The corporate finance function varies depending on the industry and organization size. Since a position in a smaller firm usually combines the functions of several positions held by separate individuals in larger firms, an analysis of the various positions at larger corporations will provide the background for understanding the responsibilities that exist in corporations of any size.
Organizational Structure
The vice president of finance is the chief financial officer; this is often one of the most powerful positions in a corporation. His or her responsibilities are centered on managing and coordinating the activities of the two main groups in the finance department: the treasury and controller groups. Financial policy making and corporate financial planning may be directly controlled by the vice president or delegated to either the treasurer or controller.
The treasurer is directly responsible for obtaining financing, managing the firm's cash account, and maintaining relationships with banks and other financial institutions. In small firms the treasurer may be the only financial executive. Generally, larger corporations have a controller whose functions are to see that money is used efficiently and to manage budgeting, accounting, auditing, and tax activities. Entry-level positions exist in both the treasury and controller areas of corporate finance. There is movement both within and between the two groups, so it is worthwhile to consider them both. Discussed below are the main functions performed within Treasury group and the types of activity common to most positions in corporate finance.
Treasury Functions
WORKING-CAPITAL MANAGEMENT
Working-capital management includes management of the firm's cash, accounts receivable, and inventory assets, each of which is described below in some detail.
Cash Management: This function is also known as collections and disbursements. Given current high interest rates, many companies have been motivated to reduce cash balances and examine the amount of time required to collect receivables (i.e., money owed them by others). Successful cash management personnel usually work closely with the company's banks, and daily interaction takes three forms. First, as a cash management officer, you would be responsible for producing funds on short notice at or close to the prime rate offered by commercial banks. Your performance evaluation will partially depend on your ability to obtain funds quickly.
Second, you would be responsible for cash collection from customers. Developing methods to speed the flow of incoming cash is an important challenge, and knowledgeable individuals with an understanding of various collection methods are in demand. As a cash manager, you should have an understanding of the uses of depositing transfer checks, wire transfers, and lockboxes in order to optimize the efficiency of an existing cash gathering system.
Third, you would have the responsibility of developing techniques to improve cash disbursing procedures. A typical function is to synchronize the timing of transfers with clearings, commonly known as "monitoring the float." This involves estimating the size of the float and predicting when checks will clear. By doing so, you can maintain negative book balances and invest the float. Other techniques include (1) delaying payments through the use of computer systems, which can slow the mailing of payments to the latest possible date, and (2) eliminating unnecessary field working funds. Many companies hold small bank balances in field locations for the convenience of paying small local bills. As cash manager, you have the responsibility for examining the situation to determine if a central disbursement account is appropriate.
A cash management group starts a typical day with a review of outstanding loans, receivables, and payables maturing that day. Based on the previous day's operation, the office forecasts total gatherings and disbursements. Once all transaction forecasts are reviewed, an estimate is made of the cash needed during the day.
At this point, you as cash manager would have to make a decision. If the availability of funds is more than ample for the day's needs, you must decide how to invest the extra funds. Depending on the size of the corporation, you might solicit outside help from a securities analyst or investment banker. If, on the other hand, money is in short supply, funds must be obtained. Now decisions must be made relating to sources and their terms for obtaining funds. If by noon the money has not been raised, you might elect to withdraw some of the firm's compensating balances at its bank, or to rely on the commercial paper market, if it provides a less expensive source of funds.
Most of the cash management department's functions are carried out in the morning. Occasionally, there will be an afternoon crisis of unexpected, uninvested cash surplus or shortage. However, most cash managers will find the day fairly structured, making for a secure environment with normal working hours ranging from forty to fifty per week.
While cash management sounds routine, it usually takes about two years before a newly hired employee is given responsibility for handling interactions that commit large cash sums. Training usually involves on-the-job coaching and frequent assignment rotations.
Accounts Receivable Management: An area related to cash management is accounts receivable management. In small corporations the two functions may be combined. Large corporations separate them, with accounts receivable concentrating on credit policy (which involves determining the optimal credit period), collection policy, discount policy, and credit standards for customers.
As an accounts receivable manager, you will need to be comfortable with computer systems, as daily computer use is the norm. You would use computers to determine the optimal credit period, based on the premise that lengthening the credit period will stimulate sales to customers while shortening it will most likely depress sales. Increased sales volume from the extension of the credit period results in an increase of working capital to fund the increase in receivables. Although credit period determination is not a weekly activity, the question is readdressed whenever there is a substantial fluctuation in interest rates, major change in variable costs, or a decrease or increase in sales resulting in a serious problem of over or underproduction.
A second function you would perform as accounts receivable manager is determination of collection policy, which refers to the procedures the firm uses to collect past-due accounts. The collection policy may be either to turn over past-due accounts to an outside collection agency for a fee or to have staff to make collections. The latter typically consists of making phone calls, sending warning notices, or involving legal counsel.
You will also be responsible for determining cash discounts for early payments. The trade-offs among the level of discount taken, how discount affects customers, and reduction of average collection period are critical in determining the optimal level of discount. Once again, computer programs are often used to determine the optimal discount.
Lastly, you would be responsible for determining credit standards for customers. The credit screening process is often carried out by means of a statistical technique called discriminant analysis, through which various characteristics of a customer are analyzed to determine credit worthiness. If the applicant falls above a cutoff value, credit will be granted. A value below the cutoff will be deemed a bad risk, and no credit will be issued.
To set up a credit scoring and screening system as described above, you need to be familiar with statistical analysis and computer applications. If you cannot write the programs yourself, a programmer would be assigned to the project. Whether you are the architect or not, developing a credit evaluation system can be very rewarding.
Much of an accounts receivable manager's activities involve keeping systems up to date and monitoring the customer-information data base. After one or two years as an accounts receivable manager, you will probably move to other areas of working-capital management. An assignment in accounts receivable is generally a starting point for a career in corporate finance; it is seldom considered permanent.
Inventory and Operations Management: The task of inventory management is to assess the costs and benefits of holding different amounts of inventory for each product. In manufacturing companies a production or operations manager may be responsible for this decision. However, in some manufacturing companies and most financial institutions with sizable consumer businesses (e.g., consumer banks and brokerage firms), financial managers are involved with operations and inventory control.
Inventories, which may be classified as raw materials, work-in-process, and finished goods, are essential to business operations. While accounts receivable accumulate after sales, inventories are established before sales and are dependent on production-run efficiencies. It would be one of your functions as an inventory manager to forecast sales and coordinate with production and operations managers so that target inventory levels can be determined. If these forecasts are made by the marketing department, you would need to work closely with both marketing and production personnel. If, however, the inventory manager makes the forecasts-which is typical of small corporations-an understanding of forecasting techniques is necessary. Some corporations use a commercially available automated system which requires few redesign efforts. However, forecasts from such systems still need to be incorporated into the inventory management system.
To this end, corporations use various techniques, from educated "guesstimation" to such operations management concepts as economic order quantity (EOQ). If a system is not already designed and in operation, the inventory manager may spend several days per month (how many depends upon the number of products) calculating optimum order quantities and timing. Consideration must be given to the amount of investment capital tied up in inventory and to the needs of the production department for raw materials.
An inventory manager is often labeled operations manager. Operations personnel are primarily a support function for the financial staff. In addition to the inventory control function, Operations is concerned with evaluation of management controls, which may involve assessing the efficiency and effectiveness of operations and operating procedures and recommending a course of action when necessary. It is the operation person's responsibility to determine the reliability of the financial and management information provided to senior management for their use in decision making.
Finally, as operations manager you would be responsible for product distribution, which may be a separate job function depending on the size and nature of the business. Responsibilities in distribution involve determination of the most effective and efficient means of product distribution. Frequent interaction with both the marketing and production control departments is essential during this determination process. Organizations that hire financial managers for inventory or operations management generally require that he or she also have knowledge of production systems.
