The Role Of Finance In Business Strategy

When we analyze the financial statements of our companies, a series of questions inevitably arise that we could summarize as “What would be a reasonable value for my business project?” or “Are we really creating value for the shareholder?”

If we are looking at historical information, we usually look at the net worth, where we are reassured to see that the reserves have been growing until today. Yes, well, there have been some setbacks along the way, unforeseeable situations, and, of course, very far from the managers’ control capacity, but, overall, the evolution has been positive.

Thinking about the future/Forecasts and risks

However, we can go a little further and repeat to ourselves the same reflection that is attributed to the writer, director and actor Woody Allen: “I am interested in the future because it is the place where I am going to spend the rest of my life.” In other words: if we want to achieve our objectives, we must start by imagining where we want to go and build, starting today, the path that should lead us to our goals.

In this case, we would be looking at forecast financial statements , a summarized and valued projection of all the plans that the organization has developed to achieve the set objectives. In this case, the questions would be the same: How much value are we creating? But, in addition, a doubt is added, encouraged by uncertainty: What risks are we running? Or, Will we be able to achieve our goals?

When we deal with risk, we realize that reality does not remain static but evolves. Hence, the construction of scenarios is necessary to understand, through hypothetical models , what the future development of the decisions we make today will be like.

By scenario we refer to an imaginary representation of the future that seeks to anticipate how the conditions of the environment and organization could behave in order to, in this way, focus the present strategy towards the desired future.

We must keep in mind four characteristics that should be required in our scenarios:

• Possibility: Facts must have the potential to become reality.
• Congruence : There must be a logical sequence between the facts, that is, a thread that shows the cause-effect relationships between facts.
• Uniqueness: Each scenario must be different from the others.
• Utility: Each scenario must provide value within the strategic options that the company is considering.

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Stand out from the competition

Recent business history shows us cases, such as the sale of Nokia to Microsoft, in which we learn that it is no longer enough to do things well to guarantee the survival of a corporation. In today’s world, where globalization, consumer differentiation and product customization are already values ​​fully assumed by the markets, to reduce uncertainty we must do things better than the competition ; you have to understand the client’s needs; and we must know how to listen to their reactions to our proposals.

In short, it is about obtaining and taking advantage of all the advantages we have with respect to the competition, strengthening our weaknesses and protecting ourselves from market threats by establishing a map of actions that leads us towards achieving our objectives, through a well thought out strategy.

The value of intangible elements

We look again at the forecast of the financial statements and the question immediately arises: Where can we see the value derived from our strategy materialized in concrete actions? The answer seems obvious: In the profit and loss account that guarantees profitability; and in a treasury that allows compliance with the obligations contracted.

And yet, something changes our approach when we realize that 60% of an organization’s value is found in intangible elements that, to our surprise, are not usually incorporated into the organization’s assets. Not even in the pension plans.

It turns out that the value of the company is found in elements that we do not usually take into account in our valuations, such as:

• Brand
• Credibility
• Trust
• Moral principles – values
• Corporate culture

That is to say, a company is worth its name, its brand, its positioning, etc. But we can affirm that the first intangible is execution , since, if I am able to develop a strategy, but it is not executed, I will not bring the expected benefits.

The importance of choosing investments well

Another important element is the correct selection of investments, the analysis of why and how much the company decides to invest in a way that enables the execution of the action plans.

We mean that investments in long-term fixed assets have a strategic nature, in the sense that they must allow us to grow and consolidate intangible assets, which, as we have already seen, make up most of the value of the projects. business.

In other words, we should demand that planned investments be capable of giving us some type of advantage that allows us to maintain the fight with our competition in our quest to satisfy the needs of the market.

And, having said that, it would be desirable that, preferably, we obtain competitive advantages, which are those that cannot be imitated nor are lost over time, over comparative ones, understood as those that are lost over time.

It is, therefore, about cultivating the advantages related to brand recognition, with trust in the products and in the management team, with the values ​​that will create an emotional bond with our customers and will contribute to the differentiation, etc.

The role of the financial function in the company

The role that should be assigned to the financial function in the management of the company has evolved since the last financial crisis that began in 2007. Although, initially, it was attributed a role of attracting financing for investment projects , practically apart from the selection and control of these projects, this function has currently been completed with the objective of maximizing the value of the company in favor of the shareholders.

The interest focuses on investment decisions , so that the financial manager acts as an intermediary between financing decisions and investment decisions. This way,

• It looks at the company “from within”, since all the subsystems are related and any decision has its impact on the financial area;
• It deals with the acquisition of resources, but also intervenes in their allocation;
• For decision making, it relies on analytical methods, which take on special importance.

In other words, once the entire strategic approach has been prepared (direction, formulation and strategic operation), financial management must intervene in the definition and development of strategic monitoring through the development of indicators: balanced score card. (BSC), and objectives and key results or key performance indicators (KPI).

The indicators are classified into:

• Strategic, which will measure the effectiveness of the strategy;
• Tactical, which will measure their effectiveness;
• Operational, which will measure the efficiency of the actions undertaken and will be reflected in the company’s financial statements.

Management tools

The best way to fuel the creation, implementation and monitoring of processes is to have integrated ERP management software. Along with participation in the daily management of the company, this is one of the great collectors of information that allows us to verify that the actions taken are giving the expected benefits, in addition, they allow us to have historical data to evaluate previous behaviors and help us in making decisions. of our decisions.

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