Financial Practices: The Compass of Business Success - Essay Sample

Introduction

Financial practices involve those procedures and steps that a firm takes in order for it to operate and function robustly, hence be able to meet its set targets and goals. These practices serve as a compass for not only startups but also well-established companies within a particular field. It enables firms to be able to conduct their accounting and budgeting procedures effectively and efficiently. An excellent example of a company that has a well-established set of financial practices includes Barclays bank plc. It is a company that has earned the confidence of both customers and stakeholders on how the company is run. They have implemented stringent financial practices that have catapulted them above other players in the banking industry.

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Barclays bank has been able to adopt essential financial practices such as proper budgeting within its systems. It is a crucial process without which the institution cannot achieve much (Babalola, 2008) almost every enterprise regardless of size complexity or sector, relies heavily on budgeting and budgetary systems to achieve strategic goals (Suberu, 2010). Banks are known to have large amounts of cash in reserves, and they diversify their portfolio in various investment opportunities that reap profits in return. According to (Barclays bank, 2018 annual report) profit, before tax amounted to 1.5 million pounds, it becomes therefore essential for the company to come up with efficient and effective budgeting mechanisms which it can use to plan for future goals and mitigate unforeseen contingencies as and when they occur.

Budgeting is one of the most successful and useful management accounting techniques that can reap handsome rewards if properly understood and implemented (Suberu, 2010). When properly implemented, this tool can be used in the decision-making process of the bank and help the management be able to plan well ahead of time to meet the financial targets of the bank. It provides for coordinated planning among different functional areas (Ramsey, 1985) and, in addition, quantifies a firm plans for the future. Budgeting also enables the institution to be able to maximize the productivity of its resources available. The success and importance of budgeting relate to the identification of goals, allocation of responsibility to achieving these goals, and, consequently, its execution (Drake & Fabozzi, 2010).

Risk management is another essential element in financial practices; one of the most common forms of risks in the banking sector involves credit risk. According to (Chijoriga, 1997) credit risk is one of the most expensive risks in financial institutions, and its effect is more significant when compared to other risks as it directly threatens the solvency of the financial institution. The bank has put in place a raft of measures to be able to mitigate and prevent this type of risk from occurring. Some of the solutions put forward by the institution include three lines of defense, which comprise of revenue generation and client-facing area, along with all associated support functions. The first line identifies the risk and sets the policies, standards, and controls within the criteria set by the second line of defense. The second line of the defense comprises risk and compliance employees and oversees the first-line setting three limits, rules and constraints, consistent with the risk appetite of the firm. The third line of the defense comprises of internal audit employees, providing independent audit assurance to the board and executive management (Barclays, 2017).

As a means to further curb the risks prevalent in the industry, the firm has a dedicated decode line function. It is tasked with managing treasury and capital risk, and this risk occurs when a firm is unable to meet its contractual or contingent obligations or that it does not have the appropriate amount, tenor, and composition of funding and liquidity to support its assets. This risk is managed and monitored through a wide range of activities including managing limits on a variety of on and off-balance sheet exposures, monitoring of market indicators for early signs of liquidity risk; recovery planning; capital planning and allocation; internal Group-wide stress testing; management of foreign exchange and pension risk, and uses a range of metrics and sensitivity analysis to measure non-traded market risk, this is according to its (Barclays, 2017)

Other examples of financial practices include internal control mechanisms. According to the University of Washington, internal controls are the rules and procedures the management uses to achieve goals, such as ensuring the reliability and the integrity of financial information as well as the promotion of efficient and effective operations. According to Whittington and Pany (2001), mention control activities as one of the components of internal control. They mention that control activities are policies and procedures that help ensure that management directives are carried out. In large firms like Barclays they use control activities to help in the streamlining of processes of easy deliverance of services, internal control systems assert that the system should always be under control and supervision since people tend to think more about their interests than the interests of the corporation. If there is a failure in the financial accounting system of a corporation, a decrease in assets, and an increase in abuses will inevitably take in the absence of an effective internal control system.

According to Olatunji (2009), the impact of the internal control system in the banking sector, and according to his findings, the lack of an active control system is the primary cause of bank fraud in Nigeria. It is therefore evident that the management at Barclays needs to put in place a modern and robust internal system within its ranks that can be able to combat the challenges that may arise in the future resulting from weak systems. (COSO 1992) Internal controls are to be performed based on five necessary components related to operational effectiveness and efficiency of reliable financial reporting and ensuring regularity. A strong internal control structure is one of the most significant components in the prevention of fraud, having a weak internal control process is one that facilitates the occurrence of fraud (Bozkurt, 2009)

According to Basel (1998), banking supervisors around the world have focused increasingly on the importance of internal sound controls. It is a process that is affected by a board of directors, senior management, and all levels of employees. It is not solely a procedure or policy that is performed at a certain point in time, but rather it is continually operating at all levels within the bank. The board of directors and senior management are responsible for establishing the appropriate culture to facilitate an effective internal control process and for monitoring its effectiveness on an ongoing basis; however, each individual within a corporation must participate in the process. Barclays bank is widely renowned in its involvement of employees in the decision-making process, especially in the financial sector.

Auditing is another essential practice that Barclays bank has implemented to be able to earn the confidence of not only the customers being served by the firm but also the spirit of the stakeholders. The bank is known for conducting both internal and external audits to enhance their transparency, the bank had conducted an external audit tender in 2015, and the decision was reached to appoint klynveld Peat Marwick Goerdeler (KPMG) as Barclay's external auditor with effect from 2017 according to Barclays bank 2015 annual report. The bank also has a robust system of internal auditors who are tasked with reviewing the internal reports and checking for discrepancies. According to (Hamers 1998), duties and responsibilities of internal auditors are examining the compliance with the existing governance financial regulations, instructions and procedures evaluating the effectiveness of internal control systems, appraising the firm, and the efficiency with which financial and other resources are being used. Reviewing the reliability and integrity of record keeping and reporting the financial and operating information system, post-audit of payment, assessing risk, and consulting the management as the need arises.

Another essential financial practice is the setting of goals for firm and proper strategic planning. Barclays bank is known to be a firm that strives to meet customer expectations in the deliverance of service. They have a strict set of norms that have to be adhered to by the employees. They set out targets for each department, including the financial department, that would be tasked with meeting the provision of financial reports before certain deadlines are reached. They have a mission that states they strive to be the most reliable and admired commercial service company in the world, recognized by its customer-driven nature and its commitment to the deliverance of excellent products and services. When it comes to strategic planning, the firm is not left out. According to Steiner (1979), a strategic plan is an attitude, a process concerned with the future consequences of current decisions. It involves the formulation of vision-mission statements, performance and situational analysis and strategy formulation and choice (Pearce & Robinson, 2008) the firm has been able to link the short term, medium-term and long-term financial plans.

Conclusion

In conclusion, financial practices are essential parts when it comes to the smooth functioning of firms. It adheres to the necessary accounting guidelines and enables companies to be able to meet their objectives and goals. These practices have also helped to enhance transparency and accountability within the firm.

References

Barclays bank (2015 annual report)

Barclays bank (2017 annual financial report)

Bozkurt, N. (2009), Isletmelerin Kara Deligi Hile Calisan Hileleri, Istanbul

COSO (1999), Internal Control-Integrated Framework, The Committed Sponsoring Organization (COSO) of The National Commission of Fraudulent Financial Reporting (Treadway Commission).

Drake, P., and Fabozzi (2011). The basics of finance, An introduction to financial markets, business finance, and portfolio management.

O. Ray Whittington & Kurt Pany (2001). Principles of auditing and other assurance services. Irwin/McGraw- Hill. New York

Olaoye Clement Olatunji, 2009. Impact of Internal Control System in the Banking Sector in Nigeria. Pakistan Journal of Social Sciences, 6: 181-189.

Ramsey, J.E., Ramsey, I.L. (1985), Budgeting Basics: How to Survive in Budgeting Process, Franklin Watts, New York, NY.