Use Financial Planning in Your Company’s Administrative Function

Use Financial Planning in Your Company’s Administrative Function

By Karl Kern, Accountant / Lecturer / Writer

The purpose of your company’s administrative function is to support what your company sells. Support consists of departments like finance, human resources, and information technology; future articles will describe these departments in greater detail. The focus of this article is on administration as a whole. As a whole, it can be overlooked because production and selling generate attention due to their effects on revenues however your company’s administrative function has an important role in your company’s effort to accumulate wealth. Understanding the role of your company’s administrative function should not occur after events occur, understanding the role of your company’s administrative function should occur before events occur by using financial planning.

The Process of Financial Planning

The process of financial planning is described by the following illustration:

The process illustrated above is described in greater detail through three articles I wrote for FP&A Trends:

Choices

When you look at choices in your company’s administrative function I suggest you begin with the following question:

How do I want to support my company’s production and selling functions?

The answer to this question is centered on the people/process/technology approach to organization.

The “people” in your company’s administrative function will be employees or consultants. As a result, the choice is whether your company’s administrative function will be staffed internally, i.e. employees, or externally, i.e. consultants. Here is where the above-listed diagram comes into play because the transactions that will occur from employees will be much different than the transactions that will occur from consultants and the differences will be described in greater detail shortly.

The “process” in your company’s administrative function will be an extension of people, i.e. internal or external. This extension can go further in terms of whether the support will be outside or inside the production and selling functions. An example of outside or inside support is the role of financial analysts. An outside financial analyst would be an employee or consultant directly reporting to someone in finance while an inside financial analyst would be an employee or consultant directly reporting to someone in production or selling. Like people, the choices you make about the process in your company’s administrative function will lead to transactions that differ from one another. This is important to remember because the transactions from whatever choice is made can positively or negatively affect the wealth you are trying to accumulate.

The “technology” in your company’s administrative function may be the most interesting of the three approaches. The reason for it being most interesting is the advancements being made in online services and artificial intelligence. Online services like LegalZoom make it easier for people to obtain support while artificial intelligence like Robotic Process Automation (RPA) offers an alternative to hiring not only employees but also consultants. RPA, however, may not be the only use of artificial intelligence in your company’s administrative function. Other advancements in this area of technology could be developed in the future which will provide even more choices for people who are looking to support their companies’ production and selling function,

Whatever choices are made transactions will follow.

Transactions

From time-to-time people engage me in discussions about hiring employees versus consultants. The primary reason for this engagement is to look at these choices from an accounting perspective. When it comes to the choice of hiring employees versus consultants there are basic elements of accounting that should be understood when using financial planning in your company’s administrative function.

Having employees requires more than the recognition of salaries and wages expense.

Having employees requires the recognition of various liabilities; in the United States examples of these liabilities include

  • Federal income tax withholding
  • State income tax withholding
  • Social Security and Medicare, i.e. FICA
  • Contributions to 401K plans
  • Contributions to insurance plans

Having employees also requires the recognition of an expense labeled Payroll Tax Expense. This expense, in the United States, includes the company’s portion of FICA taxes plus federal as well as state unemployment taxes. When using financial planning in your company’s administrative function the above-listed transactions must be taken into consideration when hiring employees.

Should your company choose to hire consultants remember that consultants are trying to earn income? Since consultants are trying to earn income the fees they charge will reflect that desire. Also, consultants can seek reimbursement for travel. In addition, consultants can seek reimbursement for expenditures like photocopying. Fees, travel reimbursements, and photocopying reimbursements are examples of elements that exist in transactions from the choices made by your company’s administrative function.

The elements in transactions with employees and consultants represent a bridge between the choices you make and the wealth you want to accumulate, a bridge that should serve as a visual aid when using financial planning in your company’s administrative function.

Wealth

 
© photo by Michael Wilson on Flickr

The gentlemen pictured above is Dante Scarnecchia who is the offensive line coach for the New England Patriots. One may wonder why I’m bringing this gentleman into this article. Your company’s administrative function is like an American football team’s offensive line in that both elements help maximize opportunities for and minimize threats against the playmakers of the team; for an American football team it’s the quarterback, running backs, and receivers and for your company, it’s the production and selling functions.

The article in the following link serves as basis for identifying the similarities between an offensive line and your company’s administrative function.

https://www.si.com/nfl/2017/01/18/dante-scarnecchia-patriots-offensive-line-coach-bill-belichick-nfl-playoffs

What is the similarity between the story in the above-listed article and the role of your company’s administrative function?

The answer is linkage.

The performance of the New England Patriots’ offense in the 2016 AFC Championship game is attributed to the work of the offensive line. The work of the offensive line was deemed ineffective which spread to the ineffectiveness of other elements in the offense and as a result, the offense failed to accumulate wealth which is touchdowns. The link between the offensive line and other elements of the offense is no different to the link between your company’s administrative function and your company’s production and selling functions because your company’s production and selling functions are responsible for touchdowns like sales, income, and cash. Like the New England Patriots during the 2016 AFC Championship game your company’s production and selling functions may be ineffective in scoring “touchdowns.” Perhaps the starting point for identifying the cause of this ineffectiveness should be in your company’s administrative function. 

The ineffectiveness of your company’s administrative function is its inability to maximize opportunities for and minimize threats against accumulating wealth in your company.

You may think about maximizing opportunities through your company’s production and selling functions. Your thoughts are in the right place however you need to go deeper in your thinking. Going deeper means getting to the root of how opportunities can be maximized which is people. Process and technology do not arise by themselves, process and technology arise from people. When you think about the people hired by your company that task begins with human resources which is an administrative function. A future article will examine the role of human resources in greater detail.

You may think about minimizing threats in your company’s production and selling functions. Your thoughts are in the right place however you need to consider how these functions perform this task. One way these functions can perform this task is through accessibility to information. The accessibility to information must encompass quantity as well as quality. Quantity can be managed by your company’s information technology department while quality can be managed by your company’s finance department, departments that exist in your company’s administrative function. Future articles will examine the roles of information technology and finance in greater detail.

Using financial planning in your company’s administrative function organizes thinking in three areas: choice, transactions, and wealth. Wealth, the abundance of valuable possessions, will come from production and selling however how can both functions maximize opportunities and minimize threats? The answer is the support provided by your company’s administrative function.

Conclusion

The purpose of this article is to introduce the use of financial planning in your company’s administrative function. Using financial planning in this function can be overwhelming due to the number of administrative departments that exist. A takeaway from this article is the definition of financial planning, the process of thinking about how to accumulate wealth. Accumulating wealth is achieved from the transactions that occur from the choices made. Future articles will describe how financial planning can be used for specific departments in your company’s administrative function so stay tuned.

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