Finance is the department which could be constructive and destructive as well. And it is a unique property of this department and its coordinates that even despite being on the back seat of the business, they are the most important people in an organization. There are multiple functions in Finance and I want to brief about them all before I proceed with this post. The description is Important and it’s importance should be understood despite you belong to any function in any organization. You have to dirty your hands in finance and statistics despite being a business owner, marketing manager, technical team. If you want to understand why is it important read my section below. Coming back to the first task in hand the functions and sub-functions of Finance. One is Finance which reports the profit and loss statement or in other words the balance sheet of the company. Second is Revenue assurance which insure the inflow and the outflow of the money is authentic and is error free it builds process and keeps vigilance on the financial transactions. Plus Revenue assurance also has authority to highlight any discrepancy if any. Third and most important is Financial planning it directly reports to Chief Executive Officer and Financial planners is the most recognized and usually considered a ugly face for many departmental heads. Fourth is cost accountants and their job is to release the payments and they work as active checks of a company. They scrutiny the cost implications on balance sheet before releasing a payment. Fifth and foremost are the Tax Planners they are usually those folks which saves company from all sorts of tax authorities. Sixth are the Auditors which audit the Internal and external assets and the expenses of the company. Seventh ones you love the most are those which pay you salary so these are the most loved people in the company. Because they can increase or decrease a zero from someones salary :).
Jokes apart you have both loved and most people from Finance and now you must have understood why they are the most important function within an organization. In this article I am going to tell you two ways of Financial planning, after reading the post you can also contribute in financial planning.
What is Adhesive Planning?
Adhesive planning means that financially the company fundamentals are strong and the leverage is on to make investment in expansion and increasing production as well as effective marketing. Best adhesive planning is 80 to 20 ratio in which 80 is kept for investment in expansion and 20 meant for dividend to share holders as well as profit of owner. 20 is usually divided in 60 to 40 ratio or 50 to 50. Depends on the director board on profit sharing.
What is Aggressive Planning?
When the expansion goes on back seat and the 40 of the total share of profit goes to Marketing and giving reach to the customer markets. Remaining 40 or may be sometimes 50 goes to expansion, left over 10 is divided equally between shareholders and the owners. This mode of financial planning I consider aggressive and term it as risky as the return could be understood only if the sections to which you are showering promotions of your products and services are actually buying your product if they are not doing it. It is a failed aggression, some times in aggressive planning 80 is used to buy a company which is add-on burden to the resources of the company. Because the investment made on the company is for sure not a profit making organization. If not loss making the company must have reached its break even point. So it is usually a risk if you are pushing in the cash for acquisition. In place acquisition fund could be set up and this cash should be invested only for acquisition usually a 5 to 10 part of your total profit.
The fruitful investment of Profit of an organization is in either expansion or increasing the production capacity of the organization in place of marketing or acquiring a new organization itself. Usually the acquired companies have a hidden bad debt history which appears when you go for loans in the future for expansion and hence it is riskier to be on buying spree with your profits. If you are unable to find ways to expand your production capacity and efficiency further it is better to keep your hard cash in banks. In place of investing in some or the other place.
Which planning you prefer for your organization? You will buy a cash cow or a break even company? Looking ahead to hear from you through comments. If you liked this article share your love on twitter.