The concept of the financial structure of an enterprise and the term financial responsibility center (abbreviated as CFD) referring to it are categories created exclusively by practitioners. Moreover, the goals in this case are purely practical. We will understand what is the financial structure and the Central Federal District. In addition, we 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, then you cannot do without a plan. In addition, a budget is needed for its implementation. So, in the plan you should provide options for overcoming the 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 thing in practice, you need to clearly determine who exactly is responsible for what in your team, team. It is worth remembering that the discord in the activities of any group can destroy even the most thorough and competent plan. Therefore, budgeting in the organization begins with a financial structure. It is the latter that determines which of the employees is responsible for what.
What is the responsibility of the Central Federal District?
Most Russian entrepreneurs are convinced that budgeting and management accounting are within the competence and authority 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 economic entities formed by companies on their own often exist and develop separately from the real world. In other words, they abound in “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 budget management, each center of financial responsibility undertakes to act not only as a material category. It should be animated, in other words, the CFD should be understood as a specific employee of the company, as a rule, the head of the unit. It is he who is engaged in the management of real processes in the business. You need to know that the assessment of the outputs of a business process is carried out through appropriate financial indicators. It is important that responsibility in this case is understood as an obligation and the ability to manage the business processes that form the financial indicator. For the latter, the CFD is responsible.
So, the generally accepted classification of the Central Federal District, which make up the structure of financial activity, becomes clear and transparent. Moreover, the desire to form a fundamentally new variety of centers of responsibility by itself disappears. If we consider this desire as an independent category, then it is completely innocent. However, such a practice, first of all, leads to the fact that the management of units in the organization is responsible for the indicators of the economic plan that it cannot manage. Moreover, the most important financial results remain unattended at all.
It should be borne in mind that such a distribution of responsibility in one way or another leads to psychologically obvious results: if there is no real opportunity to manage a specific business process, and responsibility for a particular indicator is imputed, then management will try to manage the indicator itself, but only “on paper” ".
Revenue center
The concept of finance and financial structure are categories that are closely interconnected with revenue centers. Under them should be understood units that are responsible for the sale of services, products on the market. They primarily manage the sales process, so they can affect revenue. Their key target is maximizing the volume of the product sold. The main indicators that may 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 Income Management
Such units are often set marginal income as a target, so that in the pursuit of sales volumes there are no too big discounts. 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 - directly income. This is not enough to optimize enterprise margins.
For full control over this income, you need to be able to influence, including the procurement / production, as well as the sales process, in other words, the cost of the product. You need to see the big picture and develop a common policy that can coordinate business processes. This is the area of responsibility of the profit center.
You should be aware that the management of the revenue center does not under any circumstances manage the production process or procurement. This suggests that it cannot affect the cost of the product. From the introduction of the term “center of marginal income”, as a rule, the sales department is transformed into it. He remains the center of income. This is characteristic of his nature.
However, today it is often possible to meet a situation where, having imputed margin income as a target indicator of the financial structure, the company management calms down on this. Thus, the question of the conformity of operations of production and purchasing units to the key goal related to maximizing margin remains an issue.
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. Consideration of the development of the company in general, as well as risk reduction, may be much more important. For example, low-margin products may be included in the assortment in order to prevent competitors from entering the market. Firms sometimes consider it necessary to provide the entire product line, regardless of the margin brought by each independent position (it is worth adding that this does not exclude detailed monitoring of sales, as well as management through the quantity / price ratio).
A company’s assortment may include products with a relatively low margin level in order to hedge risks, which are primarily associated with unstable demand for an expensive product in case of a change in the economic situation. This means that the work of the income center should not be carried out contrary to the interests of the company in a strategic plan, the manager must establish 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
The financial and economic structure also includes cost centers. They are classified into two types: centers of non-standardized and standard costs. This separation is primarily associated with a fundamental difference in business processes managed by such centers. This requires the use of financial indicators of various types for full control over activities.
Standard costs
Business processes that are managed by standard cost centers that make up the financial structure of almost any company are characterized by the relationship that arises between the release of consumed resources and volume. For example, procurement, production units. It is worth noting that they do not manage profit and income.
In this case, the necessary volume of output, as well as standards for the expenditure of resource funds per unit, are identified from the outside. The key criteria for the effectiveness of the activities of such units are the following: the implementation of the plan, 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 qualitative characteristics of work or products are usually directly related to compliance with certain standards in the consumption of resources.
The generally accepted definition in 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 a certain level of costs for the plan, incorrectly defines the purpose of the activities of such a unit. Its purpose is not “achieving a cost level” and not saving. It is about release in a given volume and parameters. And cost standards are nothing more than restrictions in the scope of which this issue should be relevant.
Exorbitant Costs
As it turned out, in the financial structure of the enterprise, in addition to centers of standardized costs, centers of non-standardized are included. 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 results at the output. The apparent blurring of the connection between the useful result of the work and the costs of such units in any case gives the impression that these costs can be reduced, if necessary, without serious consequences for the company. Nevertheless, one should be extremely careful in evaluations so as not to accidentally cut down the branch where we are sitting.
Units should be understood as non-standardized cost centers that are formed to achieve specific goals that are important to the business. For example:
- the onset (not the onset) of an event: winning a tender - for the development unit of the building structure; no fines from tax authorities - for the accounting department;
- providing conditions for the effective operation of key divisions from serving;
- non-standard piece product or the most complex range of services, in accordance with which an important role is played by the compliance of the result with customer-specific requirements.
Profit center
The financial structure of the organization also includes a profit center. It is he who manages the chain of interconnected business processes. It generates profits. Since it is necessary to understand the difference between expenses and revenues, it is important that the relevant center can control both the business process of sales, which generates income, and business processes associated with the expenses of the unit: procurement, including the selection of suppliers, production, etc.. For a full understanding of the specifics of the activity in question, it should be borne in mind that the presented component of the financial structure is, first of all, responsible for optimizing and coordinating the work of the entire chain, which is formed from business processes subordinate to it.
This means that in order to fulfill its functions, the profit center must have a sufficiently high level of independence 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 the unit in any case should be able to independently operate on the market both in sales and in procurement, be responsible for rationing production and so on.
In this case, 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 profit. If the center’s activity is too oversized or it does not have the opportunity to enter the market external to the company (for example, it supplies its product only to the company’s divisions), then its management will try to achieve the required indicators in ways that are unacceptable to the structure.
Investment center
In the process of forming a financial structure, the creation of an investment center plays a crucial role. He owns the powers associated not only with the independent management of expenses and income, but also with the use of the capital at his disposal. In other words, this is almost an independent business. As a rule, the owner delegates such powers not 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 consider that monitoring the effectiveness of investment centers in the long run is not so simple as it might seem at first glance. In modern literature indicate the indicator of ROI, which is sometimes supplemented by EVA. In reality, such a business is part of the holding, and this relationship 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 general strategy of the company.
An attempt to limit oneself only to financial indicators, as a rule, leads to serious problems that arise over literally several years. The fact is that these indicators have significant shortcomings that act as tools for motivating the management of divisions. It should be noted that in the short term there are always very uncomplicated methods of external improvement of indicators that negatively affect long-term business prospects.
