Conceptualizing, implementing, and maintaining a finance strategy requires an understanding of the finance function itself. This function has many components, some more easily defined than others. The finance function serves as the foundation for virtually all aspects of the business from gathering data and converting it to knowledge, to performing due diligence on expansions, to disseminating financial data to the general public.

So what does the finance function do? Many aspects of the business are prompted, driven, or dependent on the finance function. However, some of the following areas also are considered an explicit part:

¡ö Budgets and forecasts

¡ö Closing the books

¡ö External reporting

¡ö Paying bills

¡ö Billing and collecting cash from customers

¡ö Paying salaries

¡ö Financing

¡ö Collecting and paying taxes

¡ö Human resources

Budgets and Forecasts

For publicly traded companies, budgeting and forecasting play an integral role in relating to the external community. Because earnings and growth estimates drive stock price, garnering accurate budget and forecast data in a timely manner is key to achieving an optimal stock price and market capitalization for the enterprise. This aspect of the finance function is no less important for small and emerging businesses that are not publicly traded. Understanding raw material needs, personnel needs, and expansion requirements will force the small and emerging business owner to thoughtfully estimate their needs in the business environment.

Closing the Books

Also referred to as the close, this aspect of the finance function is the process by which all subsidiary ledgers and journals of the organization are summed up for a given time period while assets and obligations (liabilities) are valued. The close may be relatively simple for small, single-site organizations or complex for large, multinational organizations. The close may cover activity over a period of a month, quarter, or year. The value of a quick close is the ability to assess the organization and provide a basis to make business-wide, strategic decisions. An organization that has difficulty with the timing of a close or with the accuracy of the data this process yields is at risk if the industry in which it operates moves quickly and changes often. At the heart of the close is the data flow dynamic, which is the process by which the data is gathered at the front lines of the organization and translated into meaningful information for management. A sound data flow dynamic is agile¡ªit works quickly and can react to the changing environment. A sound data flow dynamic will yield complete and accurate information to the management team. The ideal closing process can be done over a period of hours, which means it can be executed on any given day. Global organizations or organizations with multiple geographical locations rely heavily on a quick close. Small to midsize organizations also should have the capability to close their books organization-wide within a few days. This enables the business to look at the entire organization¡¯s performance on a monthly basis without disrupting operations.

External Reporting

Organizations with outside financing, absentee shareholders, and certain regulatory requirements to follow have standard external reporting requirements. Typical of many companies, this shows how banks, shareholders, and the general public are all stakeholders in the organization. Unlike owners who participate in day-to-day management, these stakeholders do not have ready access to the performance results of the company. In spite of this absentee ownership, shareholders and debt holders (those lending money to the company) still have an interest in the company¡¯s performance. They rely exclusively on the legally mandated reporting requirements of the organization to gain an understanding of company performance. Publicly traded companies are subject to comprehensive reporting requirements. These reporting requirements typically have hard deadlines (quarterly) and content requirements. Public companies must adhere to the detailed requirements of generally accepted accounting principles in preparing the details of account balances as well as additional nonfinancial disclosures mandated by the Securities and Exchange Commission. The final product must be subjected to audit or review procedures by a qualified professional (a certified public accountant). Because the majority of owners (stockholders) of public companies are absentee (i.e., do not participate in day-to-day management or operations), they rely on the accuracy and predictability of the data coming from the companies in which they invest. They hold the company to performance predictions or forecasts and typically punish those companies that do not meet their expectations by dumping (selling) the stock. This fact underscores the need for good data and shows how external reporting may have both an actual and a budget/forecast component. Companies must realize that before going public or taking on outside stakeholders, they must ensure their reporting process is sound from the data flow dynamic to the dissemination of data to stakeholders. Maintaining credibility with the external community is key to optimizing stock price or future consideration of stakeholders.

Paying Bills

Managing cash in and cash out is critical for the small and emerging business. It is important to ensure that vendors, creditors, and service providers are paid the proper amounts at the proper time. Optimizing cash flow means staying adequately liquid (having as much cash on hand as possible) at all times. The finance function must record and maintain payment policies that balance the organization¡¯s cash needs (optimize liquidity) while paying bills within a reasonable time period. Rather than paying bills as they are received, organizations should take advantage of payment terms. Paying a bill the day it is received as opposed to waiting through a vendorapproved term of 30 days or more may deny the organization cash it needs to run the business. A sound finance function schedules cash payments that optimize the organization¡¯s cash management objectives¡ªwhich means keeping as much cash on hand as possible while satisfying vendors and their payment terms.

Billing and Collecting Cash from Customers

Most important, an organization¡¯s success or failure is based on how well it can bring in cash. Many companies can have substantial difficulties in billing and collecting from customers. Terms and conditions of delivery and/or satisfactory installation of promised products can represent a substantial gap between recognizing revenue (signing contracts, etc.), and billing and collecting cash from customers. These circumstances can turn a nice revenue or sales number into a highly discounted or delayed payment term. Companies may have the sales process down but fall short when it comes to follow-through. At this crucial juncture of the organization¡¯s operations, the finance function must be in sync with the company, especially with the way in which it does business and relates to customers. The growing availability of Internet software packages suited for billing and collections creates alternatives for companies in the area of cash management. Investigating these alternatives is important for the small and emerging business owner whose resources (time and money) are in short supply. The advantage of using these packages is that they are usually quick and easy to deploy and relatively inexpensive. Being linked online to customers facilitates quick, paperless orders as well as swift, simple billing and payment processes.

The cautious business owner may prefer the traditional method of delivering bills through the mail. Regardless of the preference, the finance function must pursue a reliable billing and collection methodology that suits both customers and management. When conceptualizing this aspect of the finance function, the organization has three basic alternatives:

1. In-house billing and collections. This involves employing personnel to prepare, mail, and monitor bills. It also means maintaining a team to follow up on and execute the collection effort. This is the costliest option, although traditionalists see it as the most reliable route in billing and collections.

2. Partial outsourcing. Some businesses hire third parties to bill cus tomers, while they focus their own efforts on collections. This is an option for small and emerging businesses that are not yet equipped to handle the documentation aspect of billing.

3. Complete outsourcing. In this case a third party handles all aspects of billing and collections. For the company that is growing quickly and does not have the internal resources to handle this function, complete outsourcing is a viable option.

Beyond the technological aspect of billing and collecting, what other challenges must be considered? Culture, especially for multinational companies, is a big issue. Selling merchandise to customers in foreign countries where owning a credit card is not common makes online billing and collection difficult. For brickand-mortar (as opposed to virtual) operations that are in foreign countries, what is the custom for collecting cash? In some South American countries, for example, the custom is to collect receivables in person.

Paying Salaries

One of the most important aspects of dispensing resources may lie in the way businesses pay employees. Keeping employees satisfied includes paying them in a reliable and timely manner. Perhaps the most overwhelming hurdle a young company faces is dealing with the laws that govern payroll taxes¡ªSocial Security, withholding, Medicare, and so on. The finance function must make the process of paying employees quick and painless for both the employee and the employer. Many companies choose to outsource this aspect of the finance function (i.e., pay a third party to manage this task). Considering the record-keeping requirements plus the need to observe state and local laws, outsourcing is a good alternative. For companies that choose to save the money, some other considerations for employing a payroll system include direct deposit, stock purchase, 401k and retirement plan deductions, and benefits withholding. For many business owners this is the first hurdle in developing the finance function.

Financing

Financing the company¡¯s operations may be the single most important aspect of the finance function for the small and emerging business owner. Adding fuel to the company¡¯s fiscal engines is a challenge that never ends¡ªalthough at the early stages of the organization it is particularly critical. What does financing mean? In simple terms, it means keeping the company¡¯s coffers full of cash to run the business. As a practical matter, it means doing this while maintaining a balanced capital structure (debt versus equity). The finance function lies at the core of financing efforts both in assessing needs and in maintaining access to the capital markets. The first challenge in financing the organization is setting up the pipeline of cash. The small and emerging business owner may choose a credit line from a bank, mortgage loan, or equipment leases. Approaching local banks that participate in small business loan programs is often a good solution. The finance function will provide data on the health of the company and/or forecast its performance. The burden is on the small business owner to garner the required financial data to paint the company¡¯s financial picture for loan officers and answer necessary questions. The second challenge, though no less important, is the maintenance of loan covenants. Do certain financial ratios or levels of performance have to be maintained? How equipped is the finance function at monitoring the covenants in loan agreements? Assembling sketchy documentation to secure a loan then subsequently failing to meet the loan covenants or conditions of financing may create a bigger headache than having never received the financing in the first place. Monitoring the capital structure, specifically keeping track of debt versus equity financing and what best suits the organization in the near, mid-, and long term, is crucial when dealing with financing needs. These issues are an integral part of the finance function.

Collecting and Paying Taxes

Regardless of the size or form of the company, the obligation to comply with tax laws is omnipresent. Whether it is compliance with federal, state, or local laws, the finance function must be prepared to gather the necessary information and documentation to support remittances to taxing authorities. Federal tax laws may require the finance function to compute alternative depreciation methods on assets, track nondeductible expenses, or gather specific data on manufacturing costs. State and local tax laws may require detailed documentation that validates sales and use tax remittances. Documentation requirements vary from state to state. This puts a burden on the finance function to accumulate adequate documentation in companies that provide products and services in multiple state jurisdictions. The finance function also is burdened with the task of interpreting the varying state tax laws appropriately to keep the company in compliance with the various jurisdictions in which it does business.

Human Resources