Back to Glossary

Financial Operations

What Are Financial Operations?

Transactions are one of the basic functions of business, as goods and services are exchanged for currency or cash.

How a business processes, records, and otherwise administers its transactions is referred to in the broad sense as financial operations.

Traditionally, the term bookkeeping was used to describe how a business records its transactions. However, in the modern business world, transactions and the process of administering them has become much more complex and supported by digital technology.

Therefore, financial operations is an all-encompassing term that references the complete and evolved systems used by businesses for tracking and processing their transactions.

In What Context Are Financial Operations Used?

All businesses engage in transactions, which are the exchange of currency or money for a product or service that the business provides to its customers.

Businesses also engage in transactions with other businesses, for services and products or supplies that the business needs.

All transactions involve the exchange of currency or other products that have a monetary value. All exchanges of monetary value must be tracked and recorded in order to track and evaluate the business’s success.

Financial operations is a broadly defined term that encompasses a wide range of functions, especially in the modern business accounting world.

Traditional functions, such as bookkeeping and accounting are included in financial operations, but it also includes much more.

Recording and tracking financial transactions at the most basic and fundamental level is done through journal entries. These are the notations that staff make in the business accounting records to document and record all financial transactions.

All financial systems in the business are constructed on this fundamental building block.

Journal entries are recorded in the general ledger and subsidiary ledgers. These are accounting records that compile all financial transactions for a business. The general ledger is a master document that is used to produce other accounting records, in particular, financial statements like the balance sheet, income statements, and cash flow statements.

Businesses have many functioning operations that process and manage the various financial activities that are recorded in these documents. For example, accounts receivable refers to all transactions between the business and its customers, for which full payment has yet to be received.

Businesses typically have processes and systems in place to monitor, track, follow through, and collect on accounts receivable.

Similarly, businesses have systems, policies, and guidelines in place for credit management. Credit is extended to selected customers to provide them with other options for payment besides cash. This involves developing policies for evaluating the creditworthiness of customers and following through with them to ensure timely payments.

Payroll is the process of administering payment to employees for the work that they perform for the business. It involves tracking hours worked, benefits accrued, time off, vacation, overtime hours, sick time, tax, social security and retirement withholdings, and many other facets of compensation.

Cash management is the process of overseeing all of the cash payments made and received by the business. Cash comes in many forms and is a fundamental element of business operations. All transactions ultimately lead to cash and are the lifeblood of the business.

Accountants have many ways of managing cash and analyzing the way the business handles it. Petty cash refers to small amounts of cash that the business keeps on hand for incidental expenses.

Liquid assets, or short-term assets, are financial assets, such as accounts receivable that can be converted to cash in a relatively short-period of time. Cash flow is a metric for the amount of cash currency that a business can generate during an accounting period. It does not represent profit or loss, the business’s net worth, or its value.

Many businesses also engage in lending, either as a lender or a lendee. Business accounting tracks and manages loans, either as an asset or liability that must be repaid.

Larger businesses also are involved in the issuance of stock to shareholders. Equities management is the very detailed process of recording, tracking, managing, and analyzing stocks in the company, their value and their ownership.

Business operations include many other accounting functions, such as accounts payable, account reconciliation, and intercompany accounting for those businesses that are comprised of multiple brands under one corporate ownership.

All of these systems and functions together make up financial operations. Additionally, in the modern accounting world, businesses have adopted digital platforms to help with the processing of these separate but related functions.

For example, accounting automation, otherwise known as computerized accounting, refers to the use of software applications to perform the essential functions involved in the process of maintaining a business’s financial records.

Accounting automation is a hot topic for businesses and organizations looking to leverage digital technology to improve their accounting systems. It is becoming more popular as businesses and organizations see the advantages of migrating their accounting systems from a manual, spreadsheet dependent or paper-based system to one that is completely digital and automated.

In this context, financial operations has become a highly evolved, integrated, and wide-reaching functionality in the modern business world.


Why Are Financial Operations Important?

Financial operations are very important, especially in the world of modern business accounting, because of the nature of contemporary business models. In today's environment, businesses have become complex operations with multiple and disparate functions that can operate independently but are interconnected because they involve processing of financial transactions in one form or another.

Even small businesses are different today because of the sophistication of financial activity and the application of advanced digital technology.

The concept of financial operations unifies these functions under one structure and facilitates the more efficient management and oversight of all of their activities.