CIMA E1 Syllabus D. Shape And Structure Of The Finance Function - Level 4 - Smart Finance Factories - Notes ^{2 / 6}

Smart Finance Factories

At this level, finance operations generate information and preliminary insights.

The 4 components at this level are:

1. Financial reporting

2. Management accounting

3. Treasury management

4. Internal audit

Financial Reporting

Financial reporting is concerned with the production of financial statements. 

Financial statements mainly include

- Statement of profit and loss
- Statement of financial position
- Cashflow statement

These financial statements:

• Mainly contain historical information (not forward looking information)

• Are used by external parties, such as, lenders and shareholders

• Their format and content are defined by law

• Limited companies are required by law to produce them, whereas unlimited companies are not required by law to produce them.

  Other reasons for producing financial statements could be for tax authorities and for employee reports.

Management accounting

Management accounting is carried out to assist management to plan, direct and control the operations of the business.

It involves:

1. Costing of products that an organisation sells

2. Producing budgets

3. Budgetary control

4. Variance analysis

Costing of products that an organisation sells

Cost schedules are prepared which include various expenses involved in manufacturing units of a product.

This is then used to make decisions like:

• What should the price of the product be?

• Should a product be produced in-house or should the production be outsourced?

• Is a new product worth producing?

Producing budgets

Budgets are useful for several reasons.

1. Coordination - ensures that everyone is working together for the good of the company.

2. Responsibility -  managers will follow the plans laid out in the budget.

3. Utilisation - make the best use of available resources.

4. Motivation - to achieve business objectives.

5. Planning - Look ahead and identify opportunities and threats.

6. Evaluation - Evaluate performance

7. Telling - what is expected from members of the business.

Budgetary control

This involves comparing budgeted results against a forecast. 

Control action is triggered by differences between budgeted and forecasted results.

Variance analysis

The management accountant is expected to report variances, the reasons for the variances and
assist management in finding solutions for them. 

Favourable variances as well as adverse variances must be investigated in a performance review as favourable variances can also be bad news for a company. 

The main objective of investigating variances is that further action can prevent the recurrence of adverse variances and the repetition of favourable variances.

Treasury management

Treasury management is the corporate handling of all financial matters. 

The key roles of the treasury function include:

1. Working capital management - This includes the management of customer/supplier payments alongside stock management.

2. Cash management - Prepare cash budgets and arrange overdrafts

3. Financing / Financial risk management - Could be through debt or equity. 

   A rise in interest rates will be of most concern to the treasury department as this will increase the cost of borrowing and financing the company

4. Foreign currency - management of foreign currency holdings.

5. Tax - try to avoid as much tax as possible. 

   Tax avoidance is legal and tax evasion is illegal.

6. Ensuring accurate asset values

Internal audit

The key purpose of internal audit is to evaluate the organisation’s risk management processes and systems of control.

Internal audit is part of the organisational control of a business; it is one of the methods used by management to ensure the efficient and orderly running of the business as a whole, and is part of the overall control environment.
They report to the directors of the company.

Their roles include:

1. Helping to design performance measurement systems

2. To check proper operation of controls

3. To ensure correct risk management procedures are followed

4. Audit the activities of other finance teams. To do this, they need to remain objective and there can be an issue of independence as some members of the internal audit team may work or be associated with other members of the finance function.

Limitations of Internal Audit

• Small organisations 

  Larger organisations can mitigate the independence problem by separating internal audit from the finance function. But smaller organisations typically cannot afford such separation.

• Staffing 

  Internal audit is only successful and capable to the extent that it is adequately staffed and resourced. Again, this can be a challenge for smaller organisations especially.

• Lack of Independence 

  Potential conflicts of interest in giving an objective, potentially critical assessment of one’s own employer.

• Fraud fears 

  In the event internal auditors do discover fraud within the company, there may be a reluctance to report it for fear it will undermine the entire company, and eventually lead to the auditors’ own jobs being lost.