The past few years have been a toss-up for many businesses. Who could have predicted, in 2019, that a global pandemic would lead to record low interest rates and drive massive market gains before crashing down – then slowly returning to normal? In just five short years, enormous changes happened across business enterprises, and those unable to adapt failed.
Unfortunately, for many, that’s developed into a short-term reactionary mindset that deals with problems as they arise rather than effectively forecasting and accounting for multiple contingencies.
Strategic finance seeks to smooth out those rough edges by forcing a long-term perspective fed by a range of data sources and unlocked analytics – not merely the three-statement financial endeavors of yore.
What is Strategic Finance?
Strategic finance is an effort to bring traditional financial functions into the 21st century. We have access to a wide range of automation tools, data sources, analytic platforms, and enough KPI generators to fill a dictionary. Still, legacy financial analysis and forecasting – focused on the three primary financial statements – are reflective rather than proactive.
That difference means past analysis and traditional financial management assessed metrics, ratios, and more in a bid to shape future action and decision-making within the financial function itself. In this way, overreliance on single-source statistics turned financial management into a game of financial engineering in many cases that, divorced from the company’s operational arms, resulted in mismanaged accounting cycles or a general managerial disregard for what the financial teams offered.
On the flip side, strategic finance seeks to reintegrate the financial function into broad company operations with a wider lens than in the past, i.e., focus on success and profitability planning for years down the road rather than the quarter-to-quarter knife fight that historically tended to take precedence. To that end, well-managed strategic finance also aggregates data from the entire spectrum of tools and platforms the company leverages – financial and otherwise – to generate a more holistic picture of the company’s outlook. From there, management can best determine how finance and operations interplay to drive more informed decision-making.
Why is Strategic Finance Important
Understanding how finance functions work with and fit into the company’s bigger overall picture improves decision-making by bringing all stakeholders into the conversation; incorporating a range of bottom-up and top-down feedback from staff and stakeholders in strategic finance helps unlock insight that otherwise goes unsaid and unnoticed during legacy financial functions.
Why Do Businesses Need Strategic Finance?
As the saying goes, we can’t manage what we don’t measure. Strategic finance puts effective measurement at the fore, beyond basic financial statements and ratios analysis. By integrating the many KPIs and data sources in modern businesses and leveraging automation tools to speed up workflows, strategic finance helps business owners and managers better understand the company’s underpinnings – which, in turn, drives more informed analysis and assessment.
Moreover, strategic finance forces executives to “take the foot off the gas” regarding planning horizons. Whether public or private, companies tend to think in quarterly cycles. This type of short-term thinking, in turn, can create nasty incentives that may briefly boost a company’s share price or cash flow but at the expense of long-term growth and customer satisfaction. In effect, strategic finance is a method that forces teams to step back and consider the forest rather than focusing too narrowly on individual trees.
Bottom line – by focusing solely on legacy financial functions, you’re effectively working two steps behind your business. By leveraging strategic finance principles, you’re better equipped to truly forecast and steer the ship in the best direction over the long run while improving a whole range of critical business functions that three-statement modeling simply doesn’t touch.
Key Elements of Strategic Finance
Of course, incorporating strategic finance principles is impossible without a solid understanding of the fundamental tenets and practices as a foundation for implementation. While not an exhaustive list by any means, these “big picture” concepts tend to drive strategic finance functions across most business types and sizes:
Financial Planning and Analysis
Those unfamiliar with strategic finance often think the concept is a mere rebrand of financial planning and analysis (FP&A). Though FP&A is a big part of effective strategic finance, legacy FP&A tends toward the short term more than the strategic mindset. Adapting traditional FP&A practices into strategic finance demands greater forecasting depth and improved analytic capabilities.
Measuring What You Manage
Since strategic finance aggregates a whole range of financial and operational data sources, strategic finance implementation can sometimes get bogged down in the metaphorical weeds as some confuse “all the data” with “the best data.” While you aren’t restricted to financial figures, think deeply about what you want to track and how to tie it into the financial function best. Customer lifetime value? Probably a good KPI to incorporate. Vanity metrics like total Instagram followers without an eye toward conversion or other reproducible and actionable stats? Best to skip when implementing strategic finance.
Capital Structuring
Often, effective capital structuring took a short-term approach in the cheap debt era. But ZIRP has come to a close, making strategic management of capital structure more important than ever. Instead of just picking the most inexpensive option in the short term, strategic finance forces analysts to think long-term to account for macroeconomic conditions while integrating better with operational teams to best model planned initiatives, sales, and more. This way, you can let your outlook and strategic planning drive your capital structure – rather than vice versa.
Other Key Elements of Strategic Finance
Beyond these big three, your strategic finance considerations will likely include:
- Treasury management: Typically a “knife fight” function, strategic finance takes a long view of treasury management to ensure improved liquidity across the planning cycle rather than maximizing cash flow quarter-to-quarter alone.
- Risk management: Strategic finance forces planners to get creative; by taking a long view of risk management, executives can better avoid minor problems today before they’re catastrophic tomorrow.
- Tax strategy: Rather than trying to cut down on taxes today at the expense of next year’s filing, strategic tax management looks at all operational costs and line items to optimize and minimize tax payments across a multi-year span, i.e., strategic finance may drive asset purchase windows to maximize depreciation within a specific window in which management expects higher sales than usual.
What is Strategic Financial Management?
Strategic financial management describes the action of implementing strategic finance within a workplace. Those freshly incorporating the principles know there can be a steep learning curve as institutional inertia takes time to overcome. Likewise, those used to fighting for short-term gains rather than long-term wins may take some time to adapt their perspective when initially managing strategic financial initiatives.
Strategic vs. Tactical Financial Management
In this context, tactical financial management takes the place of short-term thinking and reactionary movement. Though tactical financial management takes place on a shorter timeframe, it is a far cry from legacy financial management of the past – rather than looking back to plan forward, tactical financial management is directly fed and informed by the strategic plan. In effect, tactical financial management is the “on-the-ground” plan implementation, while strategic financial management informs the wider picture.
Benefits of Strategic Financial Management
The biggest benefit to effective strategic financial management is longevity. By taking a longer-horizon perspective, you ensure that your company is best equipped to deal with short-term difficulties and hurdles without overreacting by considering the big picture. Beyond that, expected benefits companies enjoy after implementing strategic finance include:
- Better risk management, internal controls, and fraud detection insight.
- Improved growth prospects across multiple timeframes.
- Better cash and liquidity management alongside preferred capital structuring.
- Smoother operations when automation tools are fully leveraged as part of a strategic finance plan.
- More value – period.
Conclusion
Taking a long view of things is always better than maximizing any financial metric in the short term – just ask Boeing. While our economic and business culture hasn’t entirely embraced the long view, changing company culture to look at the bigger picture through effective strategic finance implementation is an important first step on the long road to improved operations – and profitability.
