The Finance functional area manages all of the money coming into and going out of the business. For a sole trader the owner will often be in charge of finance, but in a larger business finance may be managed by a large department or a firm of accountants.
The finance functional area has a central role within the business as without it the other functional areas could not operate. It has to raise the money for the business to start up. Once the business is up and running it has to ensure that each functional area has enough money to carry out their duties. It will also ensure that functional areas do not spend more money than they have been allocated.
The main functions of Finance are outlined below.
The finance department is responsible for producing the profit and loss account and the balance sheet. The profit and loss account will provide a record of all the costs and revenues over a particular period. The balance sheet lists all of the business’s assets and liabilities. In addition to this, a cash flow statement can be produced that will provide a record of how cash has flowed in and out of the business.
Financial accounting looks at the money that has come into and out of the business. The profit and loss account, the balance sheet and the cash flow statement are examples of financial accounting. They are a record of what has happened in the past. Sole traders and partnerships can keep this information private. However, limited companies must make their profit and loss account and balance sheet available to the public. Public limited companies must also produce a cash flow statement.
These documents give a financial overview that can help the managers with planning for the future and decision making. A cash flow forecast and a break even forecast are often used. The cash flow forecast shows the amounts of money which the business predicts it will spend and receive on a month-by-month basis. The break even forecast shows the amount of sales which the business thinks it will have to make in order to break even, in other words, the number of sales it must make so that its revenue covers its costs.
The finance department is responsible for providing the workers with their wages. If the employees are not paid on time they may become demotivated or leave the company.
When a business starts up it will need to obtain money in order to buy the premises, machinery, equipment and to pay workers. For a sole trader or partnership this money will often come from the owner’s own money or a bank loan. Limited companies will obtain their money from the sale of shares.
Money will also be required to enable the business to carry out its plans and expand in the future.