Importance of Different Ratios to Different User Groups
As we have seen earlier that there is a wide variety of financial ratios available. They fall into many categories and if variations are included there are hundreds of types of ratios that are common in practice. However, all the ratios are not used by everyone on a regular basis. There are some ratios which […]
The Last Step: Handing Over the Financial Model
Financial models are complex projects which take months or even years to build. It also needs to be understood that the people developing the financial models are not the same people who maintain it over the long term. Hence, there is a need for a formal transition wherein the creator of the model must handover […]
Benefits of a Holding Company
The holding company-subsidiary company corporate structure is extremely popular all across the world. All large companies serve as holding companies. For instance, Apple Inc. is a holding company which is registered in the United States. Apple has several subsidiaries all across the world. Companies like Apple China and Apple Russia are registered in their respective […]
Why Do Start-ups Fail After Receiving Funding?
It is common knowledge in the investing world that almost 90% of the start-up companies which come into existence shut down within the first couple of years. However, it is also assumed that if a company is able to gain funding from professional investors, its chances of surviving become astronomically high. This is because it […]
Myths Surrounding Toys R Us Bankruptcy
Toys R Us is an iconic American company. According to recent surveys, Toys R Us has a market share of more than 15%. With this market share, the company should be in a commanding position in the toys market. However, ironically it is filing for Chapter 11 bankruptcy. This means that it is still likely […]
Contemporary organizations need to practice cost control if they are to survive the recessionary times.
Given the fact that many top tier companies are currently mired in low growth and less activity situations, it is imperative that they control their costs as much as possible.
This can happen only when the finance function in these companies is diligent and has a hawk eye towards the costs being incurred. Apart from this, companies also have to introduce efficiencies in the way their processes operate and this is another role for the finance function in modern day organizations.
There must be synergies between the various processes and this is where the finance function can play a critical role.
Lest one thinks that the finance function, which is essentially a support function, has to do this all by themselves, it is useful to note that, many contemporary organizations have dedicated project office teams for each division, which perform this function.
In other words, whereas the finance function oversees the organizational processes at a macro level, the project office teams indulge in the same at the micro level. This is the reason why finance and project budgeting and cost control have assumed significance because after all, companies exist to make profits and finance is the lifeblood that determines whether organizations are profitable or failures.
The next role of the finance function is in payroll, claims processing, and acting as the repository of pension schemes and gratuity. If the US follow the 401(k) rule and the finance function manages the defined benefit and defined contribution schemes, in India it is the EPF or the Employee Provident Funds that are managed by the finance function.
Of course, only large organizations have dedicated EPF trusts to take care of these aspects and the norm in most other organizations is to act as facilitators for the EPF scheme with the local or regional PF (Provident Fund) commissioner.
The third aspect of the role of the finance function is to manage the taxes and their collection at source from the employees. Whereas in the US, TDS or Tax Deduction at Source works differently from other countries, in India and much of the Western world, it is mandatory for organizations to deduct tax at source from the employees commensurate with their pay and benefits.
The finance function also has to coordinate with the tax authorities and hand out the annual tax statements that form the basis of the employee’s tax returns. Often, this is a sensitive and critical process since the tax rules mandate very strict principles for generating the tax statements.
We have discussed the pension fund management and the tax deduction. The other role of the finance function is to process payroll and associated benefits in time and in tune with the regulatory requirements.
Claims made by the employees with respect to medical, and transport allowances have to be processed by the finance function. Often, many organizations automate this routine activity wherein the use of ERP (Enterprise Resource Planning) software and financial workflow automation software make the job and the task of claims processing easier.
Having said that, it must be remembered that the finance function has to do its due diligence on the claims being submitted to ensure that bogus claims and suspicious activities are found out and stopped. This is the reason why many organizations have experienced chartered accountants and financial professionals in charge of the finance function so that these aspects can be managed professionally and in a trustworthy manner.
The key aspect here is that the finance function must be headed by persons of high integrity and trust that the management reposes in them must not be misused.
In conclusion, the finance function though a non-core process in many organizations has come to occupy a place of prominence because of these aspects.
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