Finance leaders can drive high performance by ensuring their activities are properly aligned with the organisation’s goals and strategy. AICPA & CIMA’s Peter Spence offers advice on what this means in practical terms.
All senior finance leaders have an important role to play in the formulation of their organisation’s goals and the strategies used to achieve them. To do this, they need to have a clear understanding of the interdependences between purpose, strategy, business model, operating model, plans and objectives.
Success starts with a clear vision of why an organisation exists. This is the purpose statement; it should clearly, simply, and succinctly state what the organisation does and how customers benefit from that.
The purpose statement, in essence, describes the business model – what it does for customers and in so doing, how it generates value for stakeholders. It must be memorable and meaningfully clarify to customers what they can expect from the organisation.
The purpose statement should guide decision making and provides a focus for identifying the cost, risk and value drivers across the operating model that are most relevant to customers. The operating model consists of the processes and capitals deployed for delivering the purpose. It explains “how we do things around here.”
The purpose should be deconstructed into strategic objectives that represent the delivery of the purpose. These business objectives are the basis for the formulation of strategy, which can be thought of as the calculated relationship between desired ends and available means. The business objectives provide the ‘desired ends’, and business planning is the organisation of the ‘available means’ in such a way as to achieve them – the ‘calculated relationship’.
Achieving success as a finance leader is about making sure that every part of this interdependent process is working in harmony. Business objectives must relate to the business and operating model, which in turn must reflect the purpose statement. There are practical steps which can aid this process:
Your team will be more effective if they understand how their work is contributing to the overall goals of the organisation. For this reason, it is better to engage people and talk about why you are doing what you are doing. This needs to be more than just ‘broadcast’. The more ‘buy-in’ you get for the strategy from your team, the more likely their work is to align with it.
Planning is about prioritisation, and ensuring resources are allocated across the organisation in ways that relate to the business objectives. Finance leaders should sort all the plans and resources by strategic goals, and discuss the efficacy of the plans for each strategic objective at the executive leadership level. You can use a strategic scorecard to help with this process.
A danger is that managers win resources for the operational function they run, rather than have them allocated to optimally execute the organisation’s strategy. From the perspective of the business this is the classic strategic mistake of confusing means with ends.
Strategies usually span multiple years, but business plans must make it possible to plan fiscal year financial outcomes, although it’s important not to artificially truncate a business plan to fiscal year end, but to keep a longer planning horizon.
It is vital to integrate both best- and worst-case scenarios into your plans. Risk management tools are available to guide your thinking. Significant capital expenditure will reduce the organisation’s break-even margin of safety, so it is important to guard against optimism bias. This is a particular risk if you were involved in formulating the objectives or the strategy.
A vital element of business planning is data planning. This is the sourcing, assembling, refining, and presenting of all the data that will be needed to evaluate how well the strategy is going and if the business is hitting its milestones.
Again, best- and worst-case scenarios should be built into the plan, along with documented response options for each one, which is the ‘playbook’. Variances to plan should trigger reviews of the options documented in the playbook. This way of working has the advantage that it speeds up the decision-making process when these scenarios occur, making the organisation more agile.
The principle behind the use of these techniques is that the finance team should be a key part of ensuring that a business’s strategy is aligned with its purpose and operating model and is functioning effectively. If this is done well, the business will use its resources in the most effective way possible for achieving its goals.
