Finance


Finance department is entrusted with the responsibilities of arranging the funds for the organisation. Funds requirement could be short-term to long-term. Short-term needs could be for meeting immediate or current liabilities or investment in short-term assets (i.e. inventory, short-term loans & advances, etc.) and long-term for investment in fixed assets or repaying long-term debts.

Why Finance Department critical?

Funds are lifeline of any organisation and so the functions of Finance department. Shortfall can lead to

      • breaks in operations or day-to-day functioning; or
      • losing key resources (like key personnel due to paucity of funds); or
      • stoppage in further investments; or
      • defaults in payments; or
      • loss of credibility, etc.

No organisation can afford above.

As we discussed earlier, funds are required for various purpose which are critical for organisation’s growth. Some of the critical needs are:

      • Acquiring new businesses; or
      • Venturing in new territories; or
      • Investment in fixed assets; or
      • Repaying liabilities (current or long term).

Traditionally, the entrepreneur arranges all funds from his / her closed sources (family or friends) or bank funding. But, over the years, with opportunities knocking the door requiring more funds has created the need for managing this function separately.

Moreover, the top management is entrusted with lot of responsibilities as we have been discussing in many articles, finance department requires special focus and can’t only be left to the entrepreneur entirely.

Functions of the department

    • Identifying the sources of funds (both short-term and long-term);
    • Negotiating the best terms and conditions (interest %, tenure of repayment and amount of securities & guarantees) with funding agencies;
    • Building healthy relations with funding agencies;
    • Ensuring proper documentations for acceptance of funds;
    • Ensuring timely payment of interest and principal / instalments;
    • Release of securities & guarantees on repayment of loans.

Goodwill of the organisation

    • Goodwill / branding / reputation – an important factor;
    • Terms & conditions dependent upon goodwill;
    • Goodwill in terms of
        • honouring the commitments;
        • timely repayment of dues → no defaults;
        • growth in turnover, profits, etc.;
        • adopting fair practices.
    • Finance world small → good and bad news travel fast → bad news / rumours to be attacked quickly → by timely response and assurance about → organisation having sufficient finances

Advantages of being an global organisation

    • World becoming flat;
    • Developed countries with lower inflation / lower interest rates / lower growth;
    • Developing countries {(B)razil, (R)ussia, (I)ndia, (C)hina} commonly known as BRIC countries with higher growth / higher inflation;
    • Country arbitrage possible (i.e. organisation operating in BRIC countries accepting funds from developed countries);
    • Confidence of financiers in developed countries on global organisations adopting global reporting practices and having high goodwill → availability of funds with best terms

Internal accruals and need of finances

    • Whether funds are required when internal accruals / generation of funds are good?
    • World moving towards inorganic growth → growth by acquisition rather than building the organisation from scratch;
    • Need for more funds immediately → can’t be met entirely from internal accruals reserves → need for funding agencies to participate.

Documentation

  • Documentation of transactions → very critical;
  • Insufficient documentation and unclear documentation in the phase of defaults → Litigation;
  • Need for putting sufficient time & legal support while drafting agreements / contracts / security, etc.

Deliverables (i.e. expectations from the Department)

    • Securing funds for longer durations;
    • Best credit terms (lowest interest %, less amount of securities & guarantees of present / future assets);
    • Exploring best funding options from across the world

Important developments in the Finance function

    • Developed stock exchanges offering options of public offerings, faster liquidity to investors;
    • Evolution of private-equity (PE) / venture / angel investors with strong institutional support looking for growth opportunities in developing countries;
    • Thanks to e-initiatives of Govt. → Availability of more information about the organisation in public domain;
    • Enactment of Companies Act, 2013 → demand for transparency in management and business operations;
    • Development of mobiles / internet / social networking → news / rumours spread fast.

Traditional / Normal ways of working in Finance function

    • Entrepreneur arranging funds from his / her closed sources (family or friends);
    • Loans from Banks / Financial institutions / Private investors;

Conflicts (Inter-departmental) / Challenges with Finance function

    • Challenges more at the macro level than micro level;
    • Goodwill of organisation → very important factor in securing finances;
    • Ensuring timely repayment of principal and interest.

Some of the Process Implementation for better Finance function

    • Document checklist before finalising the contract;
    • Interest payment schedules;
    • Principal repayment schedules;
    • Checklist while repaying the loans:
        • Collection of Full & Final receipt from Financiers;
        • Release of securities & guarantees;
        • Charge release from Financier / Registrar of Companies (ROC).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s