Explain the function of finance in a business organisation! ~ finance.sekolahmuonline.com. What is the function of finance in a business organisation? How important is finance in a business organisation? Find the answers below.
The financial function in the business organisation
Experience tells us that the main reason why companies are decapitalised is not because of economic contingencies, but because of the actions of their owners, who, due to lack of knowledge of financial management, lead them to lose so much cash flow that one day it is no longer possible to sustain it without a new capital investment or a loan.
Given the above, experts place the first major risk for companies on control of money, specifically the movement of money. The dynamics of cash inflows and outflows and their control is one of the constant concerns of every entrepreneur.
is one of the constant concerns of every entrepreneur. This is why, suddenly and the day before the There is no money for the payroll" or "I've already bounced a cheque".
The surprise in the amounts of money needed or surplus can be controlled and managed with a register called "Cash Flow".
This record, more than any profit calculation, is the simplest tool to keep, the most useful tool to control the business and the least used in practice by micro and small business entrepreneurs. Experts call it the "flyer" of the company. Commonly called "Programming and Budgeting" sheet, the "Cash Flow" sheet has columns that represent periods, which are usually weeks, fortnights or months (depending on the cash movements) and consists of a line called "Initial Balance", a "Receipts" and an "Outflows" section, and finally a line called "Final Balance".
With this tool, elaborated periodically and projected to future periods, it is not necessary to have a "magic ball" to predict the near future, and even better, to make decisions in advance and not fall into non-compliance with vital commitments such as payroll, rents or supplier payments, or worse, into a decapitalisation of the company that prevents it from continuing to operate.
There is also confusion in practice between the calculation of profits and "earnings". Commonly, the calculation of profit is understood as the upper difference between Sales and all Costs and Expenses. Whether it is called Profit or Profit, the tricky thing is not to make a correct subtraction, the interesting thing is to use the correct concepts of Sales, Costs and Expenses in such a calculation.
In principle, "Receipts" are often confused with Sales, of course they may be, but what if the cash inflow was motivated by a Sale made in the past, or in the future? The periods of Sales are not always the same as those of Cash Inflows, so it is common for the entrepreneur to confuse a time of high Sales with a time of recovery of previously granted credits. The sale is considered as such, from a financial point of view, at the moment in which the commitment of the parties is created, either through the generation of an invoice, the delivery of the product or service, the signing of a contract or promissory note, or the payment in cash or cheque.
However, if the Sale must be considered in the financial calculations in the period in which it was made, it must also be set against the Costs and Expenses that contributed to generating it in that same period, based on the same nature of the Sales, in order to determine with certainty the profit for the period.
The periods of Costs and Expenses are also not always the same as those of Cash Outflows.
It should be clarified that the most recurrent error in this respect is the omission of the concepts of Director's Salaries, unpaid rents (of assets regularly lent to the company by their owners, relatives or acquaintances and used in the operations), the expenses of the company, and the expenses of the company.
used in operations), depreciation of assets owned by the company (allocation of the value of the assets over the useful life of the assets to expenses, for their proper replacement.
It is only after integrating all the above data, isolated by periods, that we have a real and accurate calculation of the company's profits in that period, a calculation that reflects the company's financial performance and supports assertive decision making.
This is the context in which the financial function of the company finds itself in the business organisation, and it is precisely this problem that it faces on a daily basis.