Business transactions involve the exchange of currency and other products or services that have a monetary value. How a company records, processes, and administers these transactions is known as financial operations. This broadly encompassing term encompasses many functions, including bookkeeping and accounting, but it also includes more evolved systems such as data management, automation, and the use of advanced digital technologies.
The business world is dynamic and changing rapidly, which makes it difficult for companies to keep pace with market developments and the needs of their customers. To remain competitive, businesses need to continuously evolve their financial operating models. For example, they need to cast a wider net for new efficiency opportunities, improve their ability to manage the flood of information that flows into the finance function, and strengthen decision-making through widespread adoption of data-visualization, advanced analytics, and debiasing techniques.
Financial operations are the highly evolved and integrated systems that help a business record and process all of its financial activity. According to Aleksey Krylov, an experienced CFO, these systems have many functions, such as accounts payable and accounts receivable, cash flow, treasury management, credit risk management, equities management, and budgeting. These systems are often complex, sophisticated, and supported by advanced digital technology.
For example, a business must monitor and manage its accounts receivable to ensure that the company receives payment for the goods or services it sells. To do so, it must have effective systems and processes in place to evaluate customer creditworthiness, follow through with customers to collect payments, and manage the accounts receivable process in the event of any unforeseen delays or issues. In addition, businesses may borrow money from lenders or investors and must develop the policies and processes to track and manage these loans. Larger businesses are also involved in issuance of stocks to shareholders, which requires the tracking and managing of these securities.
The business life cycle is the progression of a company in phases over time and is most commonly divided into five stages: launch, growth, shake-out, maturity, and decline (see How to Become an Entrepreneur in 2024). Its three main financial metrics are sales, profit, and cash flow. At the launch stage, the business’s sales are the lowest and its business risk is highest, which prevents it from obtaining debt funding. At the growth stage, profits increase and business risks decrease as companies prove their positioning in the marketplace and demonstrate their ability to repay debt. At the shake-out stage, companies begin to experience rapid sales growth and competition intensifies in the marketplace. At the maturity stage, business risks are low and firms can easily obtain debt financing. At the decline stage, sales and profits drop, and the business can no longer stay profitable or compete in its market.
