The purpose of the finance function, its role within business and how it…

The idea

The finance function manages money so the business can survive, grow and meet its objectives. Its purpose is to record income and expenditure, control cash flow, produce financial information and support decision making. Its role includes preparing budgets, monitoring actual figures against them, arranging finance such as loans or overdrafts, paying suppliers and staff, and calculating profit and break-even. This influences business activity because finance sets limits and signals: a tight cash-flow forecast may delay expansion, while a healthy budget may allow new equipment or recruitment. Finance also supplies data that other functions use, so marketing, operations and human resources plan around the money available.

What earns the marks

• States the purpose of the finance function, including recording financial transactions and providing financial information for decisions.
• Explains at least two roles, such as budgeting, cash-flow forecasting, arranging finance, paying wages and suppliers, or calculating profit.
• Explains how finance influences another function, for example a limited budget restricting a marketing campaign or recruitment plan.
• Uses a named business example to show finance shaping a decision such as delaying expansion because of a cash-flow shortfall.
• Analyses the effect of poor financial control, such as suppliers refusing credit or the business being unable to pay wages.
• Uses correct terminology, for example budget, cash flow, expenditure, overdraft and profit.

Common mistakes and how to put them right

• Confusing profit with cash flow.

  Put it right: Explain that profit is income minus costs over a period while cash flow is the timing of money in and out.

• Thinking the finance function only keeps records.

  Put it right: Include its active role in planning, budgeting and decision making.

• Assuming finance has no effect on other functions.

  Put it right: Show how budgets and forecasts constrain or enable their plans.

Exam tips

• Link each role of finance to a decision the business actually makes, such as whether to buy new machinery.
• Use a short calculation or figure, such as a £2,000 monthly shortfall, to make the influence of finance concrete.
• Check that your answer covers purpose, role and influence, because the statement names all three.