Guide: What Role does Finance Play in Business?

By Linda RoperMarch 15, 2022
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The role of finance in a business is one of utmost importance. At its very core, finance relates to the funds coming into and flowing out of a business. Therefore, it’s one of the most crucial elements in determining if a business sinks or swims.

In this in-depth guide, we cover everything there is to know about the role of Finance in a Business.

Table of Contents

Why is Finance so Important for Businesses?

Woman on desk with laptop looking at financial figures

We’ve mentioned just how crucial finance is within a company. Now, let’s look at why finance is important, along with what it does for a company.

Any business need finances to function. It must first spend money in order to generate money—on inventory and supplies, equipment and facilities, and staff wages and salaries. As a result, money is critical to the success of all businesses. It may not be as obvious as marketing or manufacturing, but financial management is just as vital to a company’s success.

Finance is essential in basically every company decision—from planning and budgeting to cash flow management and capital structure, as well as how you handle risks and expenses.

Finance is the function within a business that is in charge of monitoring acquired money, managing current funds, and planning for future expenditures. Therefore, we can say that finance passes through every part of a firm’s operations. Simply put, without finance, there is no business.

The Role of the Finance Department

As you’ve learned, the role of finance in a company is one of huge importance. Let’s now turn our attention to the role of the finance department in an organisation.

A finance department is the unit of a business that is in charge of receiving and managing money on the company’s behalf. The finance department controls income and spending, and ensures the business runs smoothly with minimal disruptions. Finance department tasks include economic analysis to enhance important company strategies, in addition to the typical roles of processing payroll, income, and expenses.

Therefore, the operations of a company’s finance department can have a significant influence on its overall success.

Infographic: Finance department key roles

Let’s take a closer look at the finance department’s key roles within a company.

1. Cash flow management

One essential role of a company’s finance department is to discover ways for the organisation to reduce expenditures and increase profitability. Hence, the finance departments role is to manage cash flow in a business successfully. They will look at methods to reduce internal expenses as well as strategies to boost generated revenue. Additionally, the finance department is responsible for ensuring that the company has sufficient liquidity to pay its suppliers and employees on time.

2. Accounting

Accounting is the important act of combining accurate financial data to make it transparent and understandable to all stakeholders and shareholders. Accounting’s primary aim is to correctly record and report a company’s financial performance. With consistent and accurate financial records, accounting allows executives to assess the performance of a company over a period of time. Additionally, it facilitates decision-making.

3. Financial insights and reporting

The finance department must also deliver relevant information and feasibility reports to management to help them make vital company decisions. When a new product is introduced to the market, for example, the finance department’s tasks may include providing financial data, establishing a funding strategy, and preparing backup measures.

Additionally, the finance department examines economic trends, identifies potential investment, and cultivates long-term business goals through analysing a company’s financial reports.

4. Managing equity

A finance department manages a company’s assets and optimises them through calculated business tactics in order to maximise earnings.

5. Risk management

The finance department identifies, evaluates, and develops risk mitigation strategies for the company. It must also develop risk control procedures capable of predicting future performance of commercial initiatives. This aims to prevent exposing the company to losses.

6. Tax management

The administration of money for the purpose of paying taxes is referred to as tax management. Tax management includes timely filing of returns, having accounts audited, and deducting tax at source, among other things. Tax management aids in the prevention of interest, penalties, and prosecution.

7. Budget preparations and forecasting

Budgets are created by business finance departments as part of their financial planning strategy. Budgets are often created using a set of financial forecasts that the firm believes it will require in order to function at full capacity.

In addition, the department conducts research and gathers data to aid in the organisation’s short- and long-term financial forecasting. The data is crucial for expansion planning and making educated decisions about things like employee training and asset acquisition.

How to Run an Efficient Finance Department

After we’ve explained the role that finance plays in a business, the question remains how to run an efficient finance department? For example, issuing prompt invoices and keeping on top of late payments along with making use of cloud accounting software are a few of the processes you can implement to create an efficient finance department. After all, they hold the key as to whether the business sinks or swims.

Office works arranging interlocking wooden wheels

That’s why the department needs a team leader with great leadership skills who can listen, delegate and communicate effectively. But don’t forget, the team wouldn’t function efficiently without the right team members in it. Thankfully, hiring your dream finance team member doesn’t have to be a terrifying or difficult endeavor. Start by setting clear expectations what type of personality you would like to join your team and potentially consider recruitment assistance from an agency. And when it comes to the interview, be honest what the role entails and ask the candidate detailed questions.

Main Challenges of Finance and How to Overcome Them

Like any other department, finance is constantly confronted to keep up with a rapidly changing world. Hence, finance managers deal with numerous challenges which range from small teams, learning new technology and limited access to data for accurate reporting. Also, like any other industry, the finance sector is subject to rules and regulations which makes the need to balance compliance and demands as well as profitability goals the most difficult.

As we’ve already established, a finance department is integral to a successful business, yet they are unable to prosper and overcome challenges without efficient and time-saving tools. One of these is cloud-based expense management software, which allows finance departments to automate time-consuming tasks, ensure compliance, and access real-time data like never before. With features such as receipt scanning, automated policies, real-time reporting, mileage recording, invoice processing, and more, an expense app brings everything you need to create, approve, and report on expenses into one easy-to-use package.