Thought Piece: What is the point of the finance department?
Everyone just accepts the presence of a Finance Department in any and every type of organisation but not everyone agrees on exactly what the department should be doing — and that includes the people who work in it.
If you were to conduct an Albert Einstein style 'thought experiment' and ask yourself, "If we abolished our Finance Department, would it matter?", most people would think it would. Finance Departments are big and powerful beasts. The last two I worked with, employed teams that ran into hundreds of people.
If you asked a non-finance person what Finance Departments do, they would probably guess that they collect cash and pay bills. But would we really need so many people just to do that?
Continuing the thought experiment for a moment, let's assume that we operated in a world of a hundred percent trust and zero percent error. The work of the finance department would fall away: the friction of checking whether purchase and sales invoices were correct would cease and customers would trust suppliers to take the right money by variable direct debit.
Perhaps only quoted companies would need a Finance Department to comply with corporate governance codes which state, in broad terms, that the Board must exercise a certain level of budgetary and financial control. But imagine, if each executive Board Director ran one cost centre, there would be no more than a dozen cost centres flowing through into the published Profit and Loss Account and Balance Sheet.
To cope with that work you would need no more than one person per cost centre, a dozen people. So what else do the hundreds of employees in a Finance Department do? Perhaps, since we don't operate in a world of perfect trust and zero mistakes, we'd expect some to be involved in checking invoices for accuracy, arranging and collecting payments and resolving disputes or errors. But that still leaves hundreds unaccounted for.
What they are actually doing is trying to cope with the results of complexity. For instance, instead of a dozen cost centres, modern Enterprise Resource Planning (ERP) systems allow for hundreds, all of which are contained in a hierarchy of data. So clerks in Accounts Payable or Receivable are gathering data in order to record in what part of the hierarchy the information should be gathered. Too much time is spent creating and releasing accruals which have limited value, let's face it, accrual is only account speak for 'guess'. Ultimately, all this complicated activity, with its expensive software all too often, becomes an end in itself.
But the real purpose of this information harvesting and organising is to provide financial information for other people to take decisions. Occasionally the Finance Director joins in with those decisions, but in essence, the primary purpose is to know the financial impact of things that have happened in the past, take decisions and then check the impact of those decisions.
Those who know finance departments and their work are likely to tell you that companies are under investing time and energy in Business Intelligence, whilst over investing in General Ledger. But the way I see it, the key issue is under investment in accurately gathering data from the thousands of financial transactions that take place each day. The real beauty and added value that a Finance Department contributes to a business is in it's clarity of purpose, to supply the right numbers and to supply them accurately.
In order to achieve that, it's important to use the strategy of the business as a starting point and think ahead to decide what information needs to be gathered now so that in one or two years time, there's a set of data that the organisation can use to inform the decisions that it will have to take. To judge every piece of information gathering, particularly financial information against likely decisions will increase quality, reduce quantity and ultimately improve cost efficiency.
Also by Peter Charles