The Finance function...

Another day of idleness at office and I started thinking about the working of a Finance function in an organization. Since I have the liberty of walking down to the highly co-operative Finance team and getting the details from them in a generic perspective it made it a lot easier.

After having seen the Q2 results of various industries over the last month, I was in particular wondering about the amount of impact forex rate fluctuations can have on the balance sheets of an organization which is locally registered (and hence the balance sheet should reflect the local currency). It is a no-brainer to guess the fact that the magnitude of the impact is in direct proportion to the size of the deal. A 10 paisa (INR) can make a difference of 100 million in a $1bn deal! Now, though the amount looks to be huge, an organization should concentrate on the factor - 'Percentage contribution of the revenue'; Saying, what % of the total revenue is this 100M contributing to. For a SME, yes it is a huge %; likewise for a larger enterprise, it might not make a huge difference! The enterprises usually get into a contract with the bank where they agree on a future rate in dealing with the currency conversion. This way the risk of currency fluctuation is mitigated to some extent.

During the conversation, I also was informed about the way bank accounts are created in order to avoid the conversion rates (forex transfer rates). Since the % deduction in the forex transfer depends on the bank, it becomes fairly important to avoid this. A forex account specific to the currency of operation is the answer for this. By making this forex account local to the client site, it only avoids the transfer rate. However, the macro-economic parameters (service tax etc.) are country specific and viewed with a bigger picture. Here, it depends on the kind of work being done. If it is a bodyshopping (the service provider just provides resources and are not responsible for what work is done by him), services taxes are most likely to be applicable depending on the country's corporate laws. If a complete development work is done, there might not be a service tax. But all this highly depends on the country with which the engagement happens.

I also worked out a high level Team structure for an IT industry which has to be in place for smooth operation. The team size and intermediate hierarchies depend on the size of the organization.