. Calculation of working capital is easiest of all as because it gives the true picture of any company. It gives the investors lot of information about the company. Current Assets Current Liabilities = Working Capital. It helps the finance managers to for see any financial difficulties that may arise. Poor working capital leads to the financial pressure on the company. Working capital is a also a common measure of a companys liquidity. It also tells us about the efficiency and overall health. Positive working capital means that company is able to pay off its short term liabilities immediately. But negative working capital indicates that company is unable to do so. Inventory is a major component of working capital. There are lot of companies who try to avoid this situation by investing so that shortages of working capital can be avoided. Working capital shortages can lead to the closure of business. There are two kinds of working capital: Gross working Capital and Net Working capital. Management of working capital is considered to be one of the most important area of day to day management of a firm. It is concerned with adequacy of current assets. Current ratio and acid test ratio is the best indicator of working capital situations. There is also a working capital cycle. There are various components of operating cycle. Raw Material Storage period, Work in progress etc. There are lot of factors which the management considers at the time of determining the working capital like production policies, Nature f Business and credit policy. There is balance sheet information about TCS for 2013: Total Current Assets = 31576 crores Total Current Liabilities = 11842 crores Therefore, Working Capital = 19734 crores There are lot of other factors which also which affects the working capital like Marketing conditions, conditions of supply, Growth and expansion, level of taxes, dividend policies, price level changes, operating efficiency and inventory policies. The need of working capital varies according to the production policies and it provides support system to the management. The calculation of the working capital provides the management about the need of as to how much working capital is required and when. The working capital is very useful in the company. It depicts the financial performance of the company. There is a lot of holistic approach to managing the end to end processes that influence working capital performance. No business can run without adequate investment in working capital. It provide support system to the management. It is basically refers to the amount of fund required to finance current assets. So in this way it can support to the finance function. So, the role of finance function has extended a lot and if calculation of working capital is done properly then it provides greater support to the management. There is lot of possible roles for the finance function in a corporation. The role of finance is basically to focus on reporting and compliance but financial accounting management is also important. Finance serve as the integral part of the management team. Hence working capital management is very important part of finance function. References https://www.researchgate.net/publication/242620337_Working_capital_management_efficiency__A_study_on_the_Indian_cement_industryhttps://www.ijept.org/index.php/ijept/article/view/Evaluating_the_Impact_of_Working_Capital_Management_Components_on_Corporate_Profitabilityhttps://gbr.sagepub.com/content/12/1/159.abstracthttps://astonjournals.com/manuscripts/Vol2012/BEJ-60_Vol2012.pdf