Founding a new company is a leap of faith. It takes courage, careful planning, and often a lucky break or two to get off the ground. But that’s just the beginning of the journey.
Evolving to a state of financial prosperity requires a commitment to strategic finance. Growth adds levels of financial complexity that are not present during the startup phase. Envisioning that growth is easy. Financing it is where the challenge lies.
What is strategic finance?
According to Mosaic, strategic finance is “the practice of translating operational data into financial insights.” Ideally, you’ll want this to happen in real time. We’ll get into that in more detail below. For now, let’s simplify this by breaking down how business data can influence financial planning.
Let’s start with sales and marketing. The tools available for these business functions track leads, prospects, conversions, sales, and ROI. Those numbers are used to create and refine marketing campaigns. With strategic finance, they’re also a factor in corporate budgeting to allocate costs and set revenue projections. The data helps drive the financial decisions in these areas.
Apply the same concept to manufacturing. Rising costs and limited supply caused many businesses to adjust their financial expectations in the aftermath of the 2020 pandemic. Several of them are still ramping back up because they’re planning at a high level, either annually or quarterly. That said, weekly or monthly strategic financial planning could have them producing at a higher level right now.
This process involves more than just analyzing financial reports. The importance of the balance sheet, income statement, and cashflow statements should not be underestimated, but they’re reports of what has already occurred in the last quarter or fiscal year. Effective strategic finance requires real time data so decisions can be made in between reporting periods.
What is the difference between strategic finance and FP&A?
Growing businesses often find themselves partnering with finance teams to increase efficiency and cut down on internal labor costs. Modern finance teams employ strategic finance because it’s a proactive approach to financial management. FP&A relies on performance reports from previous quarters and fiscal years, making it a more reactive approach.
It’s important to emphasize here that strategic finance and FP&A are not competing functions. Successful businesses don’t do one or the other—they do both. Strategic finance is used to make business decisions in real time to ensure that reporting at the end of the period shows a healthier bottom line to investors and shareholders.
Another way to look at this is that FP&A is for setting long-term financial goals and analyzing company performance at a macro level. Strategic finance is the process of using data to make financial decisions between reporting periods. This approach gives companies the ability to make real-time adjustments when market conditions change, not months after the fact.
Most companies have some type of financial planning and analysis embedded in their culture. Implementing a strategic financial approach requires a change in the mindset of employees involved in accounting, marketing, production, and data gathering. The importance of KPIs should be emphasized so everyone understands what the data is being used for.
Which teams or job roles are involved with strategic financial planning?
The leadership team needs to buy into any financial strategy for it to be effective, so strategic financial planning starts at the top. Owners, CEOs, CFOs, executive directors, and high-level managers should be briefed on the process first. Running a training seminar or even a few classes wouldn’t hurt. Get leaders on board first, then roll it out to other key players.
Obviously, you’ll need to have your accounting department on board, but their role doesn’t change much with strategic financial planning. Accountants record transactions and provide reports. The analysis and decision making should be handled by the finance team. Best practices in this area suggest a small team made up of leaders and finance experts.
The next level is your data gatherers. Accuracy is critical, so use automation wherever possible. We’ll get into that in more detail below. When using humans to gather data, loop them into why accuracy is so important. Department heads will buy into it if they understand that KPIs directly affect their budgets, team salaries, bonuses, and production quotas.
Marketing and production teams play a role in this also. Their participation is critical if you want to effectively implement a strategic financial plan. Your finance team makes decisions to adjust for changes in economic circumstances. Marketing and production need to pivot for those changes to take effect. Prepare them properly so those transitions happen smoothly.
Why is strategic financial planning important?
Success is achieved by looking forward and being prepared to take on new challenges. That’s what strategic financial planning is. Your finance team will be analyzing real-time data to make choices that affect your company’s immediate future. That’s very different from using the traditional three-statement financial reporting model to make reactive decisions.
Why is this important? The modern business world moves fast. Variable factors that affect your business include economic climate, government regulation, supply chain availability, materials costs, and employee turnover. Waiting for the quarterly report before making adjustments in any of these areas could cost your company thousands, even millions of dollars.
The need for strategic finance becomes more prevalent when growth accelerates. Finance teams don’t want to wait for old numbers in rapid scale scenarios. They need real-time data to make corrections or boost programs that appear promising. That’s not a quarterly activity. It’s a daily one. Because of this, it’s essential to ensure that your teams have the tools they need to work most efficiently.
How do you develop a strategic financial plan?
The first step in developing a strategic financial plan is to make sure you have the proper financial management software to manage it. Ramp supports strategic financial management for businesses by automating a myriad of processes, giving multiple teams access to real-time data, and integrating with other strategic finance platforms.
Once the software is in place, train your leadership team to use it. Include data gatherers and department heads who’ll be recording KPIs and other business metrics. Emphasize the importance of those numbers and get everyone on the same page. Strategic financial planning is a team effort that works better when all employees buy in to what you’re doing.
The final step is selecting your finance team. There are differing philosophies on this. Internal hiring gives you people who know the company and understand your mission and vision. External hiring gives you the ability to look for higher level financial minds who can take your company to the next level. High growth businesses are encouraged to take this approach.
Numbers should be analyzed daily, not quarterly. That doesn’t mean changes need to happen every day, but minor trends can become major problems if they’re not caught early.
What to do after developing a financial strategy
Treat the initial financial strategy as a living document that will change as the company evolves. Part of being strategic is to know when to make changes to your own policies. What works today may not be effective tomorrow. That’s just part of the process. It’s recommended that business owners schedule regular reviews with their finance team to discuss strategy.
That said, don’t scrap the quarterly financial reports. They’re useful to measure progress and your shareholders and investors need them. Keeping track of cashflows, income, and balances is important. Strategic finance adds another level to that. It’s a way for you to stop being reactive and start making proactive decisions to achieve financial prosperity.