Strategic Finance
Helping businesses chart a course for long-term success by providing them with the tools and guidance they need to ensure their financial decisions are aligned with their overall strategy.
Book Your Free Consultation Today
Strategic Financial Reporting
This means your monthly reporting goes beyond balancing the accounts and tells you what happened behind the numbers and why. It also means that the results are presented with enough context that they are recognizable as “the truth” to everyone on your management team. Most importantly, no one is managing to their own version of the truth outside the system.
Financial statements that are accurate and timely are non-negotiable - "table stakes". But we consider that the bare minimum you should get from your finance function. Strategic finance does not stop there.
A finance department can impact the quality of a company’s decision-making greatly and it’s important to know where you stand so you can grow to where you want to be. We have developed a framework to evaluate where in the continuum from "misleading” to “strategic” a finance and accounting function is operating.
Stage 1: Misleading
In this state, the key data collection and accounting processes such as inventory counts, receiving, payables, and revenue and expense recognition are unreliable and that causes the income statement to whipsaw from one month to the next. These financial statements are only “accurate” when several months are totaled or averaged together. Financial statements are often late and information contained in them is no longer relevant to the current situation.
Stage 2: Stable
Information is accurate on a monthly basis, but the content is purely financial. You may have a good idea of how much money you made or how much inventory you have, but there’s no additional insight as to why or how. Financial statements are not late but still lag the end of the month by a couple of weeks.
Stage 3: Informative
In this stage, we have reporting that is informative in terms of what happened. We see percentages and ratios that are compared to budget and prior period(s) and variances are explained but the explanations are often vague or generic. Financial statements are delivered within a few days of the end of the month with all the variance analysis and explanations.
Stage 4: Diagnostic
Margins and ratio changes are explained in operational terms. (E.g. “inventory was up this month because of the material we brought in for the elementary school job we’re starting on next month”, or “labor cost as a percent of revenue was up partially because the unit cost of materials was down, and partly because the mix of projects was more complex with more labor content”.)
Stage 5: Strategic
In this stage, monthly results are largely known before the month is out, and financial reporting contains a high degree of analysis and forms the basis for what to expect in the future. The finance function understands the microeconomics of the business and uses that understanding, along with real-time developments in costs, productivity, and project pipeline to give insight into future concerns such as production bottlenecks, cash flow issues, and capacity utilization.
A Digital Environment
A digital environment is within every company’s reach in today’s world. If you are not taking advantage of project management and workflow technology in a coordinated way, you are leaving money on the table with operating costs that are too high and operational insight that is too low.
The stages of a company’s digital evolution can be broken down into these categories:
Analog
if you are still printing out invoices and other documents to file and save in boxes or drawers, then your digital environment, even if you are using computer systems for accounting, estimating, etc., is what we could call analog. Some of your data may be digital, but your workflow and documents are not.
Digitized
A digitized environment is one in which documents are converted to PDF file format and routed for approval or additional processing via email, then stored in a (hopefully) structured file system on the network. In this stage, your data, your documents, and your workflow are digitized, but not what we would call digital.
Digital
There are two major distinctions that move a company from digitized to digital. The first is workflow automation. This means that documents, requests, and other work get routed automatically to the correct team members for some task to be performed on them, such as documenting an approval. The routing is based on roles, approval, or other requirements that are set up in the system in advance. When a company becomes digital, there is virtually no internal generation of paper and no need to convert anything to PDF.
The second element of a digital environment is integration. A key principle is that no data or document should be entered into the system more than once, and there should be no “off-system” data repositories such as spreadsheets where different versions of the “truth” can be found.
The key benefits of a digital environment
- Teams that work in an analog or digitized environment spend a shocking amount of time looking for documents or other bits of information to do their job. In today's environment that is waste.
- Superior information for management. You can evolve from having no management information at all to having it right away. The shorter you can make the feedback cycles in your business (amount of time between doing something and knowing how well you did it), the faster you can improve your results.
- Better, faster onboarding and training. Your work will be more structured and MUCH easier to explain to a new person. Turnover will likely drop as a result, and the strain your organization feels from a surge of growth will be far less painful.
- Fewer mistakes. Automated workflow systems significantly decrease the human error that occurs at process hand-off and approval points. The automation of notices and reminders keeps things from falling through the cracks, which will keep your customers happier.
- The gap between companies that operate in a digital environment and those that don't will get even wider in the future. Artificial Intelligence capability will define the future in business, and can only be developed in a digital environment.
1. Make a surprisingly small investment in software and implementation.
2. Lower overhead costs, improve scalability and boost business performance.
3. Become one of the winners in the new software era that is dawning right now.
A Meaningful Financial Plan
This discussion ties back to the fourth item on our Strategic Finance checklist – a meaningful financial plan, or for ease of use, a budget. One management thing that a lot of small business owners and managers think they can do without is a budget. The word is generally associated with bureaucratic rules about what can and can’t be spent and the accounting department stopping managers from doing things that are good for the business.
Rather than think of it that way, think of a budget as a model of how a business works and how it performs under different types and levels of demand. If you don’t want to change anything about who spends what, you don’t have to, but having a budget enables executives and managers to ask insightful questions and provide solid support when making requests and decisions.
Here are some scenarios where a budget might come in handy:
1.
You have a renewal of your line of credit with your bank coming up. Last year was a bit of a struggle. Explaining the adjustments you‘ve made to your business to do better this year while looking at the year’s budget income statement showing the changes being made is a 100% more credible place to start that discussion with your banker.
2.
A manager of one of your service departments is asking for an additional position, saying the workload is higher than expected and that the cost is justified. You look at the budget and see that revenue is slightly worse than budget and gross margin is slightly better. The current staff cost in the department is roughly equal to what you budgeted. The question that a budget would enable is: “What is different in workload or productivity than we expected for this year?”
3.
Revenue is about equal to budget, gross profit is worse than budget, and sales commissions as a percentage of revenue are up compared to budget. The question that arises when you have a budget is: “Are we paying commissions the same way we budgeted them, or has our commission plan been implemented differently from that?” If you don’t have a budget, how would you ever know?
4.
Revenue is up by a lot, but gross profit is down compared to what we expected. Have we had a unit cost increase? More waste? A change in product or customer mix? Hard to say if you don’t have what you thought would be recorded somewhere.
5.
Net Profit is solid, but we keep tapping into the line of credit when it seems like it should be getting paid down. What is using cash that we didn’t expect?
Stereotypes about life in corporate America have permeated the business culture and media, creating misconceptions about what a budget is for, and often for good reason! If you work in a corporate environment, you probably recognize the reason for some of those stereotypes. But if you can avoid the stereotypical pitfalls, you can get all the benefits of a good model and operating budget for your business with none of the silliness. We’re here to show you how.
Management Insight from Financial Analysis
With a Meaningful Financial Plan and financial reporting that is at least Stage 4, you can get real management insight from your financial reporting. We can build, or show your team how to build a reporting package that is more than monthly financial statements. It's an in-depth analysis of your operating results that is tied to what changed in the business during the month. If product mix, operating efficiency, or production costs were different from plan, from last month or last year, we'll highlight that and tell you why.
Pricing Analysis
The top level of strategic finance performance is having the ability to report in real time whether or not your goods and services are priced right to achieve your business goals. This requires knitting together your advanced financial reporting and analysis capability, low cost/high frequency information from your digital environment, and an advanced understanding of the microeconomics of contracting and building materials. This is usually the difference between a business that operates at or around industry averages and one that generates excess return for its owners.