FINANCE MANAGER AND THE FINANCE FUNCTION IN BUSINESS
SUSTAINABILITY
SUMMARY
This paper titled Finance Manager and the Finance Function in Business
Sustainability is an article in the International Journal of Business Marketing and
Management, published in 2017. The paper sought to examine the importance of finance
function, the imperativeness of financial strategies and the special role of finance
manager in business sustainability. In addition, a reflection is made of the financial
management practices of businesses in African countries, and recommendations made for
changes required for their sustainability.
The paper is divided into various sections; introduction; understanding finance;
executive finance function; operative finance function; finance, financial strategies and
business sustainability; the finance manager and business sustainability; development of
financial strategy; treasury management; controlling function; dimensions of business
finance and managerial oversight in African countries; conclusion and recommendations
and then references which was arranged in the APA style. All numbered in Roman
numerals from i to xi except the references.
INTRODUCTION
It has been observed that lesser developed countries particularly in Africa needs
the establishment of an economic-viable business enterprise to enable them has a
successful economy, and also because of its relative advantages which includes potential
for employment generation, economic empowerment, poverty alleviation and income re-
distribution. Also, developing countries have tried efforts to improve on their
development by trying to formulate and implement various monetary, fiscal and industrial
policies and also by way of interventions employed to provide appropriate financing and
incentives for the development of indigenous entrepreneurship. However, these efforts
have not yielded the expected results as the numbers of enterprises are still very few and
their mortality rate remains consistently high in these countries. Various suggested causes
of this failures includethe business environment, government policies and infrastructural
facilities, lack of experience in terms of marketing, production and finance, inadequate
financing, poor financial management, restricted access to finance that they require to
growth and also lack of executive capacity to manage the limited funds at their disposal
Given the above situation, the article is written to examine the importance and the role of
a finance manager and the finance function in business sustainability in developing
countries particularly in Africa.
The finance manager is the principal personnel responsible for the financial
management of the business, including financial records and reports. He is in charge of
all decisions relating to investment, financing, dividend and liquidity or short-term asset
mix of the entity. Long-term sustainability of business depends largely on the ability of
the finance manager to drive the finance process. He is also responsible for planning and
be accessed and how to choose among them. In line with the above description of finance
manager, business sustainability is also viewed as an enterprise ability to manage its
financial, social and environmental risks, in a manner which will create enhanced
outcomes and enhance long-term value of shareholders.
UNDERSTANDING FINANCE: The best way to understand finance is to view it from
fourdifferent perspectives; as an instrument, as a managerial function, as an area of study
and as a process. As an instrument, finance refers to money, money convertibles or
moneys worth, as a managerial function, it refers to the finance and accounts department
which is vested with the responsibilities of carrying out finance and accounts functions of
the organization, as a discipline, finance is a field of study and lastly as a process, it
relates to the aggregate activities of identifying, estimating, sourcing, allocating,
returning, and appropriating pecuniary values of economic units. Finance as a process
involves three main activities; planning of how much funds the business needs,
determining the best sources or mix of sources to procure funds at reasonable costs to
ensure business operations are sustained and lastly, the application of the funds among
competing projects and programmes of the entity with a view of maximising the business
objectives. Finance requires creative thinking and actions on matters such as the
provision of financial information for management and other business stakeholders,
investment selection and financing, mergers and acquisitions, liquidity and dividend
policies, obtaining stock exchange listing, and raising of capital to start up new ventures
or shore-up existing capital base. Business firms rely on the flow of funds from different
sources such as retained earnings, disposal of financial assets or securities (shares, bonds
or debentures), trade and expense creditors and investment in stocks. The funds generated
from these sources are committed to production of goods and/or services, acquisition of
current and non-current assets, among other needs. Firms expect to receive returns from
these investments, which in turn are allocated among stakeholders, including
shareholders, employees, government and the host communities. Therefore, finance is
essential for business sustainability, this is due to the various functions and uses that it
posses.
EXECUTIVE FINANCE FUNCTION: The executive finance function in business is
often a decision by the top management with the assistance of a finance manager. The
method and manner in which the executive finance functions are performed is a key
requirement for sustainable growth of the business. The functions includes making
decisions in such areas as determining which capital expenditure to undertake and the
funding model to adopt as well as prioritising the expenditure needs of the enterprise.
The budget document is often prepared, taking into consideration uncertainties and
timing of the estimated cash flows, effects on the current accounting profits, internal rate
of returns and the applicable cost of capital, to facilitate the proper performance of these
executive finance functions. The executive also decides on the method of financing.
Possible sources of funds include new equity issues, loans, retained earnings and sale of
assets. The financing task requires relevant information such as the available sources of
funds and conditions for accessing them, the enterprises level of gearing as well as the
timing and projection of cash flows. The essence is for the management to obtain an
optimal financial structure which can meet the firms objective of maximizing its market
value. This decision must be taken with caution because whatever option that is adopted
would usually affect the market value of the firms shares. The executives are expected to
make optimal decision that will enhance the value of the firm, without undermining the
shareholders expectations.
The executive finance decision also includes decisions on what to do with the
firms return on investment. Shareholders expectations must be accorded priority as
owners of the firm. The executives are to decide whether to distribute all its earnings to
the shareholders, or retain some or retain all. For this function to be thoroughly executed,
financial information like the shareholders preference for current income, the need to
maintain a high share price and the opportunity for internal use of retained earnings is
often required. Also, the executives must decide on the amount of funds to tie up in
current assets to promote liquidity, and to achieve appropriate trade-off between liquidity
for short-term survival and profitability as a pre-requisite for long-term growth. They also
take decision on areas of taxation, assets and risk management as well as consistent
monitoring and evaluation of the entire finance process. They establish standards and
policies to which outputs and performances are measured. The task embraces establishing
finance policies and setting standards for expenditure controls, income, revenues, and
other benefits accruing to the entity. It entails the provision of regular performance
reports, correction of deviations, monitoring of liquidity positions, and undertaking
surprise cheeks on persons and responsibility centres to inculcate a sense of discipline in
those entrusted with the resources of the entity.
OPERATIVE FINANCE FUNCTION: The operative finance function is concerned
with the regular procedural and clerical duties intended to facilitate the actualization of
the executive financial functions. Theyinclude all aspects of cash flow management,
including the supervision of cash receipts and payments, as well as ensuring safety of
cash and cash equivalents. Also, it utilizes accounting as a tool for the coordination and
control of the activities and it involves keeping track record of all monetary transactions.
The operative finance functions involve records of purchases of inventories, staff wages
and salaries and revenue generated from sale of goods and services. This information are
also required by the management for planning and control purposes, especially those
relating to performance measurement and the day-to-day business decisions.
FINANCE, FINANCIAL STRATEGIES AND BUSINESS SUSTAINABILITY:
Business sustainability depends largely upon the manner in which finance functions are
performed. Finance plays a key role in the sustenance of business by increasing
operational efficiency within the firm. Businesses are financed in one or a combination of
ways such as, equity financing, debt financing, utilization of retained earnings and
disposal of assets. Each of the financing methods is unique and has some cost
implications. Therefore, it is necessary for a business to have a strategic balance so as to
obtain optimum combination of finances and guard against much exposure to debt.The
use of financial models such as capital asset pricing model and the weighted average cost
of capital are proven strategic measures for optimal decisions on business
financing.Maximization of market value is one of the indices for measuring the
sophistication of financial strategies, and of course, business sustainability. This is
because the concept provides a holistic picture of growth in terms of profits, sales
revenue, market share, employment and output as well as stakeholders satisfaction.
THE FINANCE MANAGER AND BUSINESS SUSTAINABILITY: The role
expected of the finance manager within the enterprise can be discussed under three main
headings: development of financial strategy, treasury management and controlling
function.
In developing financial strategy, the finance manager is expected to determine the
financial objectives of the business. By this, he/she is expected to do a comprehensive
review of business policies, portfolio of investments, budgets document and cash flow
profile. It is the manager’s responsibility to see to the development, implementation and
monitoring of strategies to ensure the actualization of intended objectives. A financial
strategy is said to be a subset of business strategy that relates to financial management,
and it includes, decisions such as determining the financial objectives of the enterprise,
long and short term planning models as well as capital structure decisions. The finance
manager is expected to see to the development, implementation and monitoring of
strategies to ensure then actualisation of the intended objectives. He must maintain
current operating records to monitor the implementation of strategic plans, and acting
promptly where implementations are inconsistent with objectives. He is also expected to
do regular review on the adopted strategy so as to keep out outdated or non productive
strategy.
In treasury management, it is that role expected from a finance manager to ensure
that the firm has sufficient liquid funds to meet its debts as and when due as well as need
for expansion and growth. Specifically, theroles revolves around obtaining funds,
managing the firm’s cash flow, controlling the working capital, investing of surplus fund
and maintaining a functional relationship with financial institutions, raising of short and
long term finances, foreign exchange management as well as the management of returns
for different interest groups, including pension funds investment. The finance manager as
part of the treasury management function is expected to have a clear understanding of the
dynamics of the capital market, and the risks involved in trading on shares and
debentures. Also, he should be able to plan the business profit, decide when to distribute
it as dividends and when to invest part or all in the business to enhance growth. This is
necessary because it will safeguard the firm against the dangers of illiquidity and
insolvency.
The controlling function is a kind of monitoring and follow up mechanism within
an organization. The finance manager must inspect and ensure that funds are applied
efficiently in the operations of the firm, ensuring that every capital expenditure helps the
enterprise along its chosen strategic path towards achieving its objectives. The first aspect
of the controlling procedure is the budget. The budget provides basis for regular
comparison of performance against target, and the analysis of variance give the finance
manager the direction in which the firm is going. Other aspect of the controlling
procedure according include book keeping and accounts, auditing and reconciliation of
office and banks record, staff payroll, taxes and dividends. The finance manager is also
involved in the financial planning and control process. This he does using the financial
statements (statement of financial position, statement of comprehensive income,
statement of changes in net assets/equity and cash flow statement, among others) as a
source of information. However, the finance manager often encounters challenges while
carrying out the controlling functions. These challenges are often imposed by the
economic, financial and business environment. In order to overcome these challenges, the
finance manager is expected to have sound knowledge of the happenings around the
business community, statutory institutions and agencies, and the prevailing economic
activities as affecting various fiscal and monetary policy issues as well as trends in
government reforms and regulations. The finance manager is also expected to possess
some qualities which will enable the manager perform the controlling function
effectively. With adequate control measures, growth is bound to be achieved in the
enterprise.
DIMENSIONS OF BUSINESS FINANCE AND MANAGERIAL OVERSIGHT IN
AFRICAN COUNTRIES: The failure of finance to realize the transformation and
sustainable growth of business in African continents has been ascribed to the problems of
limited finances and missed priority in the management of available funds. Businesses
experience frustrations in lending from banks due to the unfriendly and stringent nature
of banks condition and guidelines for loan facilities. Also, government on their part has
failed in their attempt to set up a regulatory framework to protect businesses from undue
exploitation by the financial intermediaries. The undeveloped nature of capital market in
African countries has being highlighted among the causes of failure in business financing
and subsequently in sustainability. The capital markets supposed to provide the
mechanism through which medium and long-term funds and other financial instruments
with maturity of more than one year are sold and purchased. The capital markets in most
African countries are underdeveloped. The market cannot afford businesses the
opportunity to raise long-term funds through dealings on stocks. More so, the bond
market is weak to be a major source of finance for businesses because of the attendant
costs, which is inconsistent with the competitiveness of businesses. The less concerned
attitude which business owners express while carrying out their business is also indicated
to be among the causes of lack of sustainability of enterprises in Africa. African
businesses have been variously blamed for inadequate attention to financial management
in their operations.
The small scale enterprises which constitute the largest population of businesses in
Africa frequently lack the requisite knowledge and skills to access funds from the
financial markets. They are incapable of establishing functional relationship with trying
development of finance and other formal credit institutions because of their size and
limited knowledge of presenting financial cases. Consequently, most of them resort to
informal sources of financing such as local money lenders and rotating credit
contributions. The main reason they resort to informal sources are due to lack of asset to
offer as collateral, the rigor and stress of going through bank lending processes and the
exorbitant interest charged on bank loans.Most businesses in Africa have weak
accounting and internal control systems, with working capital being poorly planned,
while capital budgeting is relatively unknown in investment planning. Also, most African
businesses carry on business operations with no functional accounting system, sometimes
the only record they maintain is a memorandum records of customers to whom goods are
sold or services rendered on account, as well as lists of suppliers who sold goods or
rendered services to them on account. They do not have accounting staff to keep
accounting records such as cash books, bank books and general ledger, and to reconcile
accounting records and bank statements as and when due. The inability of most small and
medium scale businesses on Africa to maintain good financial statements is seen as an
attitude that is anti developmental and does not portray the businesses in good light as
responsible corporate citizens. Financial statements are detailed reports of the
management, intended to serve as an instrument of accountability by which management
submits itself for scrutiny of its stakeholders. They are also deemed necessary when
businesses have need to investigate fraud or irregularities in the system, or are under
pressure to tender expression of interest for contract jobs in other organizations. Most
businesses in Africa, however only consider auditing their accounts when they have to
support loan applications with the financial statements as a requirement from loan
providers, or when they have to file their annual returns with their relevant government
agencies.
In conclusion, the article is a theoretical review.The writers have been able to
establish link between finance manager, the finance function and business sustainability.
This means that there is a sound and experienced finance manager to drive the growth
process of enterprises. Hence it is recommended that business enterprises in Africa
should change their attitude to financial management; the management culture should be
entrenched in dignity and global outlook. In addressing the challenges of finance and its
management oversight, the following measures are suggested:
The state of affairs in Africa calls for constant capacity building for business
operators, particularly the owner-managers who double as financial managers in most
cases. This will keep them abreast with the state-of-art of business finance and financial
strategies, among others.
Finance managers should be at the forefront of ensuring financial discipline and
integrity in order to minimize the rate of business discontinuities.
Banks and other financial institutions should help businesses to prepare business
plans and lead them through their implementations. In this way, the banks would be sure
that loans granted for such projects are repaid with the associated interests as and when
due.
The governments of African countries should strengthen their regulatory
provisions, in line with international best practices to entrench rules and principles that
would enhance effective credit delivery of banks to businesses.
There is need to broaden and deepen the capital markets in Africa for improved
intermediary role as well as a vibrant bond market that would give businesses opportunity
to invest in debt instruments.
CRITIQUE: having carefully summarized the article, the following critiques are drawn:
There is a Good logical coherence of ideas within topics and paragraphs
The abstract in this article is quite specific and is a great representative of the article. It follows
the form for a theoretical review.
The writers have taken pertinent efforts to discuss their facts and have given clear interpretations
to them. It has also been observed that there is a logical coherence of ideas. Ideas are not being
overemphasized and there is little or no use of ambiguous statements in their explanations.
Therefore, this article is greatly recommended for the businesses and financial managers and to
the general public for reading. Also, it is also recommended to be used as basis for further
academic research.
