A MBA in marketing later, I was still meandering about my financial ABC’s. Most of us are usually foxed by balance sheets, income statements and break even analysis. And yet if you want to be a store owner, or run a technology firm, it’s important to have basic skills in finance to survive business cycles. It is just as important for professionals from other streams to understand what finance and accounting departments do, understand the cash turnaround of a particular product or service. Understand them and you will make better decisions while investing your money. Cooked up balance sheets have seen many a corporation falling. Budgeting, basic financial analyses are considered a basic skill set for newbie and CEO’s alike.
Budgeting for a task or monthly household expenditure; Budgeting for a product launch or a capital expenditure, you need to know your financial ABC’s.
Typically a Finance department has two key areas. Finance undertakes the task of managing the company’s resources and Accounting reports the financial transactions of the firm. In smaller companies a few people may handle both, while in a large firm it may be headed by two different departments. Mergers and acquisitions, attracting investor capital, and managing IPO’s fall under the purview of the Finance department.
The Accounting department is responsible for recording all financial transactions and preparing reports that help the company, investors and government agencies understand them from a financial standpoint. These transactions are recorded and reported in a standardised format that varies from country to country. America for instance follows GAAP or Generally Accepted Accounting Principles. Now International Financial Reporting Standards (IFRS) is becoming popular all across the world. Since a one rule fits all does not work for diverse industries, these principles help maintain recording and reporting standards, allowing room for manoeuvre for industry specific details.
The key functions of the Finance and Accounting Departments include:
- Safeguard a company’s resources
- Institute and monitor internal controls
- Collect and organize all financial transactions of the company.
- Prepare budgets and monitor expenditure against it
- Prepare reports (Balance sheets, Income Reports) that can be used by other departments, investors, analysts, bankers etc.
It would not be incorrect to compare the finance department to the safe keeper of resources and monitor of financial transactions within the company.