Too many companies make strategic decisions without any real data to back up assumptions. When planning strategy, businesses must look at financial data around their profits, cash flow and operational efficiencies. These key indicators help organisations to understand their performance to date, and design realistic growth plans.
What should your finance function be providing to the strategy team?
What financial data helps to form strategic recommendations?
Ernst & Young say that one of the three key functions of the finance team is to be effective in driving forward the business. This includes accurate reporting and strengthening decision making. While there are numerous reports that the strategic team may need, depending on the business and industry, there are some key areas to cover.
Profit margins determine how much your business makes after all associated expenses. Understanding what level of profit you have available allows your strategy team to see how much negative impact you can absorb – crucial if they’re thinking about taking calculated risks. It also allows you to drill down into which products don’t make enough profit, and perhaps focus your business efforts more wisely.
2) Operational efficiency
Your business likely has a lot of resources, but you’re not necessarily using them well. Operational efficiency analysis involves looking closely at areas of business like customer credit or inventory, to see how that’s affecting your ability to grow. For example, if you have a high number of your customers still owing you money, you probably need to tighten up your debt collection procedures while too much stock means you’re ordering incorrectly.
Having this type of data to hand allows your directors to design data-driven strategy improvements and understand how this could impact their investment capabilities.
No matter how many sales you achieve, you can’t make growth investments if you don’t have any cash available. Looking at the business’s liquidity allows the strategy team to understand what types of spending power they have available. If there isn’t enough cash to invest in the direction they want to take, they can look at what illiquid assets are stifling their ability to spend.
Unveil which types of customers or products are making money.
Revenue growth and concentration are important figures to understand before making strategic decisions that may impact one or more of these areas. These types of statistics unveil which types of customers or products are making money, and which ones are affecting business performance. You can also determine whether certain types or groups of employees are contributing more to your bottom line, or which areas of revenue are growing versus slowing.
5) Capital efficiency and solvency
Relevant where investors and lenders are involved, they need to see how much return you’re generating and how highly you’re leveraged. Your strategy team can’t make any plans if they don’t understand how this aspect of your financial set up will be viewed by potential financiers.
Providing good financial data
When it comes to providing the best support to the strategic decision makers, Ernst and Young say that finance team must eliminate operational silos and look at their analytics, reporting and insights as an agile and collaborative unit. While all this information may be available, it’s not always easy to collate or present. It’s important that separate teams agree on the use of certain systems or software to improve the level of reporting they can provide, and therefore ensure strategic decision makers are dealing with meaningful data.