E1 | Managing finance in a digital world 2019 syllabus

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 E1 | Managing finance in a digital world 2019 syllabus

E1 Notes Trial

All the notes you need to pass your

CIMA E1 exam
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© 2022 Finanicals
Written by the finanicals team
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 E1 | Managing finance in a digital world 2019 syllabus

Welcome
This document is designed to assist students worldwide to pass their CIMA E1
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How to read
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The above list is based on the order we recommend using the document.
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Download a PDF version

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Print a PDF copy

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Included things
You might see the following things within this book.

Contents section
A list of topics available in the book can be seen in the contents section. A more
detailed list of topics with sup-topics is available in the index section.

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Lessons
The lessons are presented in a concise way with all the content you need to pass
your exams. The syllabus is divided into 12 lessons. More explanations on how the
lessons align with the syllabus are available below.

Changelogs
We might make updates to this document based on our student feedback and
various other reasons. A log of the changes we made will be available at the end
of the book. [here]

Note components
You might see the following components within the lessons

Definitions
The definitions in this book are usually presented in a squared space. A definition
is a statement of the exact meaning of a word. We usually try to keep definitions
as much as similar to the official CIMA definitions as they could be tested.

This right here is an example of a definition. This is what definitions look like in the
book.

Introductions
Each lesson has a brief introduction at the beginning which explains what we are
going to learn in each lesson. It is important to know what you are going to learn
and your progress. Otherwise, you would lose track and end up being confused.

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Potential exam points

At the end of each lesson, there will be a list of potential exam testing points. The
points in these lists are included in the list because they've been tested in the past
CIMA exams (according to our student feedback), presented in official CIMA exam
practice kits, or tested in the CIMA aptitude programs.

Note that anything outside of these points could also be tested in the actual
exam. The exam is highly dynamic and machine-generated and there are no
past papers available for this exam. Questions are usually within the syllabus, and
this note collection covers all the aspects of the syllabus.

The exam rarely includes very difficult questions that are related to the subject
scope but are a bit outside of the syllabus. These questions might decide the prize
winners. To answer such a question, you might need to develop a good
understanding and a good general knowledge of subject matters.

Notes
Notes in the document might provide you with information and hint about using
the document. For example, what to do with a section (study, skip for now), the
probability of a topic being tested in the exam, or where we would tackle a given
concept again in the syllabus

This is an example for a note. This section contains user instructions

Sidenotes
In case it is necessary to explain additional concepts, we would be using
sidenotes. Sidenotes are often used to explain concepts further and to provide
examples

*This is an example sidenote. This would explain something, in addition,

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Links
There are links within the document that might take you to external websites,
resources, or to another section of this document.

Sample Link

Additional reading
At the end of each lesson, there will be a list of additional reading material.
Additional reading material might include resources, reference documents,
articles, research papers, and books. We might also provide links to these
resources. In any case, if those are not provided, or the provided links don’t work
anymore, you can try searching for them on the internet or in a library.

Link to contents page

You can use the links in the header (which appears at the top of all the pages) to
quickly visit the contents section or the index section. This works only in the PDF
version. You can easily use the left panel to visit any section easily in the google
docs version.

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Contents
Here’s the list of lessons and topics we are about to discuss throughout this book

Welcome 3

Contents 8

CIMA syllabus 9

L1. Role of the finance function 20

L2. Activities of finance professionals 72

L3. Technology affecting business and finance 90

L4. How the finance function uses digital technology 114

L5. Data and the finance function 146

L6. Usage of data in Creation and Preservation of value 167

L7. Shape and structure of the finance function 185

L8. Activities in different levels of the finance function 212

L9. Operations and finance 245

L10. Marketing and sales and finance 272

L11. HR and finance 296

L12. IT and finance 317

Index 335

Changelog 354

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CIMA syllabus
CIMA provide 2 main educational qualifications, namely
1. CIMA Certificate in Business Accounting (Cert BA)
2. CIMA Professional qualification

CIMA certificate in business accounting is a prerequisite to CIMA professional

qualification. You have to complete the CIMA Certificate in Business Accounting to
proceed to CIMA professional qualification. Optionally, you can try obtaining
exemptions for a qualification you hold to get into the CIMA professional
qualification straight without doing the certification. For exemptions or other entry
paths, you should contact your nearest CIMA office to obtain up-to-date details.

The CIMA Certificate in Business Accounting consists of 4 subjects, namely, BA1,

BA2, BA3, and BA4. Students have to sit for one OTQ paper per subject. Cert BA
exams are 120 minutes long. BA1, BA2, and BA3 each contain 60 objective test
questions, while BA4 contains 85 objective test questions.

The professional qualification is divided into 3 levels

1. Operational
2. Managerial
3. Strategic

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Students should complete 3 papers and a case study in each of these stages. The
3 papers in each stage are focused on 3 subject areas. These areas are known as
pillars. The 3 pillars are
1. Enterprise - Focused on theory parts of management
2. Performance - Focused on management accounting
3. Financial - Focused on financial accounting

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After completing the certificate level, students can sit for the 3 operational levels
OTQ papers. After completing all 3 of those papers, students can sit for the
operational case study. After passing the operational case study, students can
continue on to the 3 OTQs at the managerial level. The same process repeats until
the completion of the strategic case study.

In this document, we are focused on the E1 subject, “Managing Finance in a Digital

World”. The E1 subject is the first enterprise pillar subject of the CIMA qualification.

E1: Managing Finance in

a Digital World
The CIMA changed some key areas in the E1 subject in the 2019 edition of the
syllabus. There used to be more theory on business administration in E1 in the
previous edition of the syllabus. This time, they reduced the weight on generic
business administration and management theories and added more content on
trending subjects.

The syllabus of the E1 subject is focused on 5 key areas

A. Role of the finance function
B. Technology in a digital world
C. Data and information in a digital world
D. Shape and structure of the finance function
E. Finance interacting with the organization

Let’s compare what’s new in the 2019 syllabus with the old 2015 syllabus.

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The first 2 units in the 2015 syllabus were about organizations, operating
environments, and the basic activities of the finance function. The new syllabus
has a single unit (instead of 2) that focuses on those areas.

Note that the previous syllabus contained a lot of content on Operations

management, Marketing, Managing human resources, and Managing technology
and information. Those areas had a unit per area in the previous syllabus.
However, in the 2019 syllabus, all of those areas share a single syllabus unit
(instead of 4).

3 New areas have been introduced in the new syllabus. Therefore, brand new
content on
1. Technology (industry 4.0, and IT, New technologies)
2. Data and information (Data privacy, Big data, Business intelligence)
3. Modern finance departments (Job roles, the impact of automation, etc…)
are present in this syllabus

You can download the official document on the CIMA E1 syllabus published by the
Global CGMA University and Academic Center of Excellence [pdf]. This document
contains the resources and details on the syllabus.

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E1 Exam
You can download the official CIMA exam blueprints from their official website,
www.cimaglobal.com [link]. You can obtain a scaled score between 0 and 150 for
this paper. 100 or above represents a pass. [source]. The exam is machine
generated by selecting random questions from a large question database and
therefore is highly dynamic. The same paper you face will not be faced by
anyone. There are no past papers for this exam.

The E1 paper is what we would recommend taking 1st at the operational level of
the CIMA professional qualification. This is because
● E1 is an exam with one of the highest pass rates [source]
● The operational case study typically tests more concepts in P1 and F1 than
in E1, therefore it would be easier to face the case study right after
completing F1 and P1.

This is of course our opinion, and according to many of our student’s suggestions.
You can decide to take exams in any order that would suit best to you.

Facts about the E1 paper

● 120 minutes long
● contains 60 questions
● Pass mark is roughly 67% (100 out of 150)
○ At least 40 answers should be correct
○ Which means you can still pass with 20 answers being incorrect
● A CIMA paper with a high pass rate (about 80%)
● Focused on theory (Usually, no calculations present)
● An OTQ paper that might contain
○ MCQs with one correct answer
○ MCQs with a specific number of correct answers
○ True or false question (1 or more statements)
○ Matching pairs
○ Labelling graphs, images, diagrams
○ Filling the blanks

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Resources
The official syllabus document mentioned in the previous section provides
references to subject resources. Here’s a brief summary of some important
resources

CIMA research papers and

articles
The syllabus, especially the brand new areas in the syllabus are based on some
research papers published by CGMA.

Creating a vision for future series

The syllabus includes many aspects introduced in the “Creating a vision for the
future“ research published by CIMA. You can download the paper that introduces
this research from their website [page] [pdf]

The series has 4 papers.

1. Changing role and mandate of finance [PDF]
2. Changing technology and finance [PDF]
3. Changing shape of the finance function [PDF]
4. Changing competencies and mindsets [PDF]

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CGMA published webinars that explain these papers by the original authors. You
can watch those for free on the official CIMA website [here]. You can also
download digital copies of the articles for free at the same location.

Re-inventing finance for a digital world

This briefing paper summarizes all 4 research papers in the Creating a vision for
future series. In addition, there are some new concepts introduced as well.

This white paper tells the story of the research underpinning CGMA's views on how
new competencies are emerging in a digital world. It describes their implications
for finance professionals, employers, academics and tuition providers, regulators,
and policymakers.

You can download a PDF of this paper from their official website [here] [PDF]

Other CGMA whitepapers and articles

Here’s a list of some other whitepapers we might refer to in this syllabus
1. Unlocking business intelligence
2. CGMA briefing - Big Data
3. From insight to impact - Unlocking opportunities in big data [PDF]

CIMA official study text

We studied the following books before preparing this note. Some parts of this
document might be based on the knowledge we obtained through studying the
following publications.
1. CIMA Managing Finance in a Digital World (E1) Study Text by Kaplan
[purchase]
2. E1 Managing Finance in a Digital World Course Book by BPP learning media
[purchase]

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Other resources
There are various popular books on management, research papers, and
documents being used as resources in this syllabus. We’ll mention the references
within the lessons when we tackle those content. Here are some of those books
used in the lessons.
1. Cover photo credits to Tima Miroshnichenko
2. THE UK CORPORATE GOVERNANCE CODE by FRC [Article] [PDF]
3. The Fourth Industrial Revolution, by Klaus Schwab [Article] [PDF]
4. SAS - five essential components of big data
5. Mintzberg's structures in 5
6. Michael Porter's competitive advantage

Lessons and the syllabus

Lessons in this document are aligned in the same order as in the syllabus. Let’s
look at how each CIMA syllabus area aligns with our lessons

The syllabus is divided into 5 key areas. Each of the areas has multiple outcomes.
Note that each syllabus area is typically explained within 2 lessons, except for the
last one. The last syllabus area takes 4 lessons.

The following table explains how the lessons align with the syllabus

Syllabus area Syllabus Outcome Lesson

A. Role of the 1. Explain the roles of the L1. Role of the finance
finance function finance function in function
organizations

2. Describe the activities that L2. Activities of finance

finance professionals perform professionals
to fulfill the roles

B. Technology in 1. Outline and explain the L3. Technology affecting

a digital world technologies that affect business and finance
business and finance.

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2. Examine how the finance L4. How the finance function

function uses digital uses digital technology
technologies to fulfill its roles

C. Data and 1. Describe the ways in which L5. Data and the finance
information in a data is used by the finance function
digital world function.

2. Explain the competencies L6. Usage of data in

required to use data to create Creation and Preservation
and preserve value for of value
organizations.

D. Shape and 1. Describe the structure and L7. Shape and structure of
structure of the shape of the finance function. the finance function
finance function
2. Explain what each level of L8. Activities in different
the finance function does. levels of the finance
function

E. Finance 1. Describe how the finance L9. Operations and finance

interacting with function interacts with
the organization operations.

2. Describe how the finance L10. Marketing and sales

function interacts with sales and finance
and marketing.

3. Describe how the finance L11. HR and finance

function interacts with human
resources.

4. Describe how the finance L12. IT and finance

function interacts with IT.

Exam weightings
The exam equally weights the key areas of the syllabus. Each key area will
represent 20% of the exam questions. This means, your E1 paper will contain 12
questions per key area of the syllabus.

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Despite being explained in 4 separate lessons (instead of 2), the last key area of
the syllabus will still only represent 20% of the paper (12 questions).

Note that each lesson in this document will represent 10% (6 questions) of the
paper on average. However, the last 4 lessons will only represent 5% (3 questions)
of the syllabus per lesson. There is plenty of content in the last 4 lessons, but the
exam weight is still low.

Syllabus area Weight Lesson Weight Avg.

% % Questions

A. Role of the 20% L1. Role of the finance function 10% 6

finance
function L2. Activities of finance 10% 6
professionals

B. Technology 20% L3. Technology affecting 10% 6

in a digital business and finance
world
L4. How the finance function 10% 6
uses digital technology

C. Data and 20% L5. Data and the finance 10% 6

information in function
a digital world
L6. Usage of data in Creation 10% 6
and Preservation of value

D. Shape and 20% L7. Shape and structure of the 10% 6

structure of finance function
the finance
function L8. Activities in different levels 10% 6
of the finance function

E. Finance 20% L9. Operations and finance 5% 3

interacting
with the L10. Marketing and sales and 5% 3
organization finance

L11. HR and finance 5% 3

L12. IT and finance 5% 3

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L1. Role of the finance

function
Introduction
There are 3 major topics we are going to discuss
1. Organizations and their operating environments
2. How finance function creates and preserves value
3. Ethical considerations of the finance function

This lesson is somewhat lengthy as it lays out some groundwork for the entire
syllabus. In addition, this lesson briefly introduces some concepts that we might
tackle in later lessons.

It is worth noticing that CIMA subject pillars (E, P, F) are focused on different roles
of the finance function
● P - Focuses on What the finance function does
● F - Focuses on What the finance function does and its Implications
● E - Focuses on How the finance function is organized

The new norm

Change is the new norm in many organizations due to seismic shifts in the level
of competition, customers’ expectations and the global political outlook
combined with the fast pace of technological change.

This evolution is rapid and often unpredictable. With the new norm
● Organizations have to plan for a different way of doing business.
● The role of the finance function had changed.

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Organizations and their

operating environments
An organization is a social arrangement with a particular goal or purpose with a
boundary separating it from its environment.

There are several contexts in which organizations operate

1. Business sector that the organization operates
2. Business type
3. Mission, vision, and objectives
4. Business environment
5. Stakeholders

Business sectors
There are 2 major sectors in that businesses operate
1. Private sector - Businesses owned by private individuals or organizations
2. Public sector - Businesses owned by the state

Business in the above sectors can further break down into types
1. Private sector
a. Profit-oriented (Most organizations are profit-oriented)
b. Not-for-profit oriented
2. Public sector
a. Public services (Eg: Schools, Hospitals, Police)
b. State industries

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Business types
Different types of businesses interact with finance functions in different ways. Let’s
talk about these types of businesses and how each of them can affect their
finance function. Different business types have different kinds of primary goals.

Profit-oriented organizations
The purpose of these organizations is to make a profit for their owners. There are a
few types of for-profit organizations.
1. Sole proprietorships
a. These are businesses owned and controlled by an individual.
b. Doesn’t have legal personhood (The law doesn’t consider these
businesses as legal entities, the owner should personally act instead
in legal activities)
c. The owner has unlimited liability for the debt of their business.
2. Partnerships
a. These are businesses owned and controlled by a group of
individuals (Partners).
b. Proportionate the ownership of the business to the partners using
various methods (written agreements, Verbal agreements)
c. Doesn’t have legal personhood.
d. The partners have unlimited liability for the debt of their business.
3. Companies
a. These are businesses owned by an individual or a group of
individuals known as shareholders
b. A portion of a company owned by a shareholder is called a share.
Only companies issue shares to their shareholders
c. Do have legal personhood.
d. Shareholders have limited liability for the debt of their business.
e. There are 2 major types of companies
i. Private companies - Issues shares to shareholders privately.
ii. Public companies - Issues shares to shareholders on public
exchanges. Shares can be traded in stock markets.

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Not-for-profit-oriented organizations
These are organizations prioritizing goals other than making a profit. Eg : social
rights, well-being, promoting ideas, and providing a benefit to society.
Non-profit organizations might still require a profit to further expand their
organizations and to support their primary goals. However, generating an income
for their owners is not their primary goal.
Examples of non-profit organizations - Charities, Societies, Associations, and
Government departments (Education, Health)

Objectives of Profit-oriented and Not-for-profit-oriented

organizations
Please consider reading the differences between the objectives of Profit-oriented
organizations and Not-for-profit-oriented organizations in the objectives
hierarchy section later in this lesson.

Co-operatives (Mutual organizations)

Co-operatives can be considered a special form of a not-for-profit organization.
In theory, co-operates are owned by their customers (members).
Co-operatives don’t make profits for their shareholders. Instead, they act to
provide a benefit to their members. Any surplus is also spent on the well-being of
members.

Multinational corporations (transnational

corporations)
Any corporation that is registered and operates in more than one country at the
same time is referred to as a multinational corporation (MNC).
In most cases, the corporation has its headquarters in one country and has wholly
or partially owned subsidiaries in others.

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Public services
Governments establish these businesses to provide some benefits to their citizens.
These organizations are not focused on profit but on social well-being. Depending
on the service, they have a wide range of goals and purposes.
The income of these organizations depends on the funds they receive. Therefore,
they don’t have much control over their incomes.

Non-Governmental Organizations (NGOs)

An NGO is a private non-profit organization that operates independently of the
government.
Their primary goal is not profit-making. They are not owned by any government.
There are a few major types of NGOs
1. Campaigning NGOs - These are the NGOs that attempt to influence social
or state policies and opinions using various tactics. (Eg - Human rights
organizations, Vegan organizations)
2. Operating NGOs - These attempt to provide a product, service or benefit to
society through projects and work. (Eg - Charities)
3. QUANGOs - NGOs known as Quasi Autonomous NGOs are a type of private
organization that shares an objective similar to the public sector
organizations.

Effect of business types on the finance

function
Finance functions in different types of organizations are affected by different key
factors such as
● Owners - Different types of owners might want different things from a
business.
● Income sources - Funding of the organization might make some major
changes. State services are funded by the state, corporates are funded by
shareholders, and proprietorships are funded by their sole owners.

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● Overall goal - Some organizations want to make profits whereas some

want to provide social benefits.
● Performance measuring - A corporate might measure its success by its
profit whereas an NGO might measure its success based on how many
people it influenced.
● Technology usage - A multinational corporation might be inclined more
toward technology than a partnership

Mission, vision, and objectives

The different kinds of organizations have different kinds of goals. We can break
down these goals into 3 key areas known as vision, mission and objectives. All
vision, mission and objectives should be aligned with each other to properly
represent the goals of a business.

Vision
A vision is a vivid view of the desired future state of an organization at some point
in the future based on the organization's goals and aspirations

A vision is a high-level target and focused on an exceptionally long time period. A

vision is important as it is concerned with the future strategy and the ultimate
ideal goal of the organization.

Examples
Tesla : create the most compelling car company of the 21st century by driving the
world's transition to electric vehicles

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Mission
Mission describes what line of business a company is in, why it exists, and what
purpose it serves in line with its stakeholder's expectations.

A mission statement is about the scope of the organization, its purpose of it, and
how it wants to achieve its purpose. A mission statement is usually a concise brief
explanation that takes a few lines of words or a short paragraph at most.

Key areas
A mission statement usually covers some key areas
● Purpose of the organization
● Scope of the organization (Operating areas/market)
● A glimpse of its culture
● How it plans to achieve its purposes (objectives)

Examples
Tesla : to accelerate the advent of sustainable transport by bringing compelling
mass-market electric cars to market as soon as possible.
● Purpose - to accelerate the advent of sustainable transport
● Scope - mass-market electric cars
● Culture - compelling mass-market electric cars (Affordable/ Economical)
● How - as soon as possible

Nike - To bring inspiration and innovation to every athlete* in the world.

● Purpose - bring inspiration and innovation to every athlete
● Scope - the world

Microsoft - to empower every person and every organization on the planet to

achieve more.
● Purpose - empower every person and every organization to achieve more
● Scope - the planet

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Apple - to bring the best personal computing products and support to students,
educators, designers, scientists, engineers, businesspersons, and consumers in
over 140 countries around the world.
● Purpose - bring the best personal computing products and support
● Scope - students, educators, designers, scientists, engineers,
businesspersons, and consumers in over 140 countries around the world
● How - best personal computing products and support

Objectives
Objectives are the specific and measurable targets companies set to control and
measure their organization's functionality and performance.

Vision and mission indicate the general purpose of an organization whereas the
objectives are specifically set to achieve those purposes. Objectives provide
achievable targets to walk toward the organization's ultimate goal. Objectives
arrange the stepping stones to accomplishing its mission and vision.

SMART Objectives
Objectives should be SMART.
● S - Specific
● M - Measurable
● A - Achievable
● R - Relevant
● T - Timely

Functions of objectives
● Planning - Establish the roadmap on how the organization is going archives
its purposes
● Responsibility - Communicate the responsibilities to the staff
● Integration - Should make the functions of a business consistent by being
consistent with other organizational objectives.
● Motivation - motivate the staff by specifying their specific goals
● Evaluation - Enables performance assessment by defining measurable
targets.

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Objectives hierarchy
In organizations, there is a primary objective and secondary objectives which
collectively supports the achievement of the overall organizational objective.

It is worth considering the difference between the objectives of profit-oriented

and not-for-profit-oriented organizations.

Profit-oriented Not-for-profit-oriented

Primary Maximise owner wealth Maximise benefit to beneficiaries.

objectives

Secondary Detailed milestones defined Economy* (Control costs),

objectives to demonstrate the path of Efficiency* (Achieve objectives at
maximizing the owner's the lowest cost), and Effectiveness*
wealth (A measure of achievement by
reference to objectives)
*Economy, Efficiency, and Effectiveness are further explained [here] later in this chapter.

In addition, objectives can be differentiated according to the organizational level

as well
● Strategic objectives - Sets the overall long-term objective
● Tactical (managerial) objectives - Set to plan and control individual
functions of the organization
● Operational objectives - Act as everyday performance targets

Financial and non-financial objectives

Objectives can be financial as well as non-financial.
Examples
● Financial - Sales, Cost of sales, Market share, Assets, Unit cost
● Non-financial - Customer ratings, Product popularity, Product development

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Critical Sucess Factors (CSFs)

Objectives broken down into elements that are necessary to achieve the objective
are called CSFs.

By achieving these factors, organizations can reach their objectives.

Each department (or function i.e- sales, HR, IT) in the organization might have its
own CSFs. The individual functions usually identify their CSFs by themselves. The
finance function can partner up with each department to generate relevant KPIs
for their unique CSFs.

Examples of CSFs and KPIs are below…

Key Performance Indicators (KPIs)

KPIs are quantifiable measures used to evaluate the success of organizational
objectives, targets, and performance.

It is required to
● Identify the critical areas
● Establish suitable matrices (KPIs)
● Setting targets to outline the desired level of performance

Many KPIs are financial factors but some are non-financial. KPIs can be used as
performance measures and control mechanisms. Managers can set KPI targets
and if they are not met, reactions should be taken.

Each department (function) can have its own KPIs based on its own CSFs. The
finance function assists the process of creating KPIs for CSFs of these
departments. The finance function will work with all departments (functions) of
the organization to assemble information on KPIs. It is necessary for finance
professionals to partner up with professionals in these departments as they
possess specialist knowledge in their specialist fields. It is unlikely for a finance
team to work on another department's KPIs alone themselves.

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Examples : A car service center

CSF A related KPI

Ensure customer satisfaction Ratings given on social media pages

Provide fast service Average service time

Increase service efficiency Average cost per service session

CSF vs KPIs
Like a key performance indicator (KPI), a CSF helps pave the way to project
success. The difference is that CSFs often focus on more high-level concepts, not
metrics or data.

To put it simply, a CSF focuses on the underlying cause of success, while a KPI
measures the impact of the actions you take.

For example, if the CSF is to increase lead quality, the KPI would be the average
value of new deals.

CSF vs KPI Source

Note : We will talk about KPIs unique to different organizational departments

(functions) in the last 4 lessons. These include Operational KPIs, Marketing KPIs, HR
KPIs, and IT KPIs.

Business Environment
Business environment is the sum of all physical and social things that surround an
organization.

The business environment can be divided into 2 segments

1. Micro environment (task environment)
2. Macro environment (general environment)

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Micro environment (task environment)

Micro environment is the portion of the environment that can directly impact the
organization. The micro environment consists of things such as suppliers,
customers, employees, shareholders and competitors.

Macro environment (general environment)

Macro environment is the portion of the environment that indirectly impact the
organization. The macro environment is often described using the PESTEL model.

PESTEL Factor Description

Political The government and state policies

Economic Economical factors such as stability, inflation, interest rates

Social Social and Cultural aspects such as trends, seasons

Technological Technology and its impact on the industry

Environmental How the natural environment affect the business and the
business affect nature.

Legal How laws and regulations affect the business

Note - We will talk about the PESTEL analysis in later lessons [here]

The digital world

Digital world is the environment constructed by the increasing levels of digital
technology usage in our everyday life.

In the digital world we live in, data and information is collected, stored and
processed in many different ways.

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Technological connectedness
Technological connectedness is a concept that describes the fact that In this
digital world, we have all become more connected.

The world is flatter and more volatile. In a world of creating, storing, retrieving and
synchronizing data, rules of engagement have changed thanks to a confluence of
technological innovations and advances.

The technological connectedness was introduced in the CGMA whitepaper

“Re-inventing finance for a digital world”. Click here to view a digital copy of the
article. Refer to page 3 for technological connectedness under the pace of
change topic.

Effect Description

Increasing levels of Informed consumers expect the same level of convenience

competition from all the organizations they interact with, right across
their ecosystems.

Communication is Crucially, in a connected ecosystem, others can instantly

becoming easier see your greatest ideas and quickly copy them for their own
and faster advantage.

Changing those It’s changing how new competitors enter the market and
who were how we interface with customers and stakeholders in the
traditionally seen business ecosystem. Yesterday's competitor might become
as competition tomorrow's collaborator.

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Stakeholders
A stakeholder is someone (Person/Group/Organization) who has an interest
(stake) in the organization.

Typical stakeholders

● Shareholders ● Suppliers
● Managers ● Society
● Customers ● Government
● Employees

Stake
Stakeholders typically have a stake related to the organization. The stake of a
stakeholder can be understood by understanding what they would lose if things
go wrong with the organization. For example, if things go wrong shareholders will
lose their “Financial investments“. The managers will lose “Status, Career,
Employment income, and safety”. The customers will lose the ability to fulfill their
“Product needs and wants”

Shareholders vs stakeholders
The shareholders and stakeholders aren’t the same. Shareholders are a type of
stakeholders. There are many other stakeholders as well. Shareholders are very
important among all the other stakeholders.

Types of stakeholders
Stakeholders can be classified into 3 categories as follows.
1. Internal stakeholders
2. Connected stakeholders
3. External stakeholders

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Internal stakeholders
Internal stakeholders are stakeholders found within the organization. They operate
within the boundary of the organization. Unlike the other types of stakeholders,
internal stakeholders have a very close relationship with the organization and
have a significant interest in how the organization functions.

Stakeholder Stake Expectation

(What is at stake?)

Employee Career, Employment ● A good salary, wages.

income and safety ● Employee insurance
● Proper work environment
● Career safety and career
Manager Status, Career,
succession paths
Employment income
● Pension
and safety
● Job security

Connected stakeholders
Connected stakeholders are stakeholders who either invest in or have deals with
the organization.

Stakeholder Stake Expectation

Shareholders Financial investments Dividends, Capital growth and the

continuation of business

Customers Product needs and Value for money, Products and

wants services

Suppliers Things they supply and Propmptly payments, Further

their value business, Revenue

Lenders Money lend Return on their investment

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External stakeholders
External stakeholders are stakeholders with indirect links to the organization.
Despite having no direct relationship, they can still be affected by the actions of
the organization.

Stakeholder Stake Expectation

Community Personal safety, Having no negative impact on their

Environmental safety life.

Environmental Fulfillment of their Having no negative impact on the

pressure groups organizational goals environment.

Government Public infrastructure Proper care for employees,

regulatory granted to use, The Provision of tax and compliance
agencies welfare of employees, with legislation
Reputation of legal
system

Stakeholder conflicts
A stakeholder conflict is a situation in which different stakeholder groups have
incompatible or contradictory goals.

Stakeholders have different interests. As in the above table, different stakeholder

groups have different expectations of a business. In some cases, fulfilling the
expectations of a stakeholder might reduce the ability to fulfill the expectations of
another stakeholder.

Here are some typical stakeholder conflicts that may arise

Stakeholders Conflict

Managers Vs Shareholders Growth by merger/takeover/issuing shares Vs

Independence of ownership

Employees Vs Managers Wages, Jobs Vs Bonuses

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Customers Vs Shareholders Product/Service quality Vs Profit, Dividends

Public Vs Shareholders Effect on environment Vs Profit, Dividends

Note : A case like Managers vs Managers, or Employee vs Employee might not be

considered as a stakeholder conflict as they fall in the same stakeholder group.

Stakeholder management
As we stated above, stakeholder interests might conflict. It is the organization’s
responsibility to properly manage its stakeholders and to take care of these
conflicts. “Mendelow’s power-interest matrix” can be useful in such cases.

Typical examples for matrix areas

● Minimal effort - Casual labor
● Keep informed - Core employees, Typical suppliers (replaceable)
● Keep satisfied - Government, Customers
● Key players - Executive managers/employees, Major suppliers

The matrix can assist an organization in stakeholder management. The

expectations of key players should be considered during the formulation of new
strategies

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Criticisms of the power matrix

Mendelow’s power–interest matrix has been around for a very long time. Despite
being old, it is still being criticized for some of its flaws
● Individual customers can sometimes be categorized as having low power
and consequently merely keeping them informed. Which is a practical joke.
● It fails to provide adequate instruction on how to deal with key players

How the finance function

creates and preserves
value
Finance function Creates, Preserves, and Narrates value. In this section, we are
concerned about how finance Creates and Preserves value in organizations. The
narration will be explained in Lesson 2.

Value
Value is the measurement of the benefit generated by individuals or
organizations.

The concept of value is subjective to the type of business. Different organizations

with different goals might consider different aspects as value. Therefore, different
organizations will measure value in different ways. For example

Organization Measurement of Value

Profit-oriented organization ● Profit generated

● Increases in shareholder wealth

Non-profit organization ● Targets achieved

● Benefits delivered to the society

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Economy, Efficiency, Effectiveness

The value added to an organization can be maximized by applying the principles
of economy, efficiency, and effectiveness.

Principle Description

Economy Getting the right inputs at the lowest cost. In other words, the
principle of performing activities for the minimum cost.
Eg - Making a unit of a product for $20 is more economical than
making a unit of the same product for $50

Efficiency Getting as many outputs as possible from the input. In other

words, the principle of maximizing output for a given input.
Eg - Producing a unit using 5kg of material is more efficient than
producing a similar unit using 10kg of material.

Effectiveness Effectiveness is the relationship between an organization's outputs

and its objectives. It ensures that the outputs of a service or
program succeed in achieving objectives.
Eg - one of the indicators often used to measure schools’
performance is exam results, and this provides a measure of
effectiveness. Is the tuition which pupils receive building their
knowledge and, in turn, helping them to pass their exams?

All the above principles are closely related. Economy and efficiency together can
make processes more effective.
Economy + Efficiency = Effectiveness

The role of accountants in a

digital world
According to the CGMA whitepaper “Re-inventing finance for a digital world”,
many roles performed by accountants will be automated within the next couple
of decades. However, this process will enable accountants to focus on more
value-adding activities. This is something we would discuss throughout the
syllabus, especially in L4 [here], L7 [here], and L8 [here].

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The functions in organizations

There are 5 major functions common to most typical organizations.
1. Sales and marketing
2. Operations
3. Human resources (HR)
4. IT
5. Finance

Each of these functions might have separate departments, Staff, and managers
depending on the organizational structure (which will be discussed later in Lesson
7 in detail).

These typical organizations generally take 3 basic types of resources namely

1. Material
2. Labor and
3. Money
to produce products and services.

We are primarily focused on the finance function among the major

organizational functions. The finance function looks after the money (Financial
resources) that an organization has.

What is the finance function

The finance function refers to practices and activities directed to manage
business finances. The functions are oriented toward acquiring and managing
financial resources to generate profit.

Key roles of the finance function

Finance function performs 3 roles in an organization
1. Enables an organization to create and preserve value
2. Shapes how an organization creates and preserves value
3. Narrates how an organization creates and preserves value

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In the CIMA Professional Qualification, the ‘Enables’ element is encompassed in

the Enterprise pillar; the ‘Shapes How’ piece is covered in the Performance pillar;
and ‘Narrates How’ is part of the Financial pillar

Basic activities of finance - Information to

impact framework
The whitepaper introduced the concept of “Information to Impact framework”. The
framework identified 4 interconnected activities.

Note : It is worth noticing these activities now but these will be discussed later in
detail in Lesson 2 (L2). In case this section seems to be complex, please leave this
section for now and come back later after studying lesson 2.

Activity Description

1. Assembling information The process of collecting, cleansing and connecting

data into valuable information.
Eg - Financial accounts, management accounts

2. Analyzing for insight Analyzing accounting information to identify

patterns, trends and insights.

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3. Advising to influence Communicates these insights and contributes an

objective, responsible perspective to influence
decision-making.

4. Applying for impact Guide actions and help ensure organizations

achieve the required impact
finance function enables and uses control systems
such as strategic planning, budgeting,
performance measures and performance reviews.

Additionally, the whitepaper explains acumen

5. Acumen The finance function ensures it assembles valuable

information to inform the consideration of
subsequent proposals.
This information can range from reports to
analyses of the outcomes achieved or experiences
gained from relevant initiatives.

The activities will be individually discussed in Lesson 2 (L2)

The value matrix of the finance function

Note : In case this section seems to be complex, please leave this section for now
and come back later after studying lesson 2 because the finance value matrix
relies on the “Information to Impact” framework discussed in the 2nd lesson. This
section is less likely to be tested in the exam.

Note : In case the framework or the matrix isn’t clear after reading through this
section, please watch the 1st webinar of this webinar series published by CGMA to
see how the authors (Dr. Martin Farrar and associates) present this whitepaper
and concepts in detail.

The whitepaper introduces the finance function value matrix. In each activity the
finance function performs, it generates value in a different way.

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Here’s a pictorial representation of the information to impact framework

The below picture represents how finance function act in each activity level of the
“Information to Impact framework”. Finance function act as different things in
different activity levels.

The above activities can be arranged into a matrix as in the picture below

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The following table explains what each axis says.

Representation Attributes

y-axis represents what finance 1. ‘sourcing and analysis of

functions do information’
2. ‘communication and use of
information’

x-axis represents why finance 1. To ‘preserve value’

functions do them. 2. To ‘create value’

The above matrix can be simplified as follows

Area How finance acts

Stewardship Finance acts as the subject matter steward&expert, contributes

to strategic decision-making, including defining objectives with
regard to developing the business model

Value enabling finance acts as a business partner, uses insights to address

performance issues, and enables solutions to create value.

Data integrity finance as a trusted source of the management information,

provides data integrity

Value analysis finance as a commercial analyst, provides insights into the

drivers of organizational value

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The value finance brings to an

organization
According to the CGMA whitepaper mentioned above, the value of the finance
function can be summarised into points as follows
1. Reporting accuracy: a balanced approach between effort, accuracy, and
relevance.
2. Partnering and decision support: become a better partner with the
business to make better business decisions.
3. Controllership and risk: known for having robust controls embedded
across your core financial processes, providing surety over your numbers.
4. Enterprise-wide cost management: sponsoring and leading initiatives to
provide cost transparency and enable the organization to identify and act
on opportunities to reduce costs.
5. Analysis and insight: increase the level and quality of insight delivered to
the business.

Key activities of finance function

There are distinct activities in a finance function that enable, shape, and narrate
value.

Key role Key Activities

Enable (create) value Planning

Forecasting

Resource Allocation

Shape value Performance management

Control

Narrate value Financial reporting

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Planning
Planning turns organizational targets, objectives, and critical success factors
(CSFs) into a detailed roadmap that makes it possible to achieve them.

The finance function converts the plan into a financial representation, often
known as a budget. A budget can be monitored and can be used to measure
performance by using KPIs and other management accounting practices.

Budgets are driven by controllable factors such as costs as well as some

uncontrollable factors such as demand.

Forecasting
Forecasting predicts or estimates different factors that can be used in various
planning activities. The planning and forecasting roles often work together and
are mutually connected.

Forecasted data is often used in budgets.

Resource allocation
Resource refers to everything available for an organization to properly function
and reaches its goals.
Examples - Physical material, Financial capital, Human resources, Property, etc…

Resource allocation is the effective assigning of scarce resources to different

activities for achieving organizational strategic goals.
Eg -
● Should we use this batch of leather to produce bags or shoes?
● Should we assign this supervisor to factory A or factory B?
● How many sales officers should be assigned to the upcoming bag
marketing campaign?
● How many machines should we employ in department C

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Effective resource allocation contributes to the success of organizational goals.

The finance function enables the management to take the best strategic resource
allocation decisions through data analysis.

Performance management
Performance management is the process of monitoring organizational
performance over time. Performance management allows the management to
evaluate the organization. It ensures that a set of activities and outputs meets an
organization's goals in an effective and efficient manner.

Control
Control is the process of taking corrective action where performance fails to meet
predefined targets. Performance management and control are closely linked
together. Value can be created by minimizing losses caused by
underperformance and maximizing profits in favorable situations.

The finance function supports both performance management and control by the
effective application of KPIs and other management accounting practices (such
as variance analysis)

Financial reporting
Financial reporting is the activity that narrates the value created and preserved
by the organization to external and internal stakeholders.

Financial reports that are provided only to the internal stakeholders are
management accounts.

Financial reports that are provided to external stakeholders (as well as internal
stakeholders) are statutory financial statements. It is necessary to create these
reports to comply with the law and to fulfill audit and other third-party purposes.

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Ethics in finance function

In this section, we are going to talk about,
1. Corporate governance
2. Ethics
3. Corporate Social Responsibility (CSR)
4. Corporate Digital Responsibility (CDR)

Corporate governance
Corporate governance is the set of processes and policies by which a company is
directed, administered and controlled.

In other words, It is the system of practices that drives and controls the
organization.

Corporate governance assists in preserving the value of an organization by

providing effective controls in order to manage risks. By doing so, Corporate
governance reduces the problems generated by having poor controls and
procedures.

Separation of ownership and control

Separation of ownership and control is the explanation for a situation in which the
owners are not the ones that operate the organization.

Companies are owned by the shareholders but managed by the directors. This
might not be the case for small-scale businesses, but this is almost certainly the
case with large companies.

In companies, owners and managers are 2 different parties.

1. Owners are the shareholders known as the “Principal”
2. Managers are the directors known as the “Agents”

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Role Role player Known as

1. Owners Shareholders Principal

2. Managers Directors Agents

The shareholders appoint directors to manage their business for them. In this sort
of environment, it is possible for the “agency problem” to arise. Therefore,
corporate governance is important to companies, as it reduces the risk of this
“agency problem”.

Agency problem
Agency problem is a conflict of interest between the principal (Owners) and the
agent (Managers).

The agent and the principal might have their own self-interests which are
contradictory to each other. Fulfilling one in the extreme will leave the other party
unsatisfied. For example, the managers might want to increase their salaries,
benefits and payments whereas the owners might want to make a profit out of
their business.

Corporate governance ensures that the directors are held accountable to the
shareholders. Corporate governance ensures that those who manage the
business do it in a way that serves the interest of the owners rather than pursuing
their own interests.

Risk of poor corporate governance

The worst-case scenario is the closedown of the business. The organization might
cease to exist because of poor corporate governance. In addition to that, there
are many more risks involved with improper corporate governance.

The failure of corporate governance may be visible in the organization's activities.

Some illustrations of poor corporate governance are listed below.

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1. Lack of supervision
Employees without supervision can cause more harm than benefit. In addition to
directors working toward their own interests, employees might also follow their
own interests rather than organizational goals.
There might also be problems caused by their incompetencies, irresponsibility
and fraudulent activities.

2. Lack of board involvement

Boards that do not meet frequently and properly enough and boards that take
decisions based on inadequate information could be a sign of improper
corporate governance. It is also problematic if they can’t take organizational
objectives and activities into proper consideration.

3. Lack of adequate control functions

Lack of internal audit functions and ineffective audit functions can create more
problems. If employees in major roles (especially audit committee members) lack
competencies, things might get out of control.

4. Individual dominations
Problems may arise if the director board is dominated by a single member while
other members are powerless. The single person might be able to pursue his own
interest while discarding the organizational goals.

5. Lack of independent scrutiny

External auditors might be afraid to carry out appropriate actions for fear of losing
the contract. Meanwhile, the internal auditors might fear to raise their voices in
fear of losing their job.

6. Misleading accounting information

Misleading information could be the result of a variety of issues within an
organization. It may be associated with or cover fraudulent activities. Misleading
information can damage a company's reputation and might be very harmful in
the long term.

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7. Emphasizing short-term profitability

The dire need of having short-term profit will lead to dire consequences. The staff
might end up adjusting financial values to get the result they wanted.

8. Lack of contact with shareholders

Board members might distance themselves from shareholders to cover their
problematic actions.

Approaches to corporate governance

What sort of approach is suitable for a corporate governance code is a
continuous debate. There are 2 main approaches to corporate governance.
1. Principles-based systems (AKA Framework approach)
2. Rules-based systems (AKA Compliance approach)

Principles-based approach is the approach driven by values and principles. A

framework of this sort consists of best practices and guidelines. Despite having no
legal penalties, companies are expected to follow these for the sake of ethics.
Example - UK Corporate governance code

Rule-based approach is the approach driven by the law. Not adhering to it will be
addressed by the legal system of the country.
Example - USA Sarbanes-Oxley act 2002 (SOX)

US Sarbanes-Oxley Act (SOX)

SOX is the corporate governance code of the USA. The act is applicable only in the
USA and the subsidiaries of USA-based companies.

The act was introduced in 2002 following some corporate governance scandals
including WorldCom and Enron cases.

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Legal requirement Description

1. Auditor independence External auditors have restrictions on

additional services they can offer

2. US stock exchange regulations Similar to the UK regulations

3. Internal control reports A statement on internal control systems must

be included in the financial reports

4. Audit committee Companies should necessarily have an audit

committee to be allowed to trade in stock
markets.

5. Increased financial disclosure Financial statements must include all the

sources of financing in the financial
statements.

The SOX Act does not mandate that private cooperatives (those that do not
register their stock in exchanges) have an audit committee. However, it is strongly
recommended by audit firms to have one.

The UK corporate governance code

The Financial reporting council (FRC) promotes the UK corporate governance
code as the responsible body for promoting high standards of corporate
governance in the UK.

The UK corporate governance code has the following features

● The board of directors
● Director’s power and duties
● The relationship of the company with directors, such as loans to directors
and the interests of directors in company contracts
● Accountability for stewardship and financial reporting via the financial
statements
● Rules on meetings with resolutions

All companies listed in the London stock exchange should necessarily apply the
principles of the UK governance code. The companies must produce a disclosure

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statement with the confirmation of compliance with the code. The companies
must explain any non-compliances as well.

Smaller companies* can take more flexible approaches.

FTSE is an index of the top companies

● FTSE100 is an index of the top 100 companies based on capitalization.
● FTSE350 is an index of the top 350 companies (including FTSE100s) based
on capitalization.
Visit the London stock exchange website here for examples.

* According to the code, a smaller company is one that is below the FTSE 350 throughout the year
immediately prior to the reporting year

Principles in UK corporate governance

code
Board
Board is the executive body of a company which consists of executives (with a
balance of skills, experience, independence and knowledge) that meets regularly

There are many roles on the board including,

● Chairman
● Deputy chairman
● Chief Executive Officer (CEO)
● Senior independent directors (SID)
● Members (Executive directors, NEDs)
● Chairs of board committees

The board is now responsible for workforce policies and practices that reinforce a
healthy culture as the 2018 revision of the code emphasizes the importance of a
positive relationship between the company, its stakeholders and shareholders.

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The responsibilities of the chair, chief executive, senior independent director,

board, and committees should be clear, set out in writing, agreed upon by the
board, and made publicly available.

The board has some recommendations on having Non-Executive Directors (NEDs)

in it. This matter is explained later in the NEDs section below.

Annual General Meeting (AGM)

AGM is the meeting held by a company to allow the board to communicate with
the shareholders.

Roles in UK corporate governance code

The chairman and the CEO are important roles on the board. Positions of these
roles should be separated to ensure that no single individual has too much power
within the company.

Chief Executive Officer (CEO)

The CEO is the highest ranking executive responsible for the everyday running of
an organization. CEO is often responsible for making strategic decisions, ensuring
profitability, improving share prices, managing overall operations, and expanding
the business. CEOs are often elected by the board of directors.

Chairman
Chairman is the role responsible for the leadership and the effectiveness of the
board. The chair
● Facilitates productive board relations.
● ensures that all non-executive directors effectively contribute to the
board
● Ensures that the board receives reliable information.

The chairman should be independent on appointment and the same person

cannot hold both CEO and chairman positions.

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Executive Directors
Executive directors are directors involved in the day-to-day management of an
organization.

Non-Executive Directors (NEDs)

Non-executive directors are directors who don’t participate in the day-to-day
management of an organization. They primarily only attend board meetings (and
the meetings of board committees).

The key role of a NED is to reduce the conflict of interest between management
and shareholders by providing balance to the board. NEDs are paid a fee (Such as
a fixed daily rate) that reflects the time commitment and the responsibilities of
the role. The rate is often decided by the executive directors.

Non-executive directors
● Assist policy-making
● provide strategic guidance
● offer specialist advice
● hold management to account (Keep an eye on executives for all the other
stakeholders)

The role of NEDs is an established best practice in corporate governance. The

role's prominence has grown significantly in recent years.

The NEDs should be as independent as possible. To ensure that, NEDs must not
● Have been an employee of the company in the last 5 years
● Had a material* interest in the company in the last 3 years.
● Served as a NED for the same company for more than 9 years.
● Have company share options, performance-wise pay and company
pension.
● Have close relatives who are executives of the company.
● Holds cross directorships*

Any of these elements could compromise the NEDs' independence. A NED can be
either independent or not independent based on these elements.

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*Material - Materiality is a concept or convention within auditing and accounting relating to the
importance/significance of an amount, transaction, or discrepancy. In a legal context, material
Interest means direct or indirect ownership of more than 5% of the total assets or capital stock of
any business entity

*Cross directorship - A cross directorship is said to exist when two (or more) directors sit on the
boards of the other. In most cases, each director's 'second' board appointment is likely to be
non-executive. For example, director Alan is an executive director on the board of company Adex
and also holds a non-executive position on the board of company Badex. Director Barry is an
executive director on the board of company Badex and also holds a non-executive position in
company Adex. This can compromise the independence of the directors involved. For example, a
director decides the salary of a colleague who, in turn, may play a part in deciding his own salary.
And remember, no director should decide their own salary! Alternative Example here

Typical recommendations are

● At least half of the board should be independent NEDs. A smaller company
should have at least 2 independent NEDs.
● One of the NEDs should be appointed the “Senior Independent Director”.

Senior Independent Director (SID)

Senior Independent Directors can act as alternative points of contact.
Shareholders can contact them to raise a matter outside the normal executive
channels. Investors who may have made little headway in discussions with the
Chair, chief executive, or finance director – or who may have concerns about the
performance of these individuals can also contact the SID. Extra information here.

Note : All the references, resources, and links for the UK corporate governance
code and other materials are available at the end of the lesson in the additional
reading section.

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Committees in UK corporate governance

code
Nomination committee
Appointments to the board should be subject to a formal, rigorous, and
transparent procedure and an effective succession plan should be maintained for
the board and senior management

The revised 2018 Code states that the nomination committee is responsible for
effective succession planning when developing a more diverse board and that
the gender balance of senior management and their direct reports should be
reported.

The nomination committee assesses a company's board of directors and looks at

the qualifications and traits expected of new board candidates.

Recommendations
● Appointment to the board should be made via the nomination committee
● 50% of the committee should be made up of NEDs.
● Committee chair should be either the chair of the board or an independent
non-executive director
● The chair of the board shall not chair the committee when it is dealing with
the matter of succession of the chair of the board (Otherwise OK)
● The committee is responsible for effective succession planning as per
recommendations of the 2018 revision of the code
● Both appointments and succession plans should be based on merit and
objective criteria.
● Committee should promote diversity of gender, social and ethnic
backgrounds, and cognitive and personal strengths.

Additional reading - Chartered Governance Institute

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Remuneration committee
The remuneration committee is the committee responsible for deciding on the
payments and incentives offered to Executive Directors. This is including pension
rights and compensation payments.

No director should be involved in deciding their own remunerations! The

remuneration committee strengthens this principle of corporate governance.

Recommendations
● Remuneration committee should have at least 3 members (at least 3 for
FTSE 350 companies and at least 2 for smaller listed companies)
● All members of the remuneration committee should be NEDs.
● The company's chairman can be a member of this committee
● The company's chairman can’t be the chair of this committee (despite
being a member)
● The chair of this committee must have been a member of the committee
for at least 12 months.
● Remuneration should be sufficient to attract, retain and motivate quality
directors but shouldn’t be more than necessary.
● A significant proportion of director remunerations should be
performance-based.

According to the 2018 revision of the code, there should be a “Remuneration

Report” which also explains how remunerations help the organization to achieve
its strategy and long-term success and its alignment to workforce remuneration.

Advantages
● It reduces the risk of agency problems by disabling the directors from
deciding their own payment
● Allow the board to focus on objectives and strategy rather than
self-interest

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Disadvantages/Limitations
● NEDs might recommend high remunerations for EDs hoping that the EDs
would recommend high remunerations for the NEDs.
● Remuneration committee requires time, money and resources that could
be spent on other organizational goals.

Additional reading - Chartered Governance Institute

Audit Committee
The audit committee is the committee that acts as a liaison between the directors
and the auditors.

The audit Committee is the committee responsible for monitoring and reviewing
the company’s financial controls and the integrity of the financial statements.

Recommendations
● Audit committee should have at least 3 members (at least 3 for FTSE 350
companies and at least 2 for smaller listed companies)
● All members of the audit committee should be independent NEDs.
● The board should review the effectiveness of risk management and
internal controls at least annually and report to shareholders covering all
material controls
● The chair of the board should not be a member

Activities of the committee

● The audit committee acts as a medium for communication between the
board of directors and the internal and external auditors.
● Review the work and effectiveness of the internal audit function
● Monitor the external auditor’s independence and objectivity
● Short-list external audit firms when a change is needed

Responsibilities of the committee

● Reviewing accounting policies and financial statements as a whole to
ensure that they are appropriate and balanced

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● Review systems of internal controls and risk management within the

organization. (Note. That risk management may be dealt with by a
separate committee – the risk committee)
● Agreement on the work agenda for the internal audit department, as well
as reviewing the results of internal audit work.
● Liaising with external auditors, including dealing with problems in the audit
as they arise as well as the appointment and removal of external auditors.

Additional reading - Chartered Governance Institute

Committee Summary
Nomination Remuneration Audit

Members required Not given 2 2

(small companies)

Members required Not given 3 3

(Large companies)

How many 50% of members 100% of members 100% of members

members should
be NEDs

Is the Essential Essential Essential

independence of
NEDs essential

Can chair of the Yes Yes (only if No

board be a member independent)
of this committee

Can chair of the Yes and No No

board be the chair recommended*
of this committee

* But only when not dealing with the matter of succession of the chair of the board.

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Ethics
Ethics is the system of moral principles that concerns the concepts of right and
wrong.

The application of ethical values into a business is generally known as “Business

ethics”. Ethics are expected to be upheld even though they are not required by
law. Business ethics might be explicit and even included in the mission statement
or policy statements. In some cases, ethics are not explicit and integrated into the
organization's culture.

The role that the finance function performs should be carried out ethically, with
integrity and professionalism in mind.

Many factors may define the rightness or wrongness of an action. The list includes
● Principles - A rule of conduct based on beliefs of what is right and wrong
● Values - What the society considers to be right or wrong
● Place - Culture, location, society, and national
● Intentions - The motivation of those who are involved in the action
● Consequences - The result of the action.

Ethical behavior is usually judged by consequences rather than motives or

intentions. What’s right and wrong might be judged differently based on the
country, location, and culture as well. Even two neighboring organizations situated
in the same place might have different moral views.

Despite not being enforced by the law, ethics are pressured on businesses by
various sources such as,
● Pressure groups
● Media
● Consumers
● NGOs
● Employees

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Advantages of being ethical

Ethical behavior reduces risks, ensures long-term profitability, and gives access to
cheaper funds, in turn, increasing the profitability of projects. On the other hand,
unethical behavior can potentially damage the reputation of a company and put
the company at legal risk in the case of being discovered.

Here are some major advantages of being ethical

● Resulting in potential higher sales volumes and prices due to customer
trust.
● Ability to attract and retain the best employees and ability to get
improvements in employee productivity.
● More opportunities for profitable projects as business collaborators can
establish trust

CIMA’s Code of Ethics

The International Federation of Accountants (IFAC) maintains an ethical code
that is made concerning the accounting profession. The CIMA’s code of ethics is
based on the IFAC’s standard ethics code which is globally accepted by many
independent accounting bodies.

Here are the 5 fundamental ethical principles in the CIMA’s code of ethics.

Principle Explanation

Integrity We should be straightforward, honest, and truthful in all

professional and business relationships. We should not be
associated with anything deceptive or misleading.

Objectivity Accountants should not allow bias, conflict of interest or the

influence of other people to override their professional
judgment.

Professional The individuals should maintain their professional competence.

competence In other words, they should be able to work carefully,
and due care thoroughly, and diligently in accordance with relevant
technical and professional standards. Those working under

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your authority must also have the appropriate training and

supervision.

Confidentiality We should not disclose professional information acquired

through professional relationships unless we have specific
permission or a legal or professional duty to do so. Such
information should not be used for personal gain.

Professional Comply with relevant laws and regulations. You must also
behavior avoid any action that could negatively affect the reputation of
the profession.

Additionally, You can review the official code and the explanations here on the
official CIMA website. View a PDF copy of the code here.

Corporate code of ethics (Code of conduct)

A corporate code of ethics is a statement of business guidelines and internal
policies that are meant to be followed by employees.

Companies do not have a legal obligation to create this. Instead, most large
companies create a code of ethics of their own will

Corporate code of ethics can come in various formats

● Corporate ethic statement - Usually, a broad generalization
● Corporate ethics code - usually, contain more specific rules

Companies hire compliance officers (or ethics officers) to maintain the

application of the code of ethics throughout the organization. Employees can
discuss ethical dilemmas and any concerns about the ethical code with the
compliance officer.

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Ethical Conflicts
A ethical conflict is a situation in which a person has two ethical obligations,
which cannot be met both at once.

An Ethical dilemma is a situation that pushes a decision maker to decide what is

the ‘right’ to do and what is the ‘wrong’ thing to do.

A true dilemma is an unresolvable ethical conflict. It will probably make you

choose the lesser wrong instead of the right.

According to the CIMAs code of ethics (Section 210), an ethical conflict arises
when a member encounters one or both of the following:
1. Obstacles to following an appropriate course of action due to internal or
external pressures
2. Conflicts in applying relevant professional and legal standards

Examples of ethical dilemmas in businesses are listed below.

Accounting issues
● Should a member report a potential fraud that might violate
confidentiality?
● Should the business make its accounts in a way that increases the profit
reported?
● Should directors be paid high remunerations despite the organization's
performance being low?
● Should the company bribe other companies to facilitate contracts,
especially where such activities are commonplace?
● Is it acceptable for the directors to purchase company shares to boost the
share prices in stock markets?

Production issues
● should the company test its products on animals.
● should the company produce certain products at all, for example, bombs,
guns, tobacco etc.

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● should the company be concerned about the effects on the environment of

its production process. Sales and marketing
● Is it ethical to target advertising at children, for example for fast food or for
expensive toys at seasons?
● Should products be advertised by junk emails or spam emails?

Personal (HRM) issues

● Employees should not be favored or discriminated against based on
gender, race, religion, age etc.
● The contract of employment must offer a fair balance of power between
employee and employer

-The above definition and examples are from CIMA official study texts.

Corporate Social Responsibility

CSR is the idea that companies should be accountable and sensitive to all their
stakeholders (including society and the public) rather than just shareholders.

As described earlier in this lesson, Someone with an interest (stake) in a company

is considered a stakeholder. A shareholder is a type of stakeholder.

CSR goes beyond mere legal compliance as it is a voluntary commitment to be

ethical in a competitive environment.

There are many kinds of social responsibilities that a corporate can practice. The
responsibilities might be categorized in different ways by different individuals.
There is no clear general categorization.

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CSR Category Explanation Example considerations

Environmental The way that company ● Usage of non-renewable

responsibilities operations impact the material.
environment shouldn’t be ● Usage of non-degradable
ignored. material.

Ethical The company should act in a ● Paying employees fairly.

responsibilities fair and just way exceeding ● Experimentations on
legal obligations. animals.

Health The health impact on ● Promotion and production of

responsibilities customers should be products such as alcohol
considered and tobacco.
● Safety of products and
production process.

Philanthropic Companies can make ● Donating to funds.

responsibilities contributions with the desire ● Donating to charities.
to promote the well-being of ● Supporting community
others.

Types of CSR strategies

A company can strategize how they approach CSR as a unique organization. Here
are some generic strategies that organizations take. A company might use any of
the following strategies depending on the situation.

1. Reactive strategy
Reactive companies prefer responding to issues after they occur. Unless
otherwise provoked or caught, they might utterly ignore the issues they made.
Eg - Driving over someone by mistake, then running away until the police find out.

2. Proactive strategy
Proactive companies prefer responding to issues before they occur. This
approach involves pre-planning, controlling and being aware of the environment.
They take responsibility for their actions without any provocation to do so, even in
case it would cost them.

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Eg - Learning to drive properly and driving slowly so no one gets hit and gets into
accidents.

3. Accommodation strategy
Considering CSR in response to pressure from interest groups or the government.
They might change their policies to satisfy critics.

4. Defense strategy
These companies make a point of following the law to ensure that others cannot
take legal action against them.
Eg - A company may create more waste than necessary, but it will remove the
waste in a legal method rather than dumping it illegally.

5. Obstructive strategy
These companies avoid CSR and focus on profit. In case it faces issues, they deny
its responsibility and wrongdoing. Possibly use obstacles to deliberately slow
down the investigations and pressure from society.
Eg- A company may create more waste than necessary, then dump it illegally to
say they didn’t do that but someone else might in case they were caught.

Additional read - here

Benefits of CSR
Good CSR practices can provide many strategical advantages to a business.

However, traditionalists argue that companies should solely focus on making

money for the shareholders and they shouldn’t worry about social responsibilities.

Modernists on the other hand argue that CSR enhances a company's reputation,
which makes the company's long-term future shine.

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Some of the potential strategical advantages of CSR are as follows

● Strenghtnes the brand - The CSR might increase the reputation of the
company and the brand.
● Social expectations - Society and the customers increasingly expect the
companies to be responsible
● New opportunities - Organizations prefer partnerships with responsible
companies for mutual benefit
● Better staff - Employees with better qualifications prefer working in more
responsible companies. Some even refuse to work in irresponsible
companies.
● Unique identity - CSR strategies can provide a unique identity to a
company by acting as a method of differentiation.
● Reduction of costs - Costs could be reduced in different ways (Tax grants,
Green energy).

Arguments against CSR

● Businesses may use CSR as just a PR (Public Relation) exercise.
● Increased costs as it cost to maintain these principles.
● Companies should just focus on maximizing profit

Corporate Digital Responsibility

The application of CSR values to data and digital devices is known as CDR.

CDR will be discussed later here in Lesson 4.

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+ Potential exam testing

points
Here are some potential points that might be tested in the exam. Keep in mind
that these are for your reference only. There might be questions outside of these
points as well. More about potential exam points is available in the introduction
section [here]

This lesson is heavy in content compared to other lessons and there are many
points that could be tested

1. What is the “new norm” (you should try to memorize or at least have an
idea of that entire section)
2. Name the 2 major business sectors
3. Identify whether a given organization is in the public sector or private
sector
4. Identify whether a given organization is a profit-oriented organization or a
not-for-profit-oriented organization
5. Identify the “business type” of a given organization
6. Ability to differentiate companies from partnerships
7. The primary goals and the secondary goals of the profit-oriented and the
not-for-profit-oriented organization. (Objectives hierarchy)
8. 3 effects of “technological connectedness”
9. 3 main types of stakeholders (Internal, Connected, External)
10. Define 3 main stakeholder types
11. Examples for each of those stakeholder types
12. Define stakeholder conflicts
13. Identify stakeholder conflicts in a given list of incidents
14. Mendelows power matrix
a. Understand the Mendelows power matrix
b. label the components on a given empty/partially empty image of
the matrix
c. Name the 2 axes of the matrix
d. Place a given example stakeholder in the relevant position of the
matrix based on its power and interest

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e. Criticism of the Mendelows power matrix

15. Definitions of economy, efficiency, and effectiveness
16. 5 main functions (departments) and 3 main resources of typical
organizations.
17. Know and explain the 3 key roles of the finance function
18. Know and explain the 6 key activities of the finance professionals
19. Categorize the key activities of the finance professionals to the key roles
(enable, shape, and narrate) they have in organizations
20. Definition of corporate governance
21. Definition of agency risk
22. Illustrations of poor corporate governance
23. 2 main approaches to corporate governance
24. Differences between principle-based systems and rule-based systems
25. Have an idea of the requirements of the SoX act
26. Name the organization that promotes the UK corporate governance code
27. Necessary corporate governance compliance requirements of large
companies and small companies
28. Have an idea of the new things added by the 2018 revision (highlighted in
the note by bolding the font)
29. What are the committees mentioned in the UK corporate governance
code?
30. Activities and responsibilities of those committees?
31. Why the role of CEO and president should be separated
32. What is a NED and what do they do?
33. Know that the role of the NED is an established best practice with
increasing prominence
34. How many NEDs should be on a director board depending on the size of the
organization?
35. How many NEDs are necessary for each committee depending on the size
of the organization
36. What compromise the independence of a NED?
37. Identify the characteristics that compromise the independence of a
described example NED
38. Who should appoint as a SID?
39. Define ethics and business ethics
40. Benefits of a company that behaves in an ethical manner

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41. Describe/Name/Explain the 5 ethical principles in CIMA’s code of ethics

42. CIMA’s code of ethics is based on the IFAC’s standard ethics code
43. Identify the ethical principles in CIMA’s code of ethics that have been
breached in a given example scenario
44. Understand what a code of ethics is and what it might contain
45. What is an ethical conflict?
46. Ability to understand examples of ethical conflicts
47. CSR definition
48. Traditionalist and modernist views on CSR
49. Criticism of CSR
50. Benefits of good CSR

+ Additional reading
Here are some suggestions on external material that you can use to improve your
knowledge. Try going through the UK corporate governance code if you have
enough time.
1. Re-inventing finance for a digital world whitepaper by CGMA [Article] [PDF]
2. 2018 UK corporate governance code highlights by FRC [Article] [PDF]
3. THE UK CORPORATE GOVERNANCE CODE by FRC [Article] [PDF]
4. The UK corporate governance code - 2018 Corporate governance reforms
by KPMG [PDF]
5. Governance in brief - FRC issues new UK Corporate Governance Code by
Deloitte [PDF]
6. Terms of reference for the nomination committee by The Chartered
Governance Institute of UK and Ireland [Article] [PDF]
7. Terms of reference for the remuneration committee by The Chartered
Governance Institute of UK and Ireland [Article] [PDF]
8. Terms of reference for the audit committee by The Chartered Governance
Institute of UK and Ireland [Article] [PDF]
9. Code of ethics at a glance by CIMA [Article]
10. CIMA’s code of ethics [PDF]

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Trial version ends here. The rest is only available in the full version.
Refer to the index section below for all the topics available in the full version.
Purchase

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Index
Here is a list of all the topics and sub-topics in the entire note pack. If you are
using a digital copy, you can try using the “Find” option to easily find references
to a certain keyword you are looking for.

Try pressing the “Control key” + “F key” ( “Command key” + “F key” on mac) on your keyboard to
use the find option.

Welcome 3
License 3
How to read 3
Using the google docs online version 4
Using the google docs app 4
Download a PDF version 4
Print a PDF copy 5
Included things 5
Contents 5
Lessons 5
Changelogs 5
Components 6
Definitions 6
Introductions 6
Potential exam points 6
Notes 7
Sidenotes 7
Links 7
Additional reading 7

Contents 8

CIMA syllabus 9
E1: Managing Finance in a Digital World 11
E1 Exam 13
Resources 14
CIMA research papers and articles 14

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Creating a vision for future series 14

Re-inventing finance for a digital world 15
Other CGMA whitepapers and articles 15
CIMA official study text 15
Other resources 16
Lessons and the syllabus 16
Exam weightings 17

L1. Role of the finance function 20

Introduction 20
The new norm 20
Organizations and their operating environments 21
Business sectors 21
Business types 22
Profit-oriented organizations 22
Not-for-profit-oriented organizations 23
Objectives of Profit-oriented and Not-for-profit-oriented
organizations 23
Co-operatives (Mutual organizations) 23
Multinational corporations (transnational corporations) 23
Public services 24
Non-Governmental Organizations (NGOs) 24
Effect of business types on the finance function 24
Mission, vision, and objectives 25
Vision 25
Examples 25
Mission 26
Key areas 26
Examples 26
Objectives 27
SMART Objectives 27
Functions of objectives 27
Objectives hierarchy 28
Financial and non-financial objectives 28
Critical Sucess Factors (CSFs) 29
Key Performance Indicators (KPIs) 29

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CSF vs KPIs 30
Business Environment 30
Micro environment (task environment) 31
Macro environment (general environment) 31
The digital world 31
Technological connectedness 32
Stakeholders 33
Stake 33
Shareholders vs stakeholders 33
Types of stakeholders 33
Internal stakeholders 34
Connected stakeholders 34
External stakeholders 35
Stakeholder conflicts 35
Stakeholder management 36
Criticisms of the power matrix 37
How the finance function creates and preserves value 37
Value 37
Economy, Efficiency, Effectiveness 38
The role of accountants in a digital world 38
The functions in organizations 39
What is the finance function 39
Key roles of the finance function 39
Basic activities of finance - Information to impact framework 40
The value matrix of the finance function 41
The value finance brings to an organization 44
Key activities of finance function 44
Planning 45
Forecasting 45
Resource allocation 45
Performance management 46
Control 46
Financial reporting 46
Ethics in finance function 47
Corporate governance 47

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Separation of ownership and control 47

Agency problem 48
Risk of poor corporate governance 48
Approaches to corporate governance 50
US Sarbanes-Oxley Act (SOX) 50
The UK corporate governance code 51
Principles in UK corporate governance code 52
Board 52
Annual General Meeting (AGM) 53
Roles in UK corporate governance code 53
Chief Executive Officer (CEO) 53
Chairman 53
Executive Directors 54
Non-Executive Directors (NEDs) 54
Senior Independent Director (SID) 55
Committees in UK corporate governance code 56
Nomination committee 56
Remuneration committee 57
Audit Committee 58
Committee Summary 59
Ethics 60
Advantages of being ethical 61
CIMA’s Code of Ethics 61
Corporate code of ethics (Code of conduct) 62
Ethical Conflicts 63
Corporate Social Responsibility 64
Types of CSR strategies 65
Benefits of CSR 66
Arguments against CSR 67
Corporate Digital Responsibility 67
+ Potential exam testing points 68
+ Additional reading 70

Trial version ends here. The rest is only available in the full version.
The rest of the topics are listed below

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L2. Activities of finance professionals 72

Introduction 72
The Information to Impact framework 73
Assembling information 75
Data and information 76
Quantitive vs Qualitative information 76
Quantitive information 76
Qualitative information 76
Financial and non-financial information 77
Quality of information 79
Collecting data 79
Data sources 80
Internal data sources 80
External data sources 81
Environmental Scanning 82
Cleansing data 82
Connecting data 82
Analyzing for insight 83
Analyzing quantitative information 84
Advising to influence 84
Information overload 85
Applying for impact 85
Business partnering 86
Business partnering skills 86
+ Potential exam testing points 87
+ Additional reading 88

L3. Technology affecting business and finance 90

Introduction 90
Industrial Revolutions 90
History of the Industrial Revolution 90
4th industrial revolution 92
Key features of the 4th industrial revolution 93
Characteristics of the 4th industrial revolution 93
Changes caused by the 4th industrial revolution 94

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Key technologies driving the 4th Industrial revolution 94

Cloud computing 94
Key points 95
Cloud types 95
Advantages and Disadvantages of cloud computing 96
Big Data 97
Main characteristics of Big Data 97
Data sources of big data 98
Structured data vs Unstructured data 98
Data Analytics 99
Key impacts of data analytics 99
Benefits of data analytics 99
Process automation 100
AI 100
Machine learning 101
Cognitive computing 101
Data visualization 101
Popular data visualization tools 102
Advantages and Disadvantages 103
Internet Of Things (IoT) 104
3D Printing 104
3D Printing process 105
3D Printing Common usages 106
Advantages and Disadvantages of 3D printing 106
Distributed Ledger Technology (DLT) 107
Blockchain 107
Blockchain functions 107
Key points 108
Cryptocurrency 109
Blockchain features 109
Mobile Technology 109
How mobile technology impacts organizations 110
How mobile technology impacts the industries 110
+ Potential exam testing points 111
+ Additional reading 112

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L4. How the finance function uses digital technology 114

Introduction 114
What is finance function 114
Core modernization tools and exponentials 115
New technologies and their use in the finance function 116
Cloud computing 116
Big data and Analytics 116
Elements that are impacted by big data 117
Importance of big data in internal audit 117
Process automation 117
Risk of automation 117
Advantages and Disadvantages of process automation 118
Artificial Intelligence 119
Data visualization 119
Benefits of data visualization 120
KPIs (Key Performance Indicators) 120
KPI Example 121
Blockchain 121
Advantages and Disadvantages of blockchain 122
Blockchain and Finance function 123
Financial reporting 123
Cross-border payments 123
Smart contracts 123
Security and Traceability 123
Other benefits of blockchain in finance and accounting 123
IoT 124
Mobile technology 125
Advantages for businesses 125
3D Printing 126
Digital mindset 127
Digital mindset definition 127
Key digital skills 128
Basic digital literacy 128
Technology know-how 128
Mindset and behaviors 129

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Summary 129
The 5 Keys to a Digital mindset 130
Change adept organizations and growth mindset 131
Automation and the Finance function 131
Types of human-machine collaboration 132
Skills required by the finance professionals 133
Garbage In Garbage Out (GIGO) 134
Automation paradox 134
Ethics of technology usage 135
Ethical considerations 135
Practical examples of corporate ethical considerations 136
Corporate Digital Responsibility (CDR) 136
General principles in CDR 137
Legal considerations of technology usage 138
General Data Protection Regulation (GDPR) 138
GDPR Principles 138
GDPR individual rights 139
GDPR Controllers and Processors 141
Controllers 141
Processors 141
+ Potential exam testing points 142
+ Additional reading 144

L5. Data and the finance function 146

Introduction 146
Data and information in a technological world 147
Context dependant nature of Data and Information 147
Quality information 148
Information for decision-makers 149
Strategic decisions 150
Tactical decisions 150
Operational decisions 150
Technology producing data 151
Enhancing data for decision makers 152
Benefits of using data for decision-makers 152
Using Data and technology for sales and marketing 153

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Data requirements for marketing 153

Data requirements for marketing mix 154
Other data requirements for the marketing function 155
Marketing data sources 156
Web crawlers (Spider Bots) 156
Using Data and technology for operations 157
Benefits of data for operations 157
Digital assets and DAMs 158
Creating value from digital assets 158
Digital Asset Management System (DAM) 159
Features of a DAM system 159
Benefits of a DAM system 160
Data protection and privacy 161
Assessing data security 161
Sound data management 162
Chief Data Officer (CDO) 162
Culture 162
Training 162
Data strategy 163
+ Potential exam testing points 164
+ Additional reading 165

L6. Usage of data in Creation and Preservation of value 167

Introduction 167
Data strategy and planning 168
Data strategy 168
Feedback 168
Data engineering, extraction and mining 170
Extraction, Transformation and Loading (ETL) 170
Main functions in an ETL system 170
Extract 170
Transform 171
Load 171
Business Intelligence (BI) 171
BI stacks 172
BI and new technologies 173

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Data modeling, manipulation and analysis 173

Data modeling 173
Stages in data modeling 174
Advantages of data modeling 174
Data manipulation 175
DML 175
Data analysis 176
Big data and its impact 176
Challenging characteristics of big data 176
Volume 177
Velocity 177
Variety 177
Veracity 177
Data science 178
Data scientists 178
Data scientists and Finance professionals 178
Hadoop 179
Communication of data and insight 179
Data visualization 180
Importance of data visualization 180
Effectiveness of data visualization 181
+ Potential exam testing points 182
+ Additional reading 183

L7. Shape and structure of the finance function 185

Introduction 185
Transformation of the finance function 185
Organizational structures 186
Mintzberg’s theory on organizational structure 187
Organizational configurations by mintzberg 188
Key coordination mechanisms 189
Typical/Traditional organizational structures 190
Entrepreneurial structure 190
Functional structure 191
Divisional structure (Product-based structure) 192
Geographic structure 193

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Matrix structure 195

Structural dimensions of an organization 196
Centralization and decentralization 197
Centralized structure 197
Decentralized structures 197
Scalar chain and span of control 197
Scalar chain 198
Span of control 198
Tall or Flat structures 198
Tall structures 199
Flat structures 199
Organizational boundaries 199
Impact of technology on the structure of the finance function 199
Other organizational developments 202
Shared Service Centres (SSCs) 202
Benefits of SSCs 203
Limitations/Disadvantages of SSCs 203
Outsourcing (BPO) 204
Service Level Agreements (SLA) 205
Benefits of outsourcing 205
Limitations/Disadvantages of outsourcing 205
Virtual organizations (Network organizations) 206
Offshoring (Relocation) 206
Advantages of offshoring 206
Limitations/Disadvantages of offshoring 207
Alliances 207
Transaction costs 207
Transaction cost theory 208
Degree of impact on transaction costs 208
Reasons for the transaction costs 209
Business Process Reengineering (BPR) 209
+ Potential exam testing points 210
+ Additional reading 210

L8. Activities in different levels of the finance function 212

Introduction 212

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Level 4 - Finance operations 216

Financial reporting 216
Financial statements 217
Types of financial statements 217
Uses of financial statements 218
Important ratios generated from financial statements 219
Management accounting 220
Cost schedules 220
Budgets 221
Variance reports 222
Management accounting vs Financial Accounting 222
Treasury management 223
Key roles of treasury management 223
Working capital management 224
Working capital components 224
Cash management 225
Financing 225
Debt 225
Equity 226
Financial gearing 226
Tax 226
Tax avoidance 226
Tax evasion 227
Tax mitigation 227
Foreign currency management 227
Internal audit 227
Purpose of the internal audit 228
Scope of internal audit 229
Fraud 229
Causes of fraud 229
Indications of fraud 230
Impact of fraud 230
Limitations of internal audit 230
Level 3 - Specialist areas 231
Financial Planning and Analysis (FP&A) 231

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FP&A responsibilities 232

Taxation 232
Tax compliance 233
Tax planning 233
Project management 233
Project appraisal 234
Project appraisal activities 235
Level 2 - Strategic partnering for value 235
Communicate insight to influence users 236
Business partnering 236
Level 1 - Strategic leadership of the finance team 237
Activities of CFOs 237
Skills required for a CFO 238
Technological impacts on the activities of the finance function 239
Automation and the diamond shape 239
Opportunity or Threat? 241
Opportunities offered by technology 242
+ Potential exam testing points 243
+ Additional reading 243

L9. Operations and finance 245

Introduction 245
The role of the operation function 246
Operation process 246
4Vs of operations 248
Porter's value chain 248
Primary activities 249
Secondary activities 249
Process design 250
Process map 250
Product and service development 251
Finance function in product development 251
Qualities unique to services 252
Supply chain management 253
Upstream and Downstream 254
Cousin’s strategic supply wheel 255

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Supplier relationship 256

Technologies for supplying 256
Material requirement planning (MRP1) 256
Usage of Material requirement Planning 257
Manufacturing Resource Planning (MRP2) 257
Enterprise Resource Planning (ERP) 257
Quality management 258
Quality assurance 258
Quality control 258
Quality-related costs 259
Operation improvement 259
Statistical Process Control 260
Total Quality Management (TQM) 261
Fundamental principles of TQM 261
Kaizen 261
Characteristics 261
Tools in kaizen 262
Six Sigma 262
Lean thinking 262
Characteristics of Lean thinking 263
Benefits of Lean thinking 263
Limitations of lean thinking 264
Just In Time (JIT) 264
Requirements for a JIT approach 264
Reverse Logistics 265
Benchmarking 266
Operation and finance 266
Purchasing (procurement) 266
Production 267
Operation KPIs 268
+ Potential exam testing points 269
+ Additional reading 270

L10. Marketing and sales and finance 272

Introduction 272
The role of marketing function 272

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Push and Pull marketing 273

Marketing environment 273
PESTEL 273
SWOT 275
Marketing mix 275
Product 276
Product levels 276
Core product 276
Actual product 276
Augmented/Extended product 276
Price 277
4Cs of price 277
Pricing tactics 277
Market penetration 277
Market skimming 277
Dynamic pricing 278
Price discrimination 278
Going rate price 278
Captive product pricing 278
Perceived quality pricing 278
Price leadership 279
Predatory pricing 279
Promotion 279
AIDA Sequence 279
Place 280
Kotler's 3Ps 280
People 280
Processes 280
Physical evidence 281
Marketing techniques 281
Market research 281
Primary research 282
Secondary research 282
Market segmentation 283
Segmentation bases 283

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Segment validity 283

Market targeting 284
Targeting strategies 284
Undifferentiation (mass) 285
Differentiation 285
Concentration 285
Market positioning 285
Porter's positional strategies 285
Marketing strategies 286
Guerilla 286
Viral 286
Experiential 287
Digital marketing 287
Product 287
Product development 287
Product life cycle 287
Stages in product life cycle 288
Introduction 288
Growth 288
Shakeout 289
Maturity 289
Decline 289
Big data and marketing 289
Use of big data in marketing 289
Demand forecasting 290
Customer experience enhancement 290
Monitoring multi-channel transactions 290
Identify customer preferences 290
Market segmentation and customization 291
Product/Service development 291
Decision-making 291
Customer feedback 291
Marketing and Finance 291
Finance function and the other functions in the context of KPIs 292
Marketing KPIs 292

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+ Potential exam testing points 293

+ Additional reading 294

L11. HR and finance 296

Introduction 296
Role of HR 296
Career Management 297
Hard vs Sof HRM 297
Recruitment 297
Determining vacancies 298
Job analysis 298
Job description 298
Person specification 299
Source candidates 299
Selection 300
Application forms 300
Selection interviews 300
Selection tests 301
Assessment centers 301
References 302
Induction 302
Training and Development 302
Training 303
Development 303
Training and Development process 303
Training methods 304
Training evaluation 304
Benefits of Training and Development 305
To individuals 305
To organization 305
Performance management 306
Steps in performance management 306
Appraisals 306
Lockette's barriers 307
Motivation 308
Incentives and practices 308

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Psychological contracts 308

Employee involvement 308
Workforce flexibility 308
Reward systems 309
Maslow's hierarchy of needs 309
Rewards 311
Reward methods 311
Basic pay 311
Performance-related pay 311
Profit sharing schemes 312
Share options 312
Benefits 312
Termination 312
Redundancy 312
Dismissal 313
HR and Finance 313
HR KPIs 314
+ Potential exam testing points 315
+ Additional reading 316

L12. IT and finance 317

Introduction 317
Role of IT 317
Information systems (IS) 318
Information technology (IT) 318
IT function 318
IT Systems 318
MIS 319
EIS 319
DSS 319
TPS 320
ES 320
OAS 320
Knowledge and IT 320
Data, information, and Knowledge 320
Knowledge Management Systems 321

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IT trends 322
IT infrastructure 322
Enabling change 322
Geo-dispersed teams 323
Increase in remote working 323
Formation of virtual teams and organizations 323
Challenges of virtual teams 324
IT and business relationships 324
Customer Relationship Management Systems (CRMs) 325
Features of CRMs 325
Benefits of CRMs 325
IT benefits and costs 326
CBA 326
Initial vs Running costs 326
Benefits 327
Privacy and Security 327
Systems architecture 328
Centralized architecture 328
Decentralized architecture 329
Data flows 330
Big data and IT 330
IT and finance 331
IT KPIs 332
+ Potential exam testing points 333
+ Additional reading 333

Index 335

Changelog 354

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Changelog
We add new content, modify the content, and update content based on new
information. For example, we might add new potential exam testing points based
on our student feedback. Here is a list of changes we made from the initial
publication.

Date Version Changes

2022/08/12 0.10 Notes added

2022/09/27 0.11 Notes completed

2022/09/29 0.3 Welcome section added

2022/09/29 1.0 Initial publication

2022/10/01 1.1 Formatted the L1 and added new content,

references, resources, potential exam testing
points, and additional reading links

2022/10/06 1.2 Finished formatting

2022/10/07 1.3 Added important links

2022/10/07 1.3 + Changed inner left cover

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