Financial structure: basic concepts, types, sources of formation, principles of construction

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

The concept of the financial structure of an enterprise and the related term of the center of financial responsibility (abbreviated as FRC) are categories created exclusively by practitioners. Moreover, the goals in this case are purely practical. Let's figure out what the financial structure and the CFD are. In addition, we will consider the classification, sources of formation, as well as the principles of building the structure of the company.

Category roots

If you want to achieve a goal, you must have a plan. In addition, a budget is needed for its implementation. So, in the plan, you must provide options for overcoming obstacles that are possible on the way to the goal, in other words, you need scenario budgeting. However, this is a theoretical approach.

If you want to implement the same in practice, you need to clearly define who exactly is responsible for what in your team, team. It is worth remembering thatdiscord in the activities of any group can destroy even the most thorough and competent plan. Therefore, budgeting in an organization begins with the financial structure. It is the latter that determines which of the employees is responsible for what.

What is the FRC responsible for?

Russian entrepreneurs are mostly convinced that budgeting and management accounting are within the competence and powers of the financial department. Therefore, the center of responsibility, the financial structure of the enterprise are purely financial concepts. This fully explains the fact that independently formed economic structures often exist and develop separately from the real world. In other words, they abound with "virtual" CFDs that perform only accounting functions. It is worth noting that responsibility centers are created not for management purposes, but for accounting. This alignment can be called quite natural: the financial department and carries out accounting. Management is primarily the prerogative of the CEO.

In order for the financial structure of the organization to exist as an instrument of budgetary management, each financial responsibility center undertakes to act not only as a material category. It must be animate, in other words, a CFD should be understood as a specific employee of the company, as a rule, the head of a department. It is he who manages the real processes that take place in business. You need to know that the evaluation of the outputs of a particular business processcarried out through the relevant financial indicators. It is important that responsibility in this case is understood as an obligation and an opportunity to manage business processes that form a financial indicator. The CFD is responsible for the latter.

Thus, the generally accepted classification of CFD, which make up the structure of financial activity, becomes clear and transparent. Moreover, the desire to form fundamentally new types of responsibility centers disappears by itself. If we consider this desire as an independent category, then it is quite innocent. However, it is precisely this practice that, first of all, leads to the fact that the management of departments in the organization is responsible for the indicators of the economic plan, which they cannot manage. At the same time, the most important financial results are left without supervision at all.

It should be borne in mind that such a distribution of responsibility one way or another leads to psychologically obvious results: if there are no real opportunities to manage a specific business process, and responsibility for a particular indicator is imputed, then management will try to manage the indicator itself, however, only on paper.

Revenue Center

The concept of finance and financial structure are categories closely related to income centers. They should be understood as units that are responsible for the implementation of services, products on the market. They primarily manage the sales process, so they can influencefor income. Their key target is to maximize the volume of product sold. The main indicators that can be affected in one way or another by the sales business process managed by the revenue center are the assortment, price and quantity of products sold.

Margin management

These divisions often set marginal revenue as a target so that they don't discount too much in pursuit of sales volume. This does not mean that they are somehow related to marginal income. It is important to note that the sales department manages only one aspect of marginal revenue - revenue itself. This is not enough to optimize the margin of the enterprise.

To fully control this income, you need to be able to influence, among other things, purchases / production, as well as the sales process, in other words, the cost of the product. It is necessary to see the big picture and develop a common policy that can coordinate business processes. This is the responsibility of the profit center.

Please be aware that the management of the revenue center does not manage the production or purchasing process under any circumstances. This suggests that it cannot affect the cost of the product. From the introduction of the term “marginal income center”, as a rule, the sales department turns into it. It remains the center of income. It is in his nature.

However, today you can often find a situation where, having imputedsales service marginal income as a target indicator of the financial structure, the company's management calms down on this. Thus, the question of whether the operations of production and purchasing departments correspond to the key goal of maximizing margins remains behind the scenes.

More than just margin

Such income is not always considered the main criterion that is taken into account in the process of forming a sales policy. Much more important may be considerations for the development of the company in general, as well as for reducing risks. For example, products with low margins may be included in the assortment in order to keep competitors out of the market. Firms sometimes make it mandatory to provide the entire product line, regardless of the margins generated by each standalone item (it should be added that this does not exclude detailed monitoring of sales, as well as management through the ratio "quantity / price").

The company's assortment may include products with relatively low margins in order to insure risks that are primarily associated with unstable demand for an expensive product in the event of a change in economic conditions. This means that in order for the work of the revenue center not to be carried out contrary to the interests of the company in a strategic plan, the manager must set additional targets (they can be called restrictions) in the field of assortment policy, as well as policies regarding buyers, distribution channels, customers, and so on.

Cost Centers

Financial-the economic structure also includes cost centers. They are classified into two types: non-standardized and standard cost centers. This division is connected, first of all, with the fundamental difference in the business processes managed by such centers. This requires the use of different types of financial ratios to fully monitor performance.

Standard costs

Business processes, which are managed by the standard cost centers that make up the financial structure of almost any company, are characterized by a relationship that occurs between the output of consumed resources and volume. For example, purchasing, production departments. It is worth noting that they do not manage profits and revenues.

In this case, the required volume of output, as well as the norms for spending resource funds per unit, are determined from the outside. The following are considered the key criteria for the effectiveness of the activities of such departments: the fulfillment of the planned task associated with the release, and the implementation of the requirements for the quality of the product or work. The most important point is that the quality characteristics of works or products are usually directly related to compliance with certain norms in the consumption of resources.

The definition generally accepted on the territory of the Russian Federation of this element of the financial structure, acting as a unit, the management of which is responsible for achieving the level of costs specified by the plan, incorrectly defines the purpose of such a unit. Its goal is not to "achieve the level of costs" and notsaving. We are talking about the release in a given volume and parameters. And cost standards are nothing more than limitations within the scope of which this release should be relevant.

Unstandardized costs

As it turned out, the financial structure of the enterprise, in addition to normalized cost centers, includes non-standardized cost centers. They manage those business processes that do not have a direct relationship between the amount of resources consumed by the business process at the input and the totals at the output. The apparent vagueness of the connection between the useful result of the work and the costs of such units in any case creates the impression that these costs can be reduced if necessary, painlessly for the company's activities. However, we should be extremely careful in our assessments so as not to accidentally cut down the branch where we sit.

Subdivisions should be understood as cost centers of non-standardized type, which are formed to achieve specific goals that are important for business. For example:

• offensive (not offensive) of an event: winning a tender - for the development unit of the building structure; no fines from the tax authorities - for the accounting department;
• providing conditions for the effective operation of key units from service units;
• non-standard piece product or a complex set of services, in accordance with which the compliance of the result with the requirements specified by the customer plays an important role.

Profit Center

BThe financial structure of the organization also includes a profit center. It is he who manages the chain of interconnected business processes. It generates profit. Since it is necessary to understand the difference between expenses and incomes, it is important that the corresponding center can control both the sales business process that generates income and the business processes associated with the expenses of the unit: purchases, including sourcing, production, etc.. For a complete understanding of the specifics of the activity in question, it should be borne in mind that the presented component of the financial structure is primarily responsible for optimizing and coordinating the work of the entire chain, which is formed from its subordinate business processes.

This means that in order to perform its functions, the profit center must have a sufficiently high level of autonomy in terms of determining the resources and costs required for the activity, as well as regarding the implementation of the sales policy. It is worth noting that in any case, the division should be able to independently operate in the market both in sales and purchases, be responsible for production rationing, and so on.

At the same time, it is fundamentally important in each specific situation to find a balance between the need to coordinate the work of the profit center with the strategy of the company as a whole, as well as the level of independence that is necessary in order to manage profits. If the activity of the center is too regulated or it does not have the opportunity to enter the market external to the company (for example, it suppliesits product only to divisions of the company), then its management will try to achieve the desired indicators in ways unacceptable for the structure.

Investment Center

In the process of forming the financial structure, the creation of an investment center plays an important role. He has the powers associated not only with the independent management of expenses and income, but also with the use of capital at his disposal. In other words, it is almost an independent business. As a rule, the owner does not delegate such powers very willingly. The presented element of the financial result structure is used in economic companies of the largest holdings, which are developed by serious specialists. It is worth noting that their use is not accompanied by obvious shortcomings and errors.

Owners need to take into account that monitoring the efficiency of investment centers in the long term is not as simple a task as it might seem at first glance. In modern literature, ROI is indicated, which is sometimes supplemented by EVA. In reality, such a business is part of a holding, and this connection should be expressed with the help of additionally set goals, restrictions, conditions that are designed to keep the department's strategy in line with the overall strategy of the company.

Attempt to be limited only to financial indicators, as a rule, leads to serious problems that arise over just a few years. The fact is that these indicators have significant shortcomings, which act as tools for motivating management.divisions. It should be noted that in the short term there are always very simple methods of external improvement of indicators that negatively affect the long-term prospects in business.

Conclusion

So, we examined the structure of financial analysis, the activities and principles of operation of responsibility centers operating in modern companies, as well as the sources of their formation. In conclusion, it should be noted that the CFD play a decisive role in the budget process. There are two parties that shape the structure of the financial resources of each center.

Thus, the company's management sets certain targets according to the type of responsibility center (a kind of budget framework), as well as the center itself, which is engaged in the formation of a detailed budget based on action plans. It should be added that the latter ensure the achievement of certain goals (in other words, fill the framework with content).

The company's divisions themselves, which form the structure of financial sources, have deep knowledge of their own activities. They should participate as much as possible in the planning of future activities. Once again, it is advisable to focus on the fact that budgeting should be understood as a management tool in practice. So, a formal approach to creating a budget is unacceptable on both sides.

It is also worth avoiding the formation of budgets by carrying over the figures of the previous period, multiplied by some decreasing or increasing coefficient. It is necessary that this content be created based onthe planned work of the unit, its volumes, specific activities, product output, resource requirements, as well as requirements for the quality characteristics of the product.