Strategic finance is an approach that CFOs and other finance leaders should use. You’ll add significant value to your company through real-time financial and strategic planning and analysis tied to the long-term strategic plan.
Strategic finance includes value-added problem-solving, identifying growth initiatives, and collaborative decision-making to reach strategic business goals. The role of the CFO is evolving into a strategist, intelligent automation technology champion, and major contributor to business results.
Table of Contents
- What is Strategic Finance?
- Why is Strategic Finance Important?
- Brief History of FP&A and Strategic Finance
- Core Elements of Strategic Finance
- Benefits of Strategic Finance for Growing Businesses
- Examples of Financial Strategies
- Strategic Finance Reports for the Board of Directors
- Why Strategic Finance is Critical to Business Growth
- Powering Finance Strategies with Technology
What is Strategic Finance?
Strategic finance is focusing the finance department on identifying and reaching long-term business strategy goals, including growth, cost reduction, and asset optimization. It uses unified advanced technology providing real-time data for analyzing and making decisions. Strategic finance spends much less time on traditional accounting, like closing the books, shifting to higher-value work.
Why is Strategic Finance Important?
Strategic finance is important because companies use it to effectively plan, analyze, and adjust course with real-time business intelligence from integrated systems throughout the organization. They achieve long-term strategic goals, allocate required resources, and improve business performance. Another name for strategic finance is strategic financial management.
The CFO and finance team become a contributor, and finance isn’t limited to being a necessary cost of doing business.
Brief History of FP&A and Strategic Finance
Strategic finance (SF) uses business intelligence and shared real-time systems to support top management’s business strategies. Strategic finance makes a difference in decision-making and discovers initiatives for achieving long-term business growth and reducing costs.
FP&A (financial planning and analysis) historically has used Excel spreadsheets to build short-term budgeting and long-term financial forecasts for business plans. The spreadsheets combine input submitted by various departments and use expected growth rates.
As FP&A software evolved, it has replaced the extensive use of Excel spreadsheets for planning. FP&A has also used Excel for decision analysis, such as ranking alternative business investment projects.
The strategic finance function goes beyond traditional FP&A for financial analysis and planning. Strategic finance uses a comprehensive integrated software system. It provides information necessary to achieve strategic objectives, including:
- Revenue growth
- Market share gains
- Spend management and supply chain management
- Cost reduction
- Increasing profitability
The system includes state-of-the-art financial planning software with access to company-wide real-time financial data and multiple scenarios functionality.
Strategic finance trends include using more robust financial planning software that integrates with human capital and business intelligence software and introducing automation software that significantly increases efficiency. Short-term and long-term plans are frequently updated with recent information.
Strategic finance uses real-time dashboards with KPIs and automatically tracks metrics. Today, some companies may still use Excel automation tools.
Core Elements of Strategic Finance
Core elements of strategic finance include:
- Shifting finance focus to value-enhancing activities for reaching long-term strategic goals
- Using real-time, automated, intelligent company-wide software systems
- Optimizing assets needed for strategic initiatives and efficient operations
- Preparing and presenting useful financial and strategic report updates
To shift finance work to those value-added activities that will help your company reach its strategic goals, apply automation technologies to gain efficiency in closing the books and performing routine transactional accounting work.
The best finance professionals don’t spend all their work time recording business transactions, shuffling paper documents, paying vendor invoices, and preparing backward-looking financial statements (including income statements, balance sheets, and cash flow statements). With the extra time that automation provides, finance professionals strive to improve the results shown on those financial statements. And they prepare better short-term and long-term profitability and cash flow forecasts.
Strategic financial management may become involved in more corporate development functions and evaluating opportunities for business partnering.
A strategic finance team, including its CFO leader, uses intelligent financial systems and advanced analytics to make strategic decision recommendations to the CEO and Board of Directors and take action.
The switch to integrated cutting-edge technologies includes:
- Integrated company-wide software instead of siloed systems that operate independently for different functional areas
- AP automation and mass payments that incorporate automated regulatory compliance and fraud risk reduction on a global scale
- Automatic consolidation of entities
- Financial planning systems with multiple scenarios, not based on error-prone and inefficient Excel spreadsheets
Artificial intelligence, including machine learning, can drive your business intelligence software. Use real-time dashboards to track KPIs and results as often as you like.
Optimize cash flow management. Finance the procurement of assets for projects that will optimize the net present value of discounted cash flows with long-term financing to match the time horizon.
Establish a structured approach for reaching strategic goals that you share throughout the business organization. Prepare and present thoughtful and persuasive reports to executive management and the Board of Directors.
These reports should include:
- Data-backed status updates tied to the strategic and financial plans
- Significant company issues, cost impacts, and solutions
- Recent and proposed initiatives, including summarized analysis and cost savings
- Opportunities for collaborative decision-making
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Benefits of Strategic Finance for Growing Businesses
Strategic finance enhances business growth and optimizes resources required for expansion.
Benefits of strategic finance include:
- Focusing on a company’s long-term goal achievement
- Optimizing the supply chain and operational efficiency to reduce costs
- Identifying opportunities for profitable growth or increased market share
- Providing decision-support for the CEO and Board of Directors in real-time
- Communicating actions and tracking results vs. objectives through a forward-looking strategic framework
Examples of Financial Strategies
Financial strategies for businesses include:
- Increase revenues and market share and reduce costs
- Identify opportunities to automate business processes
- Optimize cash management
- Finance growth through internal and external financing sources
- Establish internal controls and enterprise risk management (ERM)
The executive management team collaborates on setting strategic goals for the business in a 3-year or 5-year business plan approved by the company’s Board of Directors. These goals are achieved through business strategies and underlying financial strategies. That’s where strategic finance operates.
To increase revenues and market share, a business needs to develop and sell products and services that customers want to buy. At the ideal time, the business will expand into new geographic markets.
Strategic finance includes decision-support analysis and providing suggestions to the CEO and Chief Revenue Officer for increasing business revenue. One example of financial strategy is determining whether the contribution margin is adequate for achieving long-term product profitability. If not, a new product shouldn’t be launched, or a decision should be made by the executive team about discontinuing the sale of a product.
To reduce costs, the finance team identifies opportunities for achieving efficiencies and cost reductions. These include:
- inventory warehousing
- Global payments and payables
Optimal cash management will reduce the amount of external financing that the business requires. Reducing the cash conversion cycle time will make cash available sooner. Automatically track days sales outstanding in accounts receivable, days payable outstanding, and use efficient systems that will let you take lucrative cash discounts when paying vendor invoices.
Calculate and track ratio trends automatically in your advanced financial software system. Use DuPont analysis to measure and manage return on equity (ROE) through net profit margin, asset turnover, and a financial leverage measurement called the equity multiplier.
When your company obtains external financing, the treasurer or finance manager should use the best capital structure for an optimal weighted-average cost of capital (WACC), debt-to-equity ratio, and degree of operating leverage within your company’s risk tolerance.
Then use that WACC to determine your company’s hurdle rate for a minimum acceptable return on investment. Apply that WACC hurdle rate as the discount rate in net present value (NPV) calculations ranking potential investments through discounted cash flow analysis.
As the CFO or Controller, you’re responsible for establishing a strong system of internal controls cash controls, and enterprise risk management (ERM) for good corporate governance. The entire financial team must ensure that these internal controls are being followed to reduce fraud and transaction error risks.
Strategic Finance Reports for the Board of Directors
A strategic Chief Financial Officer (CFO) prepares information packages for the CEO and Board of Directors to describe financial results and strategic financial issues. A strategic CFO needs forward-looking critical thinking and storytelling skills to report the progress of meeting strategic business goals and present recommended initiatives for reaching these goals.
The Board and top company management, including the CEO and CFO, have a fiduciary responsibility to shareholders and the company to perform ethically through proper corporate governance and execute business plans to achieve desired financial results.
Determining linkages between strategic goals from long-term planning and actions to reach these goals is required. Real-time systems will produce timely information to track the achievement of these goals, generate expected results under multiple scenarios, and identify opportunities to reduce costs.
It’s best to distribute Board information packages in advance of each monthly Board of Directors meeting to give the board members time to familiarize themselves with the information before discussing and voting on issues and making financial decisions and significant business decisions.
Why Strategic Finance is Critical to Business Growth
Strategic finance is critical to business growth because its focus is on achieving strategic goals rather than just closing the books in accounting. A strategic finance approach produces better financial results, higher revenue growth, operational efficiency, and optimal resource deployment.
Businesses have a greater probability of meeting their long-term objectives through strategic finance. Strategic finance accesses company-wide business intelligence and engages in scenario planning and multi-functional collaboration.
Powering Finance Strategies with Technology
Using unified real-time, state-of-the art systems throughout the company provides needed insights for decision-making and taking beneficial actions to reach or exceed KPIs linked to strategic goals.
Corporate finance gains effectiveness in achieving the stakeholders’ desired results by using advanced technology solutions for strategic finance.
A Gartner whitepaper, Top Strategic Technology Trends for Finance, includes the following prediction:
“Strategic Planning Assumption:
“By 2024, organizations will reduce operational costs by 30% by combining hyperautomation technologies with redesigned operational processes”.
In some business areas, you may be able to achieve a significantly larger 80% reduction in operational costs.
For example, one hyperautomation SaaS software technology that CFOs should strongly consider for AP automation and mass payments is Tipalti, which integrates with your ERP system. Tipalti eliminates 80% of your accounts payable cycle workload, adds financial controls for reducing payments fraud, and automates global regulatory compliance. Tipalti is powered by AI and eliminates paper documents.
Strategic finance is an approach that makes you and the finance department an essential contributor to the success of your business. Finance adds comprehensive corporate development to its traditional financial roles, taking part in developing and implementing growth strategies.
Strategic finance requires:
- A forward-looking, continuous improvement mindset
- Leadership and collaboration
- Strategic, communication, and financial skills
- Advanced, automated, real-time software technology
Understand how to propel the financial model and business model to new heights. Use strategic finance to improve results through alignment with your company’s strategic business plan.