Executive Finance and Strategy

How to Understand and Use Financial Information to Set Strategic Goals

Ralph Tiffin

• Publisher: Kogan Page
• Year: 2014
• ISBN:
  9780749471514
• Edition: 1
• Topic: Business
• Subtopic: Finanza
• Index: Business

Many strategies are explained as actions that will achieve the desired goals or visions of the company, but in order to predict the success of your strategy it is vital to gain an understanding of how it will impact on the financial statement. Executive Finance and Strategy works on the premise that financial models can clearly demonstrate where a particular strategy might lead, enabling you to evaluate past accounts and statements in order to respond to recent company history. It also explains how company law and ethics underpin financial statements and clarifies your responsibilities as a senior manager or director. By using finance as a record keeper and predictor of success, it helps you quantify your strategy to gain support from colleagues and take the right actions to ensure sustainable growth.Online supporting resources for this book include tables and formulas to support financial models within the book.

01

What is strategy?

What does financial strategy mean?

This chapter addresses the task of defining financial strategy, in the process clarifying usage of the many terms associated with ‘strategy’ and ‘strategic’. Strategy and strategic are much-overused words, as is evidenced by ‘winning strategy’, ‘strategic thinker’, ‘strategic appointment’, ‘strategic direction’, ‘strategic supplier’ and so on.

When we hear the word ‘strategy’ we run into a range of meanings, quite incorrect usage, vagueness and misunderstanding. At the outset we need to be clear as to what the words ‘financial’ and ‘strategy’ really mean; what is meant by the individual words and therefore the term ‘financial strategy’. This in turn leads us to pose the question: ‘Why be in business?’

Content, order and logic of this chapter

Within this chapter we will cover the following topics:

• Definitions of ‘financial’, ‘strategy’ and ‘strategic’
• Further strategy-related definitions
• What is business strategy?
• What is the objective of financial strategy?
• Why be in business?

Order and logic

Words are used loosely and at times given perverted meanings and thus we should be careful to define what we mean by ‘financial’ and ‘strategy’ and how these words relate to business strategies and other common business terminology. This then leads to identifying what the objectives of financial strategies may be and whether there is the one objective.

Definitions of ‘financial’, ‘strategy’ and ‘strategic’

Financial

• pertaining or relating to money matters;
• pertaining to those commonly engaged in dealing with money;
• relating to finance or financiers;
• the science of the management of money and other assets.

There should be no misunderstanding or ambiguity with this word or its usage, and the last definition has an interesting connotation, that of financial activities being a management science.

Strategy

• a plan of action designed to achieve a long-term or overall aim;
• the art of planning and directing overall military operations and movements in a war or battle.

And the certainly overused word:

Strategic

• highly important to an intended objective;
• essential to the effective conduct of war.

It is the aura of the second definition (along with many other militaristic words such as ‘tactics’) that business people, academics and consultants have latched onto to give executives and managers a commanding image as the field marshal, the general, the ‘strategist’! Maybe some CEOs see themselves as at war?

A strategy is a plan, a means of achieving an objective – a strategy is not an objective. Businesses often think that their strategy is the objective or goal. ‘Strategy’ describes a broad perspective on how resources may be used to achieve goals or objectives.

Financial strategy may be defined as the science of the management of assets and liabilities to achieve an intended objective. The management may be of an operational nature or a structural nature or a combination, as explained below.

Further strategy-related definitions

As well as explaining how the term ‘financial strategy’ is used in this book, to avoid any misunderstanding it is sensible to review words and phrases that are often used when talking about, or in relation to, business strategies. Common business terms that are bandied about, often used loosely and open to different interpretations are: align, goal, mission, motive, objective, tactics, target, values and vision.

Presumably we all understand what they mean but of more relevance is the need to check that the words are understood consistently within and between organizations. Here are definitions with commentary on their proper and improper usage.

Align

• put (things) into correct or appropriate relative positions;
• to get or fall into line.

Both of these definitions indicate the need for deliberate action – alignment is unlikely to happen by chance. The significance of alignment and strategy is that strategies are aligned with objectives (or goals) and tactics are aligned with the strategies they are supposed to achieve or support.

Goal

• the terminal point of a race;
• the object of a person’s ambition or effort; an aim or desired result.

This might be considered too ‘sporty’ – a one-off to win or lose. However, using ‘goal’ may be useful to focus and incentivize. It can be used as a synonym for objective but has the flavour of a ‘one-off’ score, a win. It would be an appropriate term where you have a sales target – a strategy being to score the goal and hit or exceed a sales target.

Objective(s)

• a thing aimed at or sought: a goal;
• something towards which effort is directed: an aim, goal.

‘Objective’ is the word I would choose above goal, aim or target as it has a simple, clear and consistent meaning.

Mission

• a strongly felt aim, ambition, or calling;
• a specific task with which a person or a group is charged.

Normally used in the phrase ‘mission statement’. Mission statements vary from the succinct and clear to the obscure. Mission statements and their place in supporting financial strategy are often seen as being the guide for the company in the years ahead.

With respect to financial strategy one thing is clear: a mission needs a strategy and supporting tactics, but above all it does need a purpose, an objective (or a goal!).

Mission statements

• how an organization provides value to stakeholders, for example by delivering returns to investors or types of products or services to attract customers;
• a declaration of an organization’s core purpose; a mission statement should answer the question, ‘Why do we exist?’

Mission statements are often vague and fail to reveal the truth as to why the entity exists. Here is one description of what a mission statement might contain:

A mission statement should:

1. define what the company is about;
2. be broad enough to allow for creative growth;
3. distinguish the company from all others;
4. serve as framework to evaluate current activities.

Defining what the company is about is admirable – if it really does; why does the company exist? The others could be helpful but will often be answered in a vague manner.

Here is another example of a mission statement which illustrates that often mission statements are focused only on one aspect of business, in this case sales:

A mission statement consists of three essential components:

Target or key market – who is your target client or customer?

Offerings – what products or services do you provide to that client?

Distinction – what makes your product or service unique so that a customer will chose your company?

Financial strategies can be clearly set out in a carefully crafted mission statement. Mission statements can be helpful when focusing on strategies, but again as long as they are not vague. A specific financial strategy could be sold to management and employees as a mission.

Motive

• a reason for doing something.

This is not a commonly used term but one I like to use, particularly when asked to assist with improving budgets. Too often we are told that there are clear budget objectives when in fact the reason for budgeting is not simply to achieve an objective but to achieve some (hidden) objective. More generally, a good question to ask the instigator of a financial strategy is ‘What are your motives?’ along with ‘Are they really aligned with the stated objectives?’

Tactic

• an action or strategy carefully planned to achieve a specific end: a device for accomplishing an end;
• commonly tactics is the deployment of forces or actions in some specific instance of applying strategy.

Common thinking is that a tactic is an action taken to further a strategy. The first definition above indicates that even wordsmiths seem to confuse tactic with strategy. In this book, tactic will be taken as an action or device for accomplishing a strategy; the term sub-strategy is also used, meaning a strategy (aligned) with and contributing to the principal strategy.

Target

• a goal to be achieved;
• to aim at or for.

A synonym for goal but useful when implementing strategies, eg sales, where sales people may be excited by the idea of sport – taking aim, winning.

Values

• principles that guide an organization’s external and internal conduct.

Core values are often summarized in the mission statement or in a separate statement of core values.

Vision

• something seen in a dream, trance, or ecstasy; especially: a supernatural appearance that conveys a revelation;
• the ability to think about or plan the future with imagination or wisdom.

It is of course the second definition that successful CEOs believe they have the power to comprehend and reveal to lesser mortals; however, ‘vision’ is often used in far too vague a manner.

To be useful, an overall vision of where an entity should be in, say, 10 years should have clear objectives to which strategies can be linked.

The issue as regards financial strategy is: ‘Does the overall financial strategy or individual strategies and tactics conflict with stated company values?’

What is business strategy?

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