The role of finance in strategic planning doesn’t seem like an aspect that should be overlooked, but many companies underestimate its impact.
As a broad function, finance is responsible for linking capital to a company’s strategic priorities. Learning how to leverage the role of finance in decision making will mean knowing what are the value drivers in finance management and how to leverage financial data to drive strategic improvements.
How Corporate Finance Affects Strategic Planning
The ROI of finance allocations aimed towards strategy can be mixed, depending on how they’re applied. Research published in McKinsey & Co. shows that companies, on average, allocate 90 percent or more of their resources to the same projects year-over-year, irrespective of changes to their environment or strategies.
This lack of strategic allocation can be problematic given how closely integrated finance management is with core business processes. Finance helps with budgeting, naturally, as it’s the primary way to manage expenses and incoming bills. It affects everything from inventory management to payroll to invoice collection in accounts receivable (AR).
Finance also relates to income generation and profitability, with finance decisions around products, services, and customer management directly impacting how much revenue a company can expect.
Generally speaking, it’s a top-level function that touches the goals and responsibilities of most departments in the organization. Finance drives strategic decisions across the board:
- Which investments to consider
- How to structure loans and debt management processes
- Which vendors to work with
- How many employees to bring on
- What kind of pay structures or incentives can be given to those employees
- What type of supply chain distribution methods are most viable
The list goes on and on – which is why understanding the role of corporate finance in decision making is instrumental for companies of any size.
Part of the finance accounting role here is creating a broad picture of a company’s financial health that executives can use to guide other decisions not directly related to finance itself – such as technology selection or risk mitigation. The focus here is leveraging the company’s financial markers as a guide of corporate strategy and which value-add activities to focus on.
Establishing Financial Metrics to Guide Strategy
If companies want to improve operations with value-added activities, they must first be aware of where they stand and which levers will best take them where they want to go. In other words, they must establish key financial metrics that help them shape strategic planning and provide actionable data on which resource allocations will move the needle.
Naturally, a company’s cash intake and free cash flow are good places to start, offering insight into how much revenue is available for future investments after subtracting the costs of investments and working capital. This is one of many asset management metrics that fall under the finance departments purview, though all assets will need to be tracked to get an accurate snapshot of financial health: receivables, payables, accruals, inventory, direct cash, debt ratios, and so on.
Research suggests that aggressive asset management can help ensure sufficient cash flow and limit the amount of borrowing needed, so companies should make asset tracking a top strategic priority.
From an accounting standpoint, metrics like days sales outstanding (DSO) should be assessed, as high DSO rates may indicate trouble in how a company collects on its existing debts. Others like accounts receivable turnover ratios and collections effectiveness index can provide additional context on AR performance.
Of course, having these metrics on hand is only the first step. For effective finance-driven strategy, these metrics must be utilized and applied by financial experts capable of turning data into actionable insights. That’s where your finance team comes in.
How Finance Teams Affect Corporate Strategy
The structure of a finance department is worth examining here, as the roles of each team member can shape the company’s overall financial management.
Most finance departments will include a CFO, finance managers, accountants, and analysts as part of the organizational structure, each of whom has a role to play. CFOs guide big picture decisions about how finance should affect your business planning, while collections specialists perform the no-less-important tasks of following up with clients and ensuring that revenue isn’t interrupted by unpaid invoices.
Optimizing the efforts of these teams can help companies improve their strategic position. The aim here is to move as many manual tasks as possible out of the team’s hands to free them up to focus on bigger picture issues.
This applies at every level of the finance hierarchy, from CFO to customer relations reps. The less time employees spend on transactional tasks, the more time they have available to focus on strategic analysis, metrics, and other big-picture decisions to support financial well-being.
This is why automated solutions for finance are so powerful at driving results. Tools for AR automation or Financial Planning and Analysis (FP&A) help executive teams coordinate key finance metrics and give staff the tools they need to get work done. Time-consuming, manual tasks can be automated and employees can do more with less.
While there’s no single solution that can help a company achieve a seamless finance accounting function for strategic planning, integrating this type of efficiency-driving technology is a good place to start.
