Financial leadership as a driver of growth

Alysha Randall at Fast Growth Consulting outlines how to align financial goals with the wider organisation agenda

 

When the finance plan and forecast is put together without the rest of the organisation, strategy really suffers.

 

I have seen this more often than I would like. A budget plan is put together separately from the strategic and operational goals. I’ve also been asked to put together a budget model before the leadership team has considered what the business goals are.

 

Sometimes the budget is used as a “tool” to set the business targets or rather the budget is based on last year’s numbers rather than where the business is going.

 

The most effective forecast or budget model that can be put together is one that starts with the company’s vision and works backwards from there.

 

When the business’s strategy and the finance forecast isn’t aligned, the misalignment can cause all sorts of problems.

 

Some perfect examples include, sales pushing for high growth with the finance team focusing on cost reductions or cost control. Or, the operations team focusing on process improvements which includes additional hiring and software implementation, but there is a hiring freeze in the budget. 

 

These issues arise when the finance budget is put together in a silo - with just the founder’s or CEO’s and board review, but not the rest of the team. A severe miscommunication between the teams or when the finance team is looped in too late is often due to a lack of business partnering and strong finance leadership.

 

With these misalignment issues, the business can run into trouble. The business will certainly miss targets, managing the cashflow will be a real concern, with even the cash runway reducing and incurring a higher cash burn. The board will also be confused with mixed messages from the various team leaders.

 

So what should the business do instead?

 

The finance team needs to start with the end in mind. The first step is to understand what the business’s mission and vision are. Often these two statements are part of the business’s culture and are included in all communications with the business. But this is not always the case. Ensure that there is a strong understanding of what these are and what they mean.

 

With the vision and mission statements in mind, what are the longer term strategic goals that the business wants to achieve so that they can get closer to the vision? Generally there are 3-5 goals and often these are the priority for the business in the next 12 months. These must be established by the leadership team well before any budget model is even opened.

 

It’s important to establish the strategic goals first, as the departmental plans can be quite different if they change. For example, a company focused on sustainability growth needs quite different metrics and operational plans compared to a company that wants to focus on EBITDA expansion or reaching breakeven.

 

Once the strategic goals have been established by the business, the leadership team then can plan what operational goals they need to achieve and what resources they need to reach these goals. 

 

There needs to be a company wide understanding of Revenue targets, margin expectations, investment priorities, and headcount planning.

 

If everyone is working together and is working towards a common business vision and annual priorities, then working out the stepping stones to get to this common view is much more cohesive than each individual department working out what their priorities are on their own.

 

These operational plans are what the finance team will use to build up the budget model. The finance team will also be the resource for the business to establish if the operational goals and resource requirements make financial sense or not. If not, then the plans will need to be revisited.

 

The finance team can also calculate the costs of certain projects, if they become a priority for the business. For example, if one strategic goal is to enter a new market, then the finance team can forecast launch costs, marketing ROI, and team ramp up when getting the other departments input. Again, if there is a big priority for the business, such as entering into a new market, as these kinds of projects take up a lot of resources, if they aren’t included in the budget, then the budget can be out of date and not really useful very quickly. The business also won’t know if the resources are available to use or not.

 

Communication between the finance team and the rest of the business ultimately should continue after the budget has been set. Getting alignment between finance and the business is important during the budgeting process, as discussed above, however it isn’t a set and forget process, it’s ongoing.

 

The finance function should develop strong relationships with the other departments and have regular discussions with product, operations, marketing and sales.

 

Important KPIs and accessible metrics should be shared and reviewed regularly between teams. This is to bring clarity between the entire business and not financial control. The focus for strategic finance is to be collaborative with the rest of the business, not just focusing on accuracy and cost control. The finance function should be a partner with the rest of the business and help them shape the business strategy.

 

A finance budget and finance operations that aren’t aligned to the rest of the business and particularly the business’s strategic and operational goals causes a huge amount of unnecessary friction. It’s best if there is alignment right at the beginning so that the finance function can help the business move forward.

 

The role of the finance lead is to link the ambition of the business to execution, ensuring that the business has the necessary tools and is prepared to reach its targets.

 

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Alysha Randall is a fractional CFO, founder of Fast Growth Consulting Ltd and author of Financial Leadership Fundamentals

 

Main image courtesy of iStockPhoto.com and andreswd