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4.4 Finance

Corporate finance functions differ from company to company. Duties can include managing financial risk, determining borrowing levels or even simple check writing. In general, the department monitors the company’s flow of money, the life blood of any business.

Your Finance Department is primarily concerned with five issues:

  1. Acquiring the capital needed to expand assets, particularly plant and equipment. Capital can be acquired through:
    • Current Debt
    • Stock Issues
    • Bond Issues (Long Term Debt)
    • Profits
  2. Establishing a dividend policy that maximizes the return to shareholders.
  3. Setting accounts payable policy (which can also be entered in the Production and Marketing areas) and accounts receivable policy (which can also be entered in the Marketing area).
  4. Driving the financial structure of the firm and its relationship between debt and equity.
  5. Selecting and monitoring performance measures that support your strategy.

Finance decisions should be made after all other departments enter their decisions. After the management team decides what resources the company needs, the Finance Department addresses funding issues and financial structure.

One of the Finance Department’s fiduciary duties is to verify that sales forecasts and prices are realistic. Unrealistic prices and forecasts will predict unrealistic cash flows in the proformas. Finance can determine a range of possible outcomes for the year by changing (but not saving) Marketing’s forecasts then rechecking the proformas. Lowering forecasts decreases revenue and increases inventory—worst case; raising forecasts increases revenue and decreases inventory—best case (see “10.4 Worst Case/Best Case”).

Finance can print the worst case and best case proformas, then compare them to next year’s annual reports.

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