Finance effectiveness is a strategy of bringing in the best practices in the industry for a specific business model to eliminate inefficiencies in finance sub-processes.
Building required approval hierarchy to deliver the services as defined by a job role as per a service level arrangement helps to build the efficiency and transparency.
Effectiveness can be brought even without using technology, however technology enablement brings down redundancy which helps to capture the information from multiple locations and keeps the dashboards ready for the management.
The major steps in building an effective finance process would be working on the below structure:
- Building the Standard Operating Procedures (SOPs for finance process)
- Assigning job roles (For all the finance employees)
- Defining approval hierarchy (For all the finance processes)
- Enablement of technology (Eliminating manual entries wherever possible)
- Building SOPs
- There are key processes in the finance function which cover all the transaction processing, understanding the process flows of the business and defining the standard operating processes for finance function will help in the automation and helps in building standardization of the operations.
The Key business cycles
- Procure to Pay cycle
- Order to Cash cycle
- Fixed assets management
- Cash & bank
- Record to report
- Procure to Pay cycle
The Procure to Pay cycle is the most voluminous cycle in many organisations which is addresses the vendor management or accounts payable
For most companies, the Accounts Payable process begins with receiving an invoice(purchase bill or expense bill) and ends with payment the vendor. Throughout the payment process, Accounts Payable process manages other necessary tasks that affect both vendor relationships and cash management.
AP responds to inquiries from vendors and from employees within the company, forging cooperative partnerships; resolves payment issues and disputes, protecting the company’s reputation and credibility; and categorizes expenses to the appropriate general ledger accounts, ensuring that financial data is accurate and in order.
Right from receiving an order from the customers to collection and receipt settlement of the receipts O2C process covers every aspect.
Accounts Receivable is part of the Order to Cash (O2C) cycle. O2C is the process of receiving orders, performance of service, issuing invoices and receiving payments. The process steps vary by industry but broadly includes master data setup/credit check, order capture and fulfilment, billing, collection and Cash Application.
For most companies, the AR process begins with raising a bill or invoice and ends with payment received from the Debtor. Throughout the process, AR manages necessary tasks that affect both debtor relationships and cash management.
Fixed assets, also known as “tangible assets” or property, plant, and equipment (PP&E), is a term used in accounting for assets and property that cannot easily be converted into cash. In most cases, only tangible assets are referred to as fixed.
The primary challenge being addressed is asset tracking to comply with regulations for proper accounting, financial disclosure, and taxation throughout the asset life cycle. The process aims to maintain appropriate financial reporting controls for fixed assets entails documenting and tracking each asset throughout its life, from acquisition through maintenance and up to disposal, in order to maintain accurate valuations for depreciation, insurance, and taxes.
Corporate tax and indirect taxes compliance function within an organization plays a very important role. Especially in India due to the presence of complex tax structures, the importance of having a strong tax support function increases manifold. Direct and indirect taxes, levied at various points in the supply chain of a product or a service shall be complied with. So the Corporate Tax function needs to be thoroughly updated on the various tax-related procedures. A proper charter for compliances have to be planned well in advance and have to be reviewed periodically with utmost diligence.
Cash & bank
Cash and Bank process deals with the transactional activities arising out of the cash management practices employed at the companies. As such, they are designated to maintain the relationships at an operational level with various banks dealing with the companies.
A thorough fool proof system for cash management is of utmost importance in every business, there should be work around that needs to be deployed to eliminate the cash usage in the business which brings down the potential risks for any embezzlement by the employees.
Record to report
Statutory and management reporting is a key responsibility of any finance function, with the advent of IFRS and Ind AS the importance of reporting has shaped to be a professional activity with a though knowledge.
The frequency for statutory reporting is generally quarterly/annual, whereas management reporting is more frequent. The depth of information and analysis for management reporting is also much higher and very context specific .
Companies adopting best practices try and ensure that the reporting is timely and there is minimum duplication of effort in preparing statutory and management reports and both provide one version of the truth. To this effect, they adopt automated, faster and transparent reporting processes.
It is important to define job roles for a number of reasons. First, it ensures that everyone in the finance department knows what their specific responsibilities are. This helps to create a sense of accountability and ownership among team members. Additionally, it can help to improve communication and coordination within the organization.
By having a clear understanding of each other’s roles, team members can more easily collaborate and work together effectively. Finally, defining job roles can also help to identify training and development needs within the organization. By knowing what skills and knowledge are required for each role, organizations can better target their resources to ensure that employees have the tools they need to be successful in their jobs.
There are many ways to measure employee performance, but some methods are more effective than others. The most important thing is to find a system that works for your company and that accurately reflects the employees’ contributions.
One popular method is to set KPIs, or key performance indicators. These are specific goals that employees must meet in order to be considered successful. KPIs can be based on a variety of factors, such as sales numbers, quality control measures, or customer satisfaction surveys.
Every transaction has to be approved by competent authorities at various levels who has the knowledge and the authority.
Transactions in an organization often need to be approved by a competent authority before they can be carried out. This is especially true for financial transactions. In most organizations, there is a hierarchy of authority when it comes to approving transactions.
The first level of approval is usually done by the departmental head. If the transaction is above a certain value, it may need to be approved by a higher authority, such as the board of directors. In some organizations, all transactions must be approved by the board.
The reason for having an approval hierarchy is to ensure that only authorized transactions are carried out and that all relevant parties have a chance to review and approve the transaction. Having an approval hierarchy also makes it easier to track who has approved what and when.
All the process flows that are defined above shall be enabled through technology.
All the paper approvals that are in the business model shall be brought into technology so that all the transactions can be tracked transparently at various stages and fixing of responsibility.
Standalone systems can be used but if the data flow is tightly integrated, if data cannot be integrated there is a need to use an ERP to track the business efficiently.
A good accounting system with a proper implementation, adoption of Chart of accounts, cost centers, management of ledgers can share great insights to the management about the business.
On adoption of business intelligence tools management can get the right insights and can make the right decisions.