What does ‘strategic finance’ really mean to you?

Our network of business owner-managers and CEOs recently explored and debated the topic of ‘strategic financial management’. I was kindly invited to speak at this session and share my story. As I sat and pondered what would be most useful to the senior leaders in the room my thoughts hit on a medium-sized catering business I had ran some years ago. As I reflected some more, a range of questions came to mind; what does it really mean to be ‘strategic’ in finance? And, how can we use the financial function to strategically guide our business towards (greater levels of) success?

What drives behaviour? Simplicity!

I chose to set three measures for the business.

The first was to increase the average spend per customer on one product range; notably fast food. On entering the business the ‘spend per head’ was 67p, which meant that customers spent an average of 67p on their food and drink. Having crunched the numbers, I decided that our two-year target would be to raise this to over a pound. The joy about this target was that it was simple to understand, could be clearly translated into simple actions for sales staff (e.g. up-selling techniques), was easy to communicate to all staff, and could be measured. Because the costs did not increase with a greater spend per head, each extra penny was largely profit. At the time, I didn’t realise how powerful this measure was. It provided a focus for everyone, and it was achieved.

The other two measures could be considered as ‘strategic’. They were EBITDA and contract values. Although they sounded grand and were seen to be useful for shareholders, they were not successful business measures for running the company day-to-day. They reflected the results of operational and financial actions, and didn’t help to drive the necessary behaviour to realise the goals we had set ourselves.

 Cutting through the noise to identify the truth

What resulted from sharing the above with the BIG Network was the realisation that numbers alone are pretty meaningless. The real challenge is to define a picture of what you want the business to look like at some given point in the future, and then identify the data – the key facts – that will help you to navigate towards this point. Let’s use the concept of map reading. The map allows you to identify your end point, and plot the direction of travel. From here you can decide on the route you would like to take, the length of your journey, and speed you would need to travel to arrive at your end destination when you want to. Beyond this, the map does little more. You will need to check back in with your map at various points of your journey, to make sure you’re on course, and you will need other forms of information to collect along the way to help you to reach your end goal.

As leaders we have to be careful about the data we act on along the journey. Traditional measures such as financial accounts can be dangerous if they are not placed within a broader context. We have been conditioned to think that business ‘data’ is a synonym for business ‘health’. The more we know, the healthier the business will be. Have enough check-ups, take the pill and your disease will go away. But data can be a distraction. I recall my Finance Director at the catering business repeatedly telling me we had a looming and severe cash flow crisis. Put bluntly; the business was going bust. The crisis however, never came. The business never had a cash flow crisis, and while the FD may have been mathematically correct, they were wrong in practice.

What this taught me is that we need to identify what our business really does, what impacts this, and what we really need to know to navigate our desired ‘flightpath’. Financial management can define some of the terrain we have passed, but not about the terrain ahead, or the winds. So you can’t say it is not useful, but it’s not enough, or even the correct information on which to decide the journey.

Take control and responsibility for the numbers

We’ve got used to measuring things, perhaps forgetting why and how we need to. This hasn’t been helped by the very British tendency to rely on authority and the word of accountants. As business owners, we all spend time with our accountant every year. It is also a fact that there are more accountants in the UK than in the whole of the rest of Europe [1], so you must have pretty good avoidance tactics for your paths never to cross! Many of my peers however lack clarity on how they can access and use the knowledge their accountant has. Lack of financial (not strategic) information might point to a lack of awareness, but this is ultimately about taking control, not about being directed.

As leaders, we have to look behind the numbers and the obvious and decide what is it we really need to know. Sometimes living though a crisis is easier, our modus operandi can be to respond and fire fight; it comes naturally. Focusing on the future is more complicated, like a view in a wooded forest. Here, there is a critical virtue in reflection and analysis, to lift us above the wooded world we live in and help identify the key measures that will make the difference.

We can all choose the two or three key measures that give us the insight we need to track our progress. These measures may not be immediately obvious, they may lie behind the data you already have, and can only be worked out through personal reflection. Once I have defined my measures for a business I like to try my ‘acceptability test’; by answering the following questions:

  • are they driving the right behavior?
  • can they be easily adopted, understood, and communicated within and across the business?
  • will their achievement take us closer to where we ultimately want to end up?They may be financial measures or they may not, the difficulty is; only you are in a position to start this process as only you know your business.

About the author

Hamish Clifton is the Regional Director for BIG Associates Ltd. in the South. He has enjoyed a diverse business career spanning a range of companies and countries. Following a period working on strategic leadership programmes at Deloitte, Hamish held a commercial director role for Wembley Stadium. He has since led and grown a range of organisations, including ‘Artscom’, a University of the Arts London-based commercial business, and executed a successful management buyout of the UK’s largest specialist sports catering company.

Hamish is a visiting fellow in Entrepreneurship at the University of Kent, an alumni of the University of Oxford (where he originally trained as an English and drama teacher) and of Oxford’s Said Business School (where he participated in their entrepreneurial and strategic leadership programmes).

About us

Our vision is to become the go to place for SME research and owner-manager support. We aspire to create a supportive, accessible and applicable learning environment within which owner-managers feel able to challenge their established mindsets and embrace new ways of working in order to create a better future for themselves and their business.

For further information contact Hamish Clifton on 07860 928655 or hamish@big-associates.com

References

[1] The UK has about 50,000 family doctors, but nearly 280,000 professionally qualified accountants, often earning exorbitant salaries. That is almost the highest number per capita in the world and more than the rest of the European Union put together. For more, see: Prem Sikka, 2009. A Nation of Accountants, The Guardian (Accessed 16 September 2015).

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