Finance controlling
The activities of any business can be broadly classified into two types, one that is concerned with the day-to-day functioning, and the other that focuses on ensuring perpetuity of the business entity. Therefore, manufacturing, material procurement, marketing efforts, and employing people are all routine functions. Procurement of additional machinery for increasing production, purchasing or developing new technologies for gaining an edge over other products, and buying land, buildings, facilities, and businesses for long-term establishment of the businesss presence are management functions.
All these functions require money, and the money has to be judiciously allocated to ensure that both objectives of the business are fulfilled, simultaneously. Like in personal lives, businesses too face financial constraints. The skill of financial controller lies in making optimum use of limited resources.
Financial controlling entails activities such as
- Ensuring that unnecessary expenditure is minimized. Therefore, staff requirement for production, administration, marketing, and management is considered carefully. If there is a temporary requirement of skilled personnel, then it is better to take the services on short-term contract, rather than take such personnel on role and pay regular remuneration even after they cease to be of any use to the company. Similarly, if the machine can only produce 100 items per day using 100 consumables, then stocking 2000 pieces of consumables does not make much sense, especially if the consumable is a perishable item, or if such stocking entails paying rent for storage accommodation. At times, there may be a good discount offered by a supplier on some consumable, and if the business has adequate spare stocking facility and the consumable is not perishable, then it makes sense to buy the consumables in bulk quantities to avail the discount. Financial control is also exercised on debtors and creditors. Any business would prefer that debtor pays promptly and creditor delays requests for payment. Financial controller negotiates terms with the suppliers of materials. In the process, he gets additional discounts for prompt payments. Similarly, financial controller may, at times be willing to offer some discounts to debtors for prepayment or prompt payment. Alternatively, debtor may be penalized for delaying the payment. Transportation of goods may also come under financial control purview of buying a fleet of transport vehicles may be more advantageous than paying hefty sums to unreliable transporters. Financial controllers assess whether the business generates adequate cash flows for repaying any loan installments for purchasing transport vehicles.
- Monitoring the regular inflows and outflows, duly considering all the payments for the day, week and month. For this, the financial controller may approach the bankers for some overdraft or credit limits. Even with this limit, it is necessary to ensure that dues are collected promptly and payments are not delayed unreasonably. While availing such credit limits from the bankers, financial controller examines the interest rates and considers whether it is better not to go for that discount offered on consumables, or delay payment to creditors. For obtaining funds and limits the financial controller may pledge the receivables if the debtors are very reputed and reliable parties. Financial controller also has the option to hypothecate the finished goods, work-in-progress and raw materials to the bankers for availing such overdraft limits.
- If the requirement for business is more than what banker is willing to offer, then the options before financial controller are taking deposits from general public or offering bonds to the public. Alternatively, the business may raise funds from its shareholders through initial public offerings or private placement. Such measures are resorted to when the business is purchasing very large asset such as new machinery, new buildings or new business.
- The business has to give consistent returns and show reasonable growth. This means that if a business is paying 10 percent dividend in a year, the next year, it should be able to give at least 10 percent dividend on the capital that has grown at a reasonable pace. Financial controlling involves allocation of profits earned in such a manner that every now and then the investors are not approached for funds. Instead, reserves are created for replacing some assets, equalizing the dividends, and expanding the business.
- Financial controller has to ensure that there is adequate annual increase of staff pay packets. If this is not done, the personnel may leave the organization, and recruiting new personnel itself will become a new activity. Apart from that, the new personnel will invariably come for a higher wage. Therefore, it makes more sense to keep the known devil happy rather than take risk of paying higher for an unknown devil who may not be half as good as the known worker.
- Financial controller may, at times, find that there are surplus funds available in the business, which are not required in immediate future, but will be required after a couple of months. These funds will, therefore, become non-earning funds for the period. Financial control entails investing these funds so that some return is earned on them, instead of keeping them idle for the period.
- Tax planning is a major part of financial control. The quantum of tax paid at the time of dividend payout may be far too high when compared to using the funds for buying another business or asset. Such decision is therefore, at financial controllers discretion. However, decision not to pay dividend or pay more dividend and tax is subject to the approval of the shareholders or investors.
- Financial controller also helps the management in selecting investment alternatives. The cash flows from each mutually exclusive proposal are examined by the financial controller and studied at their present value to ascertain which, of the two or more options, is better. At times, the business itself may have to inject some funds and therefore, a thorough study of any new investment, project, purchase, expansion, etc., by the financial controller is essential.
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