Chapter 6

CHAPTER 6
THE FINANCE FUNCTION

&
FINANCIAL
INFORMATION
201053_Chapter 6: The finance Function and Financial Information 1

TOPIC LIST
1. What does the finance function do? 9 Measuring performance

2 The structure of the finance 10 Measuring climate change,
function sustainability management &
natural capital
3 Managing the finance function
4 Uses and types of financial 11 Establishing financial control
information processes and internal controls
5 Users of financial information and

their information needs
6 Limitations of financial information
in meeting users’ needs
7 Information processing and
management
8 Information security
1. What does the finance function do?
Tasks of finance function
The Finance function is involved in 4 specific, but often interrelated, tasks.
Recording financial • Ensuring accurate records of revenue,

expenses, assets, liabilities and
transactions capital
Management • Information assisting decision-

accounting & making, performance measurement,
planning and control activities
control activities
• Provide information about business to
Financial reporting external users for decisions-making.
• Assessing management’s stewardship
Treasury • Managing funds, including: cash,

working capital items, long-term
management
3
investments, debt and equity finance

201053_Chapter 6: The finance Function and Financial Information
Recording financial Management

transactions accounting
• Recording financial • Internal reporting for planning
transactions (payroll, credit and control
sales, credit purchase, etc) in • Determine the unit cost of the
the accounting records goods or services provided by the
business.
• Entering transaction • Forecasts and budgets
summaries in permanent
• Decision making information (e.g.
records (nominal, receivable for investment decisions – CVP,
and payable legers) breakeven, limiting factor
• Proper control of resources analysis)
(Stewardship) • Prepare performance measures
• Cloud accounting, machine • Analyze capital investment
learning, ledger automation, decisions
etc • Determine sales and transfer
4
price
Financial reporting Treasury management

• Cash budget preparing and
• Financial statements for monitoring
external users
• Manage cash balances
• Tax reporting (surplus/deficit)
• Regulatory reporting • Manage working capital on daily
basis to optimize cash flow,
including inventory, receivables, and
payables
• Analyze short-term and long-term
financing decisions
• Manage investments
• Manage foreign exchange
• Manage financial risk
• Raise long-term finance

Business partnering
Involves the finance function working alongside other business
functions rather than being a separate function on their own.
 The finance function forms close relationship with the other
business functions →It’s often used as the source of financial
expertise for specific business areas:
 Marketing: insights into drivers of revenue, analysis of sale
volumes, etc.
 Operations/production: analysis of increase/decrease of
cost per unit
 IT: KPIs for IT performance: system downtime, IT
equipment’s age for new investments.
 HR: employees’ productivity
6
 Procurement: suppliers’ performance against service

Factors relating to effective business partnering
There is a risk that a finance business partner may get

too close to the business function managers, this thus
leads to a compromise of objectivity and
independence.
Insufficient time is allocated to business partnering

because:
✓ Lack of necessary knowledge, skills, and attitudes to
perform business partnering
✓ Resistance by operational managers
7
2. The structure of finance function
Centralised finance function:

 Advantages
✓ Better cash management
✓ Easier external reporting
 Disadvantages
✓ Problem in providing local managers with information (internal
reporting)
✓ Global organizations may have difficulties dealing with
exchange rates and different time zones
201053_Ch7_The business's Financial Function. 8

2. The structure of finance function
9
3. Managing the finance function
Factors
influencin
g
structure
Managing
the
finance
function
Organising Planning
and and
leading control

3. Managing the finance function
Factors Planning and Organizing and

influencing control leading
finance function • Forecast what is • Defining
• The business’s needed processes,
structure • What are available technology,
resources people
• Organizational • Develop objectives,
structure plans, targets • Allocating and co-
• Markets ordinating work
• Implement plans and
• Technology performance • Generating effort
measuring and commitment
• History and in finance staff
• Making amendments
Ownership when necessary (Leading)
• Culture
4. Uses & types of financial information
The need for financial information
 Financial information: about an entity’s activities
expressed in monetary terms. Or according to IFRS,
financial information is contained in an entity’s
financial report, including income, expenses, assets,
liabilities, and equity.
 Businesses and managers require financial information
for:
✓ Planning
✓ Controlling
✓ Recording transactions
✓ Performance measurement
12
✓ Decision making
The need for financial information
• Available resources
• Time-scales for implementation
Planning
• Possible outcomes under alternative
scenarios
• Assess whether implementation is
Controlling proceeding as planned for corrective
actions if needed
• Documentation of transactions or events as

evidence in case of dispute
Recording transactions • Legal requirement to record transactions, for
example for accounting or auditing purposes
• Better assessment of profitability
Performance • Comparisons of actual outcome with the

measurement plan
• Information is required as a basis to make

Decision making informed decisions 13
201053_Ch6_Introduction to Financial Information

Types of information
Planning • Planning
information
Operational • Day-to-day activities

information e.g. how many operatives are needed on 1 shift
Tactical • Short-term issues and

opportunities (monthly
information reports for factory)
Strategic • Major long-term decision

information making
14

5. Users and their needs of financial
information
What is financial information used for?
Generally, financial information is used to make

decisions, such as:
- Buy, hold, or sell an equity investment or a debt
instrument
- Provide or settle loans, or other forms of credit
- Influence management decisions
201053_Ch6_Introduction to Financial Information 15

information
Who uses financial information?

Sharehoders
Primary
Lenders and other
payables
Employees
Users
Customers
Suppliers and other

Others
partners
Governments
The public and

community
16

information
When is financial information useful?
 Financial information is useful when:
• Helps make decisions
• Show management’s stewardship (use of
resources)
 Basis for preparation (underlying assumptions):

• Accrual basis of accounting
• Going concern
information
Information for making decisions and making managers
accountable
When making decisions, users need financial info to evaluate:
• The ability of a business to generate cash to pay wages, suppliers,
loan interests, and dividends.
• The timing and certainty of cash flows
The info helps users evaluate how efficiently and effectively the
entity’s management and board discharge their stewardship
responsibilities to use the entity’s resources. The users must
need info on the business’s:
• Financial position (assets & liabilities)
• Financial performance (profit & loss)
• Changes in financial position (cash flow)
18
information
Information for making decisions and making managers accountable
Information on the financial position (assets & liabilities)
Factors affecting the business’s This is useful for predicting
financial position
Its economic resources Its ability to generate cash
Liabilities What the business owns to other
parties
Financial structure Future financing needs? Distributed
profit and cash among stakeholders?
Raising new equity and borrowing?
Liquidity Cash will be available in near future?
Solvency Availability of cash in long term to
meet financial commitments
Adaptability
201053_Ch6_Introduction to Financial Information Its capacity to adapt to changes
19
information
Information for making decisions and making managers accountable
Information on the financial performance
The Info on a business’s profitability over time helps users
predict or assess:
- Potential changes in economic resources
- The business’s capacity to generate cash flows
- How effectively the business might employ additional
resources
Information on changes in financial position
The Info on a business’s past cash flow helps users predict or
assess its investing, financing, and operating activities:
- How able the business is generating cash
- How well the business uses cash that it has generated?
information
Qualitative characteristics of financial statements
Relevance
Fundamental
Faithful
representation
Qualitative
Understandability
characteristics
Comparability
Enhancing
Verifiability
Timeliness
information
Fundamental qualitative characteristics
A) The financial information is relevant if it has:
• Predictive value: can be used as input to processes employed by
users to predict future outcomes.
• Confirmatory value: correct or confirm past evaluation.
Relevance is affected by:
• Nature of items
• Materiality (importance)
B) The financial information has faithful representation
when it is:
• Complete: include all necessary descriptions and explanations
• Neutral: without bias in the selection of certain info 22
• Error free: no errors in the description or in the process used to

5. Users and their needs of financial information
Enhancing qualitative characteristics

 Understandability:
• Clear and concise
• Users are assumed to have reasonable knowledge
 Comparability
• Throughout the business
• Over time
• Across different business
 Verifiability
• Knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement
 Timeliness
• Provide information in time for decision making. 23
6. Limitations of financial information
• Standard format and presentation though
businesses are very diverse
Standardized and
• Many transactions are combined into few
aggregated figures only ➔ difficult to evaluate some
business’s components
• Covering historical period while most

Backward-looking users of financial info base their
decisions on future expectations.
• Contain financial, not non-financial info:

✓No narrative description of major operations
Omission of non- ✓No discussion of risks and opportunities
financial information ✓No business performance and prospects
✓No management policies of how the business
24
is governed and controlled
6. Limitations of financial information
Other sources of information
• Info on the internet and social media
• Internal management information
• Banks gain business info under the terms of loan
agreements
• Potential investors
• Suppliers get reports on the business’s credit
standing
• Some info such as brochures, publicity materials
• Brokers’ reports 25

7. Information processing & management
How is data/information processed?
Information processing: Data, once collected, is

converted into information for communicating
more widely within the business.

How is data/information processed?
To be effective, information processing must meet CATIVA
- Completeness: includes everything needed to be processed
- Accuracy: data remains true, information contains no
errors
- Timeliness: should occur in line with data availability,
which means real time (instantaneously)
- Inalterability (unchangeability): no intervention, no
alteration
- Verifiability: capable of being followed through
- Assessability: quality can be judged since the effectiveness
27
of processing should be open to scrutiny

Information systems
Data are processed into information by the
business’s information systems
- System: a set of interacting components that operate together to
accomplish a purpose.
- Business system: people, machines, and methods are organized to
accomplish a set of specific functions.
- Information system (IS): systems, and procedures involved in: the
collection, storage, production, and distribution of information
- Information technology (IT): equipment used to capture, store,
transmit, or present info – IT provides a large part of the information
system infrastructure
- Information management: an approach towards the management 28 of
a business’s information.
Information systems
29

The transaction processing system (TPS)
 Transaction processing system (TPS): a system

that performs, records, and process routine
transactions
- TPS is used for routine tasks in which data
items and transactions must be processed so
that operations can continue.
- A TPS supports most business functions (see TPS
table in ebook)

Management information system (MIS)
 Management information system (MIS): a system
which converts data from internal sources into
information (usually in forms of reports), which
enables managers to make timely and effective
decisions.
 Management information system (MIS):
• Supports structured decisions
• Reports on existing operations
• Has little analytical capability
• Is relatively inflexible
• Has internal focus
8. Information security
Why is information security important?
- Information is valuable and deserves care

- Security (in information management): the
protection of data from accidental or
deliberate threats, and the protection of the
information system from degradation or non-
availability of services

Risks to data
- Human error - Natural disasters

- Entering incorrect - Deliberate action
transactions - Commercial espionage
- Failing to correct errors - Malicious damage
- Processing wrong files - Industrial action
- Technical error - Cyber risks like data
corruption, hacking, etc

Ensuring the security of information
• Stop threats from happening,

Prevention prevention is better than cure
Detection • Notice or discover anything strange
• Deter people from doing something

Deterrence (make them less enthusiastic)
Recovery • Fixing the consequences of

procedures materialized threats
Correction • Deal with the vulnerability (build

procedures stricter controls)
Threat avoidance • Change the design of the system

34

Qualities of a secure information system - ACIANA
• Availability: info can be always available to be accessed
by authorized people
• Confidentiality: Info can not be accessed by anyone who
does not have the right to see it
• Integrity: data is as same as its sources, and has not been
accidentally or deliberately reduced, altered, destroyed,
or disclosed.
• Authenticity: being taken from bona fide sources
• Non-repudiation: not being rejected by intended users
because of faults in the system
• Authorisation: changes only by accountable persons
PHYSICAL ACCESS CONTROL
- Personnel
- Door locks
- Intruder alarms
- Devices to be kept secure
- Staff to be allocated PIN (personal
identification number)

Security controls in the systems
Helps to prevent:
➢ Human error
✓ Entering incorrect transactions
✓ Failing to correct errors
✓ Processing the wrong files
➢ Technical error such as malfunctioning hardware or software
➢ Deliberate actions such as fraud
➢ Commercial espionage
➢ Malicious damage

Integrity controls in the system
Data will maintain its integrity if it is complete and not corrupted
- Input controls should ensure the accuracy, completeness, and validity of input.
- Data verification involves ensuring data entered matches source documents
- Data validation involves ensuring that data entered is not incomplete or
unreasonable.
- Processing control should ensure accuracy and completeness of processing.
- Output controls should include: error reports, exception reports, batch control, etc
- Back-up and archive: regular back-up, archive plans, disaster recovery plan
- Logical access system using passwords
- Personnel selection: key people should be carefully recruited.
- Segregation of duties: divisions of responsibilities into separate roles.
9. Measuring performance
9.1. Types of performance measures
Performance
measures
Qualitative measures
Quantitative measures
(not expressed in
(expressed in numerical terms)
numerical terms)
Financial measures
(sales, profits, etc)
Non-financial measures
(number of items
produced, phone calls,
201053_Chapter 6: The finance Function and
etc) 39
Financial Information
9.1. Types of performance measures
Qualitative measures vs. Quantitative measures
✓ Quantitative measures: not just measuring numbers, but expressed in

numerical terms
✓ Qualitative measures: not expressed in numerical terms
40

9.2 Measuring profitability, activity,
productivity
Cost centers Number of Quantity of

(incurring cost) orders- a outputs in
Profit centers measure of relations to
(incurring cost marketing inputs
and revenue)
Profitability (Cost
Activity
Productivity
and revenue) effectiveness (efficiency of
Machine the use of
breakdowns- resources)
repair and
maintenance
function
41

Measuring profitability
Profit = Revenue - Costs
Relative terms (profit

Absolute terms: relative to revenue or
$10,000 capital):
Net margin on revenue (%),
Return On Equity (%)
42

9.3 Measuring resource use
 Resources include:
• Physical assets (buildings, machinery, etc)
• Competencies (what the business is good at
doing?)
• Intangible assets (license, corporate image,
brand, digital assets, etc)
• The way in which the business is structured
• Available knowledge
43

 Economy, effectiveness and efficiency:
• Reduction or containment of cost

Economy (measured against targets)
• Measure of achievement
Effectiveness referenced to objectives
• ‘being effective at minimum cost’

Efficiency => Efficiency is a combination of
effectiveness and economy
44

Assessment of whether objectives are being met
• What is output relative to

Productively input?
• How far are targets and

Effectively objectives achieved?
• What is the gain that the

Efficiently business has achieved?
45

9.4 Measuring critical success factors (CSFs)
Critical success factors (CFSs):

 Product features that are particularly valued by customers,
therefore, where the organization must excel to outperform the
competition. CSF differs from one area to another, such as:
- Price level
- Product quality
- Quality of delivery
 ➔ CSFs concern not only internal resources but also the
competitive environment
46

9.5 Identifying key performance indicator (KPI)
 Key Performance Indicator (KPI)

Once, CSFs have been identified, the business then must
identify its KPI in relation to them.
KPI: A measure of the level of performance in an area where
a target level (quantified target) must be achieved in order
for the business to outperform rivals and achieve
competitive advantages (examples)
 Benchmarking:
The establishment, through data gathering, of targets and
comparators, through whose use relative levels of
performance (and particularly areas of underperformance)
can be identified. By the adoption of identified best
practices it is hoped that performance will improve. (CIMA)
47
9.6 Limitations of financial measures
Comparison Comparison
Information
problem: problem: different
problem businesses
trends
• Out-of-date • Effects of price • Selection of
information leads changes industry norms
to interpretation • Technology • Different financial
problems changes affect and business risk
• Historical cost asset values profiles
may not be • Changing • Different
appropriate environment accounting
• External users: no • Changes in policies
access to detailed accounting • Impacts of size of
information policies the business
• Only symptoms, • Problems in • Impact of
not causes establishing a different
‘normal base environments
year’ 48

9.7 The balanced scorecard
Balanced scorecard: An integrated set of

performance measures linked to the achievement of
strategic objectives.
49

9.7 The balanced scorecard
Answering the
Perspective Examples of measures
questions
Satisfaction ratings,
Customer retention rates, returns How do customers see us?
rates
Internal
Product quality, failure
business What must we excel at?
rates
processes
Employee retention rates,
Innovation and How can we continue to
time to market for new
learning improve and create value?
products
Gross margin, net margin,
return on capital employed How do we look to our
Financial
(ROCE), gearing, interest shareholders?
cover 50

10. Measuring climate change, sustainability
management and natural capital
The triple bottom line (SEE) measures of a business

sustainability management:
- Social: health and safety, workers’ rights, pay and
benefits, diversity of quality, impacts of product use
(on society), etc
- Environmental: climate change, pollution, emissions
levels, waste, use of natural resources, impacts of
product use (on the environment), etc
- Economic: economic stability and growth, job
provision, local economic development, etc
51

Climate change: the main cause of climate change is an increase

in the volume of greenhouse gasses in the earth’s atmosphere
and this is caused by industrial activities.
A task force on Climate-related Financial Disclosure (TCFD) was
set up by the Financial Stability Board to develop
recommendations for more effective climate-related disclosures.
Disclosures are information that a company must provide in its
financial statements and other public information to ensure
users are given high-quality and reliable info needed about the
impacts the company have on climate change, the effect of
climate change on company, and the company’s response to it.
52

4 core areas of the disclosure are recommended by TCFD as

follows:
✓ Governance: disclosures relating to the organization’s
governance around climate-related risks and opportunities
✓ Strategy: the impact of climate-related risks and
opportunities on the organization’s business strategy and
financial planning
✓ Risk management: how the organization identifies,
assesses, and manages climate-related risks
✓ Metrics and targets: to assess and manage relevant climate
relevant risks and opportunities
53

Sustainability management
IFAC ( the International Federation of Accountants)
states that the accountants’ involvement in
sustainability management is about improving
business decisions making in:
- Responding to uncertainty and risk
- Developing existing and new markets
- Innovating processes, products, and services
- Improving operational efficiency by way of
sustainable operations
- Engaging employees, customers, and suppliers
toward sustainability
54

GRI Sustainability Reporting Standards
Sustainability Reporting Standards issued by Global

Reporting Initiative (GRI) are about global, voluntary code
for corporate responsibility and sustainability reporting
A GRI-based report typically includes economic, social,

and environmental performance information, and sets
out the organization’s direct and direct impacts.
There are 03 “universal” standards (GR1, GR2 and GR3)

(check Ebook for more info)
55

Natural capital and Climate Disclosure
Standards Board
Natural Capital: Businesses can take into account how far they depend on natural
capital and how much they impact it so they can include natural capital in their
decision-making.
Climate Disclosure Standards Board (CDSB): publishes the CDSB framework for
reporting environmental and climate change information. Its aim is to ensure that
info about natural capital is given the same prominence as financial capital in a
company’s report. This enables the report’s users to not only appreciate financial
consideration, but also the impact of business on climate change and natural
capital.
International Sustainability Standards Board (ISSB) was set up by IFRS in 2021. Its
objective is to “deliver comprehensive global baseline of sustainability-related
disclosure standards that provide investors and other capital market participants
with info about company’s sustainability-related risks and opportunities.
11. Establishing financial control processes and
internal controls
 Internal control: A process, effected by an entity’s

board of directors, management and other personnel,
designed to provide reasonable assurance regarding
the achievement of objectives relating to operations,
reporting and compliance
 (COSO Internal Control – integrated Framework 2013)
57

Effective internal control (COSO)
Effective internal control consists of 5 integrated components to
provide an effective framework:
Control • Sets the tone of the business and the control

awareness of people.
environment
• Risk management via assessment,
Risk assessment measurement and control activities
• Actions established through policies and

Control activities procedures that help to mitigate risks
Information and • Information systems: produce reports

• Communication: ensures information flow
communication
• Detect deficiencies
Monitoring activities 58
• Take corrective action to improve the system
Risk management and internal control (FRC)
 Risk management and internal control system: encompasses the

policies, culture, organization, behaviors, processes, systems, and
other aspects of the company.
 It helps:
✓ Assess and respond to risks and significant control failures; safeguard
assets (effective and efficient operation)
✓ Reduce the likelihood and impact of risks and errors
✓ Ensure quality of internal and external reporting
✓ Ensure compliance with applicable laws and regulations, and internal
policies
 Guidance on risk management, internal control and related financial
and business reporting
59

Who is responsible for internal control?
Board of directors Managers

• Policy-making: on an • Implementing the internal
effective system of internal control system
control • Day-to-day monitoring
• Reviewing: how effectively
the internal control system
address risks
• Reporting: on internal
control to shareholders
60

What constitutes a sound system of internal control?
 A sound internal control system includes:

- Nature and extent of risks
- Likelihood of the risks concerned materializing
- Ability to reduce the likelihood and impact of risks
- Exposure to risk before and after risks being managed
- Operation of the relevant controls and control processes
- Effectiveness of particular controls
- Impact of values and culture of the company
61
201053_Chapter 6: The finance
Function and Financial Information
What constitutes a sound system of internal control?
 The system of internal control should:

- Be embedded in the operations and form part of the
culture
- Be capable of responding to evolving risks and changes in
the environment
- Include procedures for reporting any significant control
failings or weaknesses and details of correction actions
62

 END OF CHAPTER 6
THANK YOU FOR YOUR

ATTENTION!

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THE FINANCE FUNCTION

201053_Chapter 6: The finance Function and Financial Information 1

1. What does the finance function do? 9 Measuring performance

5 Users of financial information and

The Finance function is involved in 4 specific, but often interrelated, tasks.

Recording financial • Ensuring accurate records of revenue,

Management • Information assisting decision-

Treasury • Managing funds, including: cash,

investments, debt and equity finance

Recording financial Management

Financial reporting Treasury management

201053_Chapter 6: The finance Function and Financial Information 5

 Procurement: suppliers’ performance against service

There is a risk that a finance business partner may get

Insufficient time is allocated to business partnering

Centralised finance function:

201053_Ch7_The business's Financial Function. 8

201053_Ch7_The business's Financial Function. 10

Factors Planning and Organizing and

• Documentation of transactions or events as

Performance • Comparisons of actual outcome with the

• Information is required as a basis to make

201053_Ch6_Introduction to Financial Information

Operational • Day-to-day activities

Tactical • Short-term issues and

Strategic • Major long-term decision

201053_Ch6_Introduction to Financial Information

What is financial information used for?

Generally, financial information is used to make

201053_Ch6_Introduction to Financial Information 15

Who uses financial information?

Suppliers and other

The public and

201053_Ch6_Introduction to Financial Information

 Basis for preparation (underlying assumptions):

Qualitative characteristics of financial statements

• Error free: no errors in the description or in the process used to

Enhancing qualitative characteristics

• Covering historical period while most

• Contain financial, not non-financial info:

201053_Ch6_Introduction to Financial Information

How is data/information processed?

Information processing: Data, once collected, is

201053_Ch6_Introduction to Financial Information 26

of processing should be open to scrutiny

201053_Ch6_Introduction to Financial Information

 Transaction processing system (TPS): a system

201053_Ch6_Introduction to Financial Information 30

- Information is valuable and deserves care

201053_Ch6_Introduction to Financial Information 32

- Human error - Natural disasters

201053_Ch6_Introduction to Financial Information 33

• Stop threats from happening,

Detection • Notice or discover anything strange

• Deter people from doing something

Recovery • Fixing the consequences of

Correction • Deal with the vulnerability (build

Threat avoidance • Change the design of the system

201053_Ch6_Introduction to Financial Information

201053_Ch6_Introduction to Financial Information 36

201053_Ch6_Introduction to Financial Information 37

Qualitative measures vs. Quantitative measures