Role of the Finance Function in the Financial Management for Corporates
The Finance Function in Corporates
We often read about how corporates are doing financially with reference to their profits, asset values, debt, equity, and other measures. These measures are indicative of how well the corporate is doing financially. The next time you read about these measures, do think about the people who enable these performance indicators and these are the finance and treasury functions of the corporates.
Before we proceed further, we would like to remind you that the Treasury or the Finance function does not actualize the broader financial performance which is determined by the various strategic, operational, and financial management. Rather, the role of the finance function is to record, and keeps track of the various matters related to financial management in corporates.
The finance and the treasury functions are also responsible for tax calculations, social security payments, payroll, managing the receivables and the payable, and in recent years, the emergence of the treasury function has meant that they also deal with foreign exchange management and hedging that has been necessitated due to globalization which means that many corporates are now actively dealing in multiple currencies and hedging.
The External Functions of the Finance Department
The functions of the finance department can be broadly broken down into external and internal financial management. The external function encompasses the entire range of activities to do with paying the suppliers, vendors, and the other stakeholders who do business with the corporates.
In addition, the finance function also keeps track of the receivables meaning that they follow up with the clients and the customers who owe the corporate money for the services rendered. Apart from this, the finance function also handles the social security payments of the employees wherein each month or quarter (depending on the prevailing laws of the country), the finance department makes payments into the 401(k) accounts in the United States and the Provident Fund Accounts in India.
Further, the finance function is also responsible for remitting the TDS or the Tax Deducted at Source from the employees into the relevant accounts of the governmental agencies. Above all, the finance department also liaises with the banks in which the corporate holds account.
Indeed, in recent years, it has become the norm to have a single banking relationship in an Umbrella format where the corporate engages and partners with a single bank for the entire financial needs of the corporate.
The Internal Functions of the Finance Department
The internal functions of the finance department are similarly important wherein it stars the payroll processing and ensures that employees are paid on time. Indeed, payroll is perhaps the most visible interface that the finance department has with the employees.
The next time when your salary is credited, do think of the people sitting in the secluded (usually the finance department in many multinationals is seated separately in glassed enclosures for diligence and compliance reasons) areas working to get your salary paid on time.
Further, the internal functions of the finance department also encompass the processing of reimbursements on account of travel, dining and hospitality, same city transportation, perks, and any other benefits that are due to the employees. Indeed, perhaps the biggest reason why many employees either praise or curse the finance department is when their vouchers and bills have to be cashed.
In many corporates, this takes some time as not only are the finance personnel overworked but also they have to perform due diligence before processing the payments. Therefore, the next time you have a bill to be cashed, you can think of the various steps and the approvals needed before you shoot off a mail or message on the Bulletin Boards of the organization.
The Treasury Function
We have considered the external and internal functions of the finance department. In recent years, many multinationals as well as domestic companies that operate globally have added another key and vital function to the tasks of the finance department and this is the Treasury Function.
Simply put, Treasury is all about managing the foreign exchange payments and ensuring that the corporate does not lose money due to fluctuations in the exchange rates. Indeed, as those who have received payments in Dollars or Euros would cash them when the exchange rate is favorable.
Similarly the Treasury’s job is to ensure that the corporate does not lose out and towards this end, it ensures that hedging and escrow accounts are managed. For instance, there are active treasury desks in the headquarters of most corporates worldwide due to their global payments.
Most of the time, the employees are unaware of this function since the Treasury staff do not sit in the operational offices but instead, are based in the financial capitals such as New York, London, and Mumbai. Further, details of hedging and treasury management are usually revealed in the annual reports that many employees do not usually read and hence, little is known to them about this vital function.
Conclusion: The Finance Departments are Like Ants
Finally, the finance department is like a pump which keeps the fluids of money and commerce flowing through the system. Indeed, it can be said that though the finance function is a support function and is away from the limelight unlike the marketing, or the project staff, they are vital cogs in the machine which keep the wheels greased and the organization moving.
Some people like to call the finance function in corporates as ants who go about their work quietly and diligently. To conclude, just as one needs the financial advisor from time to time, all employees need the finance function and especially when one sees the money in one’s account for salaries or bills.
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.