How finance can frame better strategy for the business
Posted by Douglas Yeung
When we look at how most companies are structured, there are few functions that address all aspects of the business in a comprehensive manner.
Broadly speaking, there are more externally focused functions such as
- sales and marketing which are driving top line or revenue for a company;
- supply chain is focusing on bringing the best products to customers in the most efficient and cost-effective manner.
More internally focused functions include
- human resources which is focusing on recruiting and optimising talents for the company;
- information technology which is a mix of providing best technology platform internally for employees while making sure the company’s external platform provides the best experiences for customer interaction via different technology channels.
What About Finance?
Other than the core function of accounting and compliance, finance teams support both externally and internally focused functions. This support means looking across the whole company and balancing different business levers.
Similar to a conductor of an orchestra, the finance team looks at all different functions, allowing some to grow faster at times but never taking eyes off other functions so that every function in the company always perform as one to achieve the best results possible.
How Can Finance Help Frame Direction or Strategy of the Business?
We can visualise this through the most common tool used in finance – that is the P&L. We can break it down into two main parts, which are revenue and cost.
Finance can use its core competencies, that is its analytical skills, its business acumen and also its communication skills, to frame various strategic insights for the business to assess.
On the revenue side:
- Drive revenue - By developing understanding of the business, finance teams can start to help frame go-to-market strategies. For example, in a business-to-business type (B2B) company, what would be the benefit of going directly to customers versus going indirectly through development of a strong partner network?
By understanding the value proposition of the company and its products, finance can help provide analysis such as profitability of different go-to-market options (e.g. what is the cost of developing a direct sales force versus developing partner channels?).
Even within the different go-to-market options, finance can provide information and data required to set up different strategies. For example, how to structure a commission scheme and how different commission schemes can impact sales behaviour for companies that choose a direct selling model or what would be the cost for partners to choose to sell its products versus a competitor’s products, which will impact the company’s ability to attract the best partners in the industry.
- Analyse revenue drivers – As the business develops, finance can start to analyse more of the revenue components and the business drivers to help business adjust their strategies. I am going to have another article dedicated to how finance can breakdown these business drivers and support better decision making but essentially, it is about understanding how business drivers impact underlying variables such as pricing, volume. Take a consumer business as an example – finance can help analyse per store sales, provide data on seasonality and provide return on investment (ROI) analysis of various marketing activities (promotions, discounts etc). All these can help the business adjust their strategies and activities.
- Identify new revenue source – Finally, finance can help provide input on future developments of the business by looking at historical performances and having the overall business acumen. Such future developments may include expanding into new geographies, developing new go-to-market channels and designing new products that can improve the company’s product portfolio.
The key element is for finance to look across functions – sales, marketing, supply chain, etc. – and help bring these functions together by identifying the right business drivers and how each of these functions will impact business results.
How Finance Can Help Prioritise and Optimise Resources?
It is not enough for a company to solely focus on driving top line or revenue without also closely monitoring cost and return on investments. Finance can deep dive into the cost side and to provide business with a more strategic guidance.
- Controlling cost of goods or services - No matter how good a company’s product or service are, there is always a trade-off in terms of cost required to deliver that product or service. Through understanding of detail costing, finance can help control and provide data to help businesses decide how much to invest in the cost of delivering that product or service. By having that information, finance can also help shape the strategy on the procurement side, e.g. how many vendors should a company have and what are the differences in cost? What are the risks of having a sole vendor or what would be the cost if there are disruption in part of the supply chain? What would be the investment to replace people with automation? All these are essentially cost benefit analysis finance is best equipped to do.
- Understanding support / general and administrative (G&A) costs - G&A functions are essential to allow various teams to focus on what they do best and let others take care of other business necessities. For example, in a rapidly expanding business, how do we control the people cost? While HR is probably best in providing overall people and talent management strategies, finance can work with HR to make sure a company also optimise the cost. This is especially useful in the when-and-where-to-hire discussion. Finance can provide an analysis and advise if the company needs to set up a centre of excellence or to pursue less centralised people strategy.
Another example is in IT. There is an obvious trade-off in providing world-class IT infrastructure to every employee versus the cost of doing so. Even decisions such as when real estate should be looking at opening a new office will require finance to provide relevant data.
We have probably just touched the surface of how finance can support the business and provide a strategic picture for management. It is important to remember that while going into the details, finance should also maintain the five-hundred-feet view of the business.
Going back to the orchestra example, finance can dive into the string section or even direct the cellists to play differently, but still keep the overall composition in perfect harmony by always maintaining the big picture or strategic view in mind.