Adding Value to an Organization- as a result of Strategic Financial Management
July 27, 2016
By Larry Ventimiglio
Financial management, at the most fundamental level, is focused on managing an organization’s assets, liabilities, revenues, profitability and cash flow. Strategic financial management kicks it up a notch by also insuring that the organization remains on track to achieve both short-term and long-term goals, while maximizing value for shareholders from limited financial resources. Strategic financial management requires forward vision, as well as a clear and objective understanding of the business, the market, and its performance drivers.
Fundamental Elements of Financial Management
Reporting
Timely reporting of monthly, quarterly and annual financial information to internal and external stakeholders is a significant goal of financial management. It ensures that financial information is prepared in accordance with accounting principles and Financial Reporting Standards. This provides internal stakeholders — that is, owners and employees — with reliable and timely information on the performance and profitability of the business. Internal financial reports should be monitored versus pre-determined benchmarks (budgets), as well as key performance indicators (KPIs), in order to achieve the greatest value of the information as “decision support tools”. Additionally, the financial reports furnish suppliers with the information they require to determine the stability of the business, and enable governmental authorities (both State and Federal) to examine the tax obligations of the business.
Planning
Financial plans and forecasts aim at facilitating efficiency in the short-term and longer-term activities of the business. The planning process seeks to balance the organization’s operational and investment activities to its overall cash flow capabilities. Current and future cash flow projections determine the scope of short-term and long-term plans of the business. This goal ensures sufficient funds are sourced in good time and allocated to different business activities, based on a pre-determined playbook. Financial planning also ensures the business engages in profitable long-term investments. Otherwise, why make the investment? For example, capital budgeting analyzes the financial viability and profitability of long-term assets prior to procuring such assets. Every financial commitment needs to bring tangible value to the organization in the form of Return On Investment.
Managing Risks
Risk management is a high profile goal because it touches on potential vulnerabilities. Financial management prescribes the appropriate contingency measures for both operational and strategic risks. Insurance and automated financial management systems help business owners and employees to prevent or reduce the risks from theft, fraud and embezzlement, as well as external sources. Internal and external auditing processes also enhance the detection of fraud and other forms of financial malpractices.
Exerting Controls
The financial management function exerts internal controls over financial resources with the objective of ensuring efficient resource utilization. These controls enhance scrutiny of financial transactions to prevent business owners or employees from violating financial principles or undermining transparency. The goal of enhancing internal financial controls is pursued through continuous oversight by the senior financial management staff and internal auditors. Failure to exert internal financial controls could spell unprecedented consequences for the business, as was the case of financial reporting scandals by Enron, Tyco and WorldCom in the early 2000s.
Strategic Financial Management Tools
In addition to the fundamental financial management elements described above, strategic financial management tools drive the business toward longer-term goals and add value for stakeholders. Several of these tools are outlined below.
Strategic Planning
Keeping the organization on track to achieving both short-term and longer-term goals requires a clear and documented vision statement as well as a set of forward looking achievement goals. Organizations engage in strategic planning activities to create a mission statement, establish operational and financial objectives, allocate limited resources, align operations to accomplish the organization’s mission and insure that stakeholders are working collaboratively toward defined goals. The strategic planning process leads to decisions and actions that define what an organization does, the customers it serves, how the organization completes required activities and how the organization will measure success. At specific intervals, management periodically assesses the progress achieved to date and repeats the planning process (annual budgets) to ensure the strategic plan remains an effective operational road map.
Free Cash Flow
Free cash flow is a measure of an organization’s financial soundness and shows how efficiently its limited financial resources are being utilized to generate additional cash for future investments. It represents the net cash available after deducting the investments and working capital increases from the operating cash flow. Organizations need to use this metric when they anticipate substantial capital expenditures in the near future.
Profitability Ratios
This metric measures the operational efficiency of an organization. It also identifies inefficient areas that require corrective actions. This tool measures profit relationships with sales, total assets, and net worth. Organizations need to set Key Performance Indicators (KPIs) in this area to insure efficient operating performance, or when they need to improve operating performance.
SWOT Analysis
A SWOT analysis is a relatively common strategic planning tool that managers can use to evaluate both internal and external factors which may impact (positive and negative) the ability to achieve goals. It involves creating a list of the business’ internal strengths and weaknesses, as well as the external opportunities and threats it faces. This process can help managers create strategies to exploit strengths and opportunities or minimize weaknesses and avoid threats.
Cost-Benefit Analysis
A cost-benefit analysis is a tool that can help managers choose between two or more different courses of action. In this analysis, managers estimate the amount of incremental revenue AND incremental profit they expect a project to earn versus the expected costs of pursuing the project. By financially evaluating several different projects, managers can determine which project is expected to produce the greatest benefit to the organization.
Outside Advice
While entrepreneurs and small business owners may be experts in their chosen skill set or industry, they quite often are not experts in actually managing a business. As a result, they often seek outside support to aid in the strategic decision making process. This is where management consultants with broad and diversified backgrounds can provide objective and balanced solutions and support, and as a result, they add value.
The Role of Strategic Management
While the strategic plan provides the forward vision road map for the organization, strategic management engages in the decisions and actions which permit the strategic plan to evolve as the organization’s operating environment, objectives and operating requirements change as it moves forward through time. Quite often, the strategic financial manager (CFO) tends to be the point person in leading this process, primarily because it falls within the scope of his/her core competencies. Examples of changing environment include competitive opportunities or challenges, changing market conditions, changing consumer preferences, new product/service developments, vendor relationships, regulatory compliance, tax considerations, need for organizational re-alignments, etc. Over the course of the journey, management takes corrective actions and adjusts strategies, as necessary based on these types of factors. Generally, the CFO leads these tasks, or is a leading team contributor on the management team performing these tasks.
The Bottom Line
Financial management is the area of the business where you interpret and USE the financial reports as “decision support” tools to make the business more successful. It requires a good financial reporting system AND a good financial manager to initiate “meaningful” reporting, objectively analyze and interpret the information in the reporting, and drive the organization toward improving operational performance.
Strategic financial management needs to possess forward vision, and enable the organization to accomplish daily financial objectives as well as “big picture” strategic financial objectives over the horizon. Strategic financial management bolsters an organization’s ability to macro-manage (from the top-down). Several examples I’ll site include:
- Manage proactively rather than reactively
- Provide better decision-support tools for key financial considerations
- Supporting management in setting challenging, yet achievable, sales goals
- Drive the organization toward continuous improvement in performance and profitability through operational analysis
- Provide and lead toward a more strategic financial vision and direction for the organization
- Foster better business “partnering relationships” with lenders and/or investors which facilitates borrowing needs
- More effectively managing working capital needs
- Controlling investment and operational spending
- Promote a “value-added” business culture throughout the organization
Plans, processes, and tools are all helpful in driving any business toward strategic success. However, execution of positive, value-driven actions is where most businesses fail because many of them lack a strategic financial manager to lead. Additionally, objectivity, stability, and balance are so vitally important in achieving strategic business success, and many small business owners are far too emotionally attached to the business to lead these activities effectively. Every business needs to possess a key manager that contributes objectivity, stability, and the balance needed to drive the business through opportunities as well as challenges on the path toward strategic success. In most cases, this tends to be the strategic financial manager, who often drives the “corporate conscience” into the future.
How is your organization performing in these areas?
What does “success” mean to YOU?
Do you need help in driving your business’ path toward success? If your organization lacks a strategic financial manager, let’s talk because I’m here to help. Additionally, I have a limited number of engagement dates available, beginning in October.
Also, visit my website @ www.LJVBusinessSolutions.com
