Chapter 12 - The Finance Function

Question 1

Importance of finance

Answer 1

From reporting to enhancing

Question 2

Current roles of finance

Answer 2

formulate corporate objectives and strategy
strengthening management and info on risks and costs of strategies or products
dealing with complexity
pressured to cut costs while providing more effective advice
turning data into valuable info source

Question 3

New roles of finance

Answer 3

recent down turn highlights value of finance function
focus on efficiency
focus long-term, sustainability
managing company life cycle events (going public, acquisition, refinancing)
well founded decision making is the basis for competitive advantage

Question 4

Relationships of finance

Answer 4

Procurement:

• credit terms
• prices
• payments
• data/order capture
• inventory
• budgeting

Production:

• Cost measurement
• Budgeting
• Cost vs quality
• Inventory

Marketing:

• Budgeting
• Advertising (measure effectiveness, like via sales)
• Pricing (to ensure costs are covered)
• Market share (sales volume per product)

Question 5

Finance function in the org (3)

Answer 5

embedded with business
Pro: info as and where required, business knowledge, relationship
Con: duplication of efforts, lack of knowledge sharing, isolation

Shared Service Centers (SSC)
Pro: HC reduction, fewer locations, lower wages, knowledge sharing, consistency (of data)
Con: loss of business know-how, removed from decision making, reduced ties to the business leaders

Business process outsourcing
Pro: cost reduction, access to specialists, focusing on business support
Con: Loss of control, reliance on 3rd party provider, confidentiality and IP risks, quality concerns

Question 6

Outsourcing

Answer 6

Hierarchy (inhouse)

• staff recruiting and training
• provision of managerial supervision
• production planning
• payments and incentive schemes to motivate
• budget controls
• performance measure
• cost of maintenance

Market solution (buy or outsource)

• negotiations and legal agreements
• monitoring
• legal actions
• penalty payments or cancellation

Question 7

External costs of market solutions driven by risks of:

Answer 7

• bounded rationality: limited capacity of individuals to process information
• difficulties measuring performance
• asymmetric information between 3rd party and own company
• uncertainty and complexity
• opportunistic behavior of 3rd party

Question 8

Asset specificity (6)

Answer 8

Extent of which particular assets are of sue only tin one specific range of operations (how unique are some operations).

• Site specific
• Physical asset specific
• Human asset specific
• Dedicated asset specific
• Brand specific (loss of exclusivity)
• Temporal specificity

Question 9

Contractual relationships and service level agreements (SLA’s)

Transaction cost theory applies because:

Answer 9

1 identification of distinctive competencies
2 support organisational structure
3 predicting the IT developments

Question 10

Relationships with professional advisors (6)

Answer 10

Solicitors
Accountants
Tax Consultants
Insurance Brokers
IT specialists
Environmental advisors

Question 11

Why use advisors and when

Answer 11

Why
dispassionate, unbiased perspective
help turn problems into opportunities

When
sales are low
profits are low
profits are high (or rise)
entering contracts or projects
upcoming litigation
bringing in new finance sources / ownership
Environmental reviews show need for improved performance or efficiency

Question 12

Relationships with external stakeholders

Answer 12

• auditors
• finance stakeholders:
  o investors or financiers
  o small and emerging businesses
  o tax and statutory authorities

Question 13

Other functions finance interacts with

Answer 13

• support decision making across the org
• understanding of numbers to be spread
• able to challenge business partners
• maintain effective controls and enhance its value contribution