The Need for Strategic Finance Groups

Introduction

Traditional corporate finance and FP&A professional spend upwards of 90% of their time on a large number of routine functions and tasks. This doesn’t leave much time to properly evaluate important operational and strategic decisions that could better optimize business performance and maximize profitability. To remain competitive these days, companies need a strategic finance function that can guide senior management into making the best business decisions possible.?A strategic finance team upends the traditional corporate finance, FP&A and strategic planning functions model by leveraging the latest technology to rapidly evaluate a multitude of corporate decisions and options. (1)?This article will explain the following concepts:

Limitations of Traditional FP&A and Strategic Planning

Traditional FP&A) budgeting and forecasting processes normally occur in the fall to set next year’s budget. Companies through an iterative and back and forth process fine tune their budgets over the course of 2-3 months. Usually by late November or early December the budgets are approved for the next year.?At the end of the first quarter then remaining three quarters are re-forecasted to take into account new information. However, most traditional FP&A teams are not equipped to handle diverse and complicated business scenarios on a real-time basis.

For instance, they can’t answer the following questions:

The above questions just can’t be answered by traditional FP&A teams as they are not equipped to answer these questions using conventional FP&A processes and tools.

One of the biggest problems with traditional strategic planning process is that it is often viewed as a once-a-year process. This is a very bad misconception and problematic long-term. Based on my experience every company should be practicing strategic planning every day through the use of a strategic finance team. Corporate opportunities and business markets are fluid and dynamically changing. The best firms I have worked for have a deeply entrenched strategic finance screening approaches to constantly evaluate and screen new business opportunities and to re-evaluate existing ones.?

What is Strategic Finance?

Strategic finance is basically a way of reducing corporate reliance on a historical siloed corporate finance, FP&A and strategic?planning functions by developing a well-connected and collaborative department that works with all corporate departments and business units. Often information from different corporate departments gets siloed in those department or business units and never sees the light of day and companies lose the opportunity to act. A strategic finance group actively reviews all information flows from all departments in a company as shown in the diagram below.

This all-seeing perspective helps strategic finance groups to connect the dots enabling senior management to make proactive decisions.?Strategic finance helps CEOs, CFOs, Boards of Directors and Business Units heads to prioritize business decisions to help maximize a firm’s long-term market value.

Traditional ?corporate finance & FP&A functions are centered on the three financial statement model including: Income Statements, Balance Sheets and the Cash Flow Statements which provide a static picture of a firm’s current financial position. (2) They do not provide a good understanding of financial possibilities long-term based on the multiple potential business decisions that executives can make at any one point in time.

Companies utilize a variety of software and systems such as accounting, budgeting, ERP, marketing, CRM, HR Management, treasury and legal software to manage various facets of their business. All of these systems produce volumes of operational data that needs to be evaluated and acted upon. A strategic finance group can help evaluate this data from a macro perspective to help to prevent management from missing strategic opportunities and optimize business opportunities.?

Strategic finance moves beyond traditional strategic planning processes.?Strategic finance is a function that bridges the gap and that brings together the key elements of corporate finance, accounting, marketing, sales, ?corporate strategy, business development, legal and operations in order to drive business growth. Strategic finance takes a long-term strategic view of business opportunities and helps quantify alternative outcomes in a disciplined manner so optimal decisions can be made senior management. ?

Private Equity Firm Andreesen Horowitz utilizes the finance pyramid show below to demonstrate how typical corporate finance or FP&A teams do not have the time or bandwidth to handle or focus on the most valuable strategic financial decisions because they are too busy with day-to-day functions. (3)

Features of Strategic Finance

Strategic finance contains several common core features which can be summarized as follows:

Strategic Finance Process

Strategic finance executives know how to ask the right questions in order to understand the big picture and communicate this message to other senior executives so that they have the information they need to make optimal business decisions.

Strategic finance is all about options. Companies have several levers that they can utilize to improve their profitability and long-term performance. It is the role of strategic finance to help senior management decide which levers to utilize so that the optimal combination is applied to yield successes. Strategic finance needs to help senior management become proactive rather than reactive.

A core mission of a strategic finance group is to facilitates closer collaboration not just between finance but all corporate departments and business units. Traditional finance processes have silos between senior executives, corporate department heads, and business unit leaders that leads to dysfunctional decision-making processes. A strategic finance group can help to bridge these siloes to solve strategic challenges and drive long-term business growth. A strategic finance group?provides both CEOs and CFOs with a fair and balanced view of all alternatives and options. A strategic finance team in essence serves as a special project rapid reaction force helping management respond to rapidly changing business environments.

The Strategic Finance Team

As strategic finance team at it most basic level at a small to medium sized company ?is made up of a minimum of 3-4 individuals and at larger firms as many as 7-15. The strategic finance team is usually led by a Vice President or Director with significant finance and diverse industry experience. The team usually has at least one senior manager or manager who supervises ?more junior analysts or associates. And finally, there are usually at least 2-3 analysts or associates who handle the majority of the number crunching, model management and other grunt work.

The best strategic finance employees have the following qualities:

1)?????Diverse industry Experiences

Strategic finance requires a deep and thorough understanding of corporate finance, accounting, treasury, legal, operations, strategic planning, sales, marketing, corporate M&A, business development and information technology.?The best strategic finance team members often have experience in not one or two industries but in several including some type of consulting work. A strategic finance practitioner must be competent and all of these areas to truly make an impact for their company. The best strategic finance employees are well rounded individuals who have broad experience in several different business disciplines.

2)?????Superior Analytical & Financial Modeling Skills

Strategic finance team members need to have superior analytical skills. They need to be able to apply different analytical techniques to help quantify and qualify the what are the best decision options.?Analytic capabilities can help drive business value and understanding new. Strategic finance groups need to utilize descriptive, diagnostic, predictive and prescriptive analytics as shown in the chart below to help senior management make the optimal business decisions.

It is not enough just to have junior analyst with strong financial modeling skills. Strategic finance teams members at all levels need to have superior financial modeling skills to be able to adapt and make changes as necessary to the core models that are driving decision processes.

3)?????Automation & Technology

Strategic finance team members need to have strong experience with automating processes and diverse technology platforms:

These types of experiences are fundamental to a strong strategic finance team. (2)

4)?????Ability to Work Independently, Automatously & Rapidly

Strategic finance team members need to be entrepreneurial in nature and able work on their own. Team members need to be able to make decisions and act on them with minimal management and supervision. And lastly, they need to be able to work at a rapid pace to get information to management ASAP so that they have time to act on it.

5)?????Effective Communications & Collaboration

Strategic finance team members need to be able to work with senior management and individuals from diverse backgrounds and with different ways of doing things. The best strategic finance executives are both inquisitive and persuasive. They don’t take an initial?“No” for an answer from senior management when presenting new approach to making strategic corporate decisions. (1) Team members need to be able to articulate effectively communicate opportunities in a concise and precise manner so that senior management understand all of their options.?The team needs to be able to collaborate with employees at all levels in different departments.?

Strategic Finance Reporting Structure

Who should a strategic finance group report to? Some argue that the strategic finance function belongs under a traditional corporate Financial Planning and Analysis (FP&A) or treasury group. (1)?However, I ?believe this would totally defeat the purpose of having a special strategic finance group. A strategics finance group would be best set-up so that it reports directly to the CFO or CEO?as an independent group or department that works with FP&A, Accounting, Treasury and various other corporate departments. The goal of strategic finance is to provide tactical and timely strategic advice directly to senior management without the message getting muffled by having the group buried within a larger FP&A or corporate finance department.

Strategic Finance Group Key Tools & Resources

Strategic finance teams at a minimum need to leverage the following tools and resources in order to get their jobs done effectively:

Cohesive ERP Systems

A high performing accounting team should be able to consistently close a company’s books monthly in 3-7 business days?and quarterly within 7-10 business days. A highly functioning FP&A group should be able to update a monthly or quarterly budget forecast within 24 hours and provide budget vs. actuals comparison with full variance analysis explanations within 1-2 days of the accounting team closing the books. If you’re accounting and FP&A groups are not up to these standards then they need to overhaul their underlying ERP platforms and operational processes. ?Having the ability to do the above will ensure that strategic finance teams get the information that they need in a timely manner to help senior management make optimal decisions on a timely basis.

Quality Financial Data

Financial data and information should be easily accessible, available (as required) and understandable across a company in order for a strategic finance team to do it job properly. All basic accounting and financial reporting workflows show be automated so that the strategic finance team does not get bogged down in manual data retrieval processes. Strategic finance teams needs to unify data from different corporate departments to provide forward-looking insights to enable management to make real-time decisions. A key component is bridging the gaps between different departments by developing a connected platform or hub that acts as a repository or data warehouse.

Strategic Finance Enterprise Model

Strategic finance need to be able to provide a clear and transparent picture of the organization that can be rapidly analyzed and utilized for multiple scenario analysis. Most standard corporate finance and FP&A ERP based budgeting systems provide basic sensitivity or have limited scenario analysis functionality.?They are not designed to handle complex corporate business structure or advanced decisions analytics with multiple potential scenarios.??Strategic finance group should develop a Strategic Finance Enterprise Model in Excel to help them overcome the limitations of traditional FP&A processes and software. Excel gives you the most flexibility and is the least expensive way to develop an initial model.

One can continue to use it in Excel model if you have the in-house expertise to maintain and improve it over-time. Or one can hire a developer to take your prototype Excel model and build it out?in a more advanced software environment like Adaptive Planning, Planiful or Anaplan. Please see my article on cloud-based budget software…. These three cloud-based software packages are utilized for traditional budgeting and forecasting processes. However, with the right time, money and technical implementation firm into very powerful Strategic Finance Enterprise Models.

I have seen both Excel based and cloud based ?Strategic Finance Enterprise Model methods work successfully for many companies.

Advanced Analytics

Strategic finance groups utilize advanced analytics to increase a company’s focus on insights and outcomes. ?Strategic finance utilizes?sensitivity engines, scenarios modeling, Monte-Carlo simulation, predictive modeling, prescriptive, modeling, data mining, statistical modeling and a host of other techniques to help companies make strategic business decisions in an optimal manner as shown in the chart below.??

Dashboards

The strategic finance team needs to have tools that allow for automated data analysis and visualization based on real-time material. This can include data tables, graphs and any customized charts that can present complex decisions in a simple easy to read manner. The team needs to have the capability to prepare board level materials and presentations results directly from the Strategic Finance Enterprise Model that summarize at a high level their preferred business scenarios or optimal course of action visually.(2) The team needs to be able to present complex decision factors in an easy to read and understandable manner.

Conclusion

Strategic finance is not something that is new. The fact remains that many companies have very cyclical FP&A budgeting and strategic planning process that occur quarterly or annually.?The tasks performed by these functions are often performed by employees who have expertise in their particular areas but not broad multi-disciplined experience across corporate finance, accounting, treasury, legal, operations, strategic planning, sales, marketing, corporate M&A, business development or information technology.?

Companies need to develop strategic finance groups to help them make better business decisions in a more-timely manner. ?If your company has some elements of strategic finance embedded within your traditional FP&A group then you should consider splitting it out into a separate stand-alone department reporting directly to the CFO or CEO. Strategic finance team member need to possess strong analytical, technology, independence, communications and collaboration skills. And lastly the strategic finance team needs to be properly equipped with the right tools such as Strategic Finance Enterprise Model. Please feel free to reach out to me if you have any questions on this article or would like to discuss any concepts.?

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