Overview
Finance is a field of economics that deals with the study of money, capital markets, and how funds are managed. It includes areas like business, personal, public, fiscal, and monetary finance. In Farseer, the focus is on business (corporate) finance.
Corporate finance is about increasing company value for shareholders, choosing funding sources, managing capital structure, and using tools to allocate resources.
Financial managers focus more on short-term financial health (profitability, cash flow and working capital management), ensuring the company can operate safely and profitably. Their key tasks are:
Repaying debts on time.
Maintaining enough cash flow for daily expenses (materials, salaries, bills, rent).
Forecasting the need for funds based on budgets.
Deciding the right mix of debt and equity (capital structure).
Farseer helps financial managers handle these challenges through financial models, which make managing business finance easier and more efficient.
Fundamental Financial Statements
The three key financial statements are the balance sheet, income statement, and cash flow statement. Together, they provide a complete picture of a company’s financial position, performance, and liquidity.
Balance Sheet: Shows assets, liabilities, and equity at a specific date. It presents what the company owns and how those assets are financed, offering a snapshot of its financial position.
Income Statement: Reports revenues and expenses over a period, resulting in profit or loss. It also serves as the basis for calculating financial indicators such as liquidity, profitability, solvency, and efficiency.
Cash Flow Statement: Tracks cash inflows and outflows from operations, investments, and financing activities, making it a key measure of liquidity.
Consolidation: When a parent company owns more than 50% of another company (subsidiary), their financial statements are combined into consolidated reports.
CAPEX (Capital Expenditures/Capital Costs) are funds that a company spends on purchasing, upgrading or funds invested in long-term assets such as buildings, equipment, or technology. They represent larger, one-time investments that bring value over time.
Examples: buying machinery, constructing or renovating facilities, investing in software, or upgrading infrastructure.
OPEX (Operating Expenditures) are costs of daily business operations. Unlike CAPEX, they do not create long-term assets but keep the business running.
Examples: salaries, rent, utilities, materials, marketing, and equipment maintenance.
In short, CAPEX = long-term investments, while OPEX = ongoing operational costs.
Cost Allocation with Allocation Keys
Cost Allocation with Allocation Keys is the process of assigning cost to different segments within an organization using predefined criteria/keys. This method helps in the fair and precise distribution of costs within different departments of a company.
Allocation Keys are criteria used to distribute costs fairly across departments or activities, based on how resources are consumed. Common allocation keys include:
Number of employees – for HR-related costs (wages, training, office space).
Square footage – for facility costs (rent, utilities, cleaning).
Machine hours – for equipment-related costs (maintenance, depreciation).
Revenue or sales – for allocating administrative costs by contribution.
Example: A company must allocate €10,000 in electricity costs to three departments using square footage as the key:
Production (50%) → €5,000
Administration (30%) → €3,000
Sales (20%) → €2,000
This method ensures costs are distributed transparently and in proportion to actual resource usage, improving reporting accuracy and cost control.
Placing in the Context of Accounting
The General Ledger (GL) is the main document in an accounting system that contains all financial transactions of the company. GL provides a comprehensive overview of the organization’s financial state, it shows all revenues, expenses, liabilities and equity. GL data is often the basis for reporting and tools like Farseer.
Accounts: Records that track specific types of assets, liabilities, income, or expenses. Each account has a unique name and number.
Journal Entries: Transactions are first entered in a journal (with date, description, debit, and credit) and then posted to the appropriate accounts in the GL. For example, buying inventory increases the “Inventory” account and decreases “Cash.”
Synthetic vs. Analytical Accounts
Synthetic Accounts: Main accounts in the GL, used for summarized financial reporting (e.g., total assets, liabilities, revenues).
Analytical Accounts: Sub-accounts that provide detailed tracking and analysis of transactions, giving more precise insights into business activities.