Understanding the role of finance to ensure effective strategic planning
- 17 May 2018
- Written by: bemelmans
- Categories: E-Learning, Procurement
Having clear financial goals and metrics allow firms to implement strategy and track success. Business leaders daily make important financial decisions such as scheduling operations, hiring and firing personnel, preparing a budget, approving a capital investment, or sending an invoice for payment. However, very often those managers do not have the necessary skills to understand the financial implications of their decisions. This can lead to negative consequences: resources are wasted, poor decisions get made, and the financial performance of the organization suffers.
For instance: not having an effective cost management can greatly affect profits and business processes. To prevent such serious issues, advanced training in this field can help to manage costs for increased return on investment. Eventually, employees will be able to make the best financial decisions. This will surely help businesses in strategic planning as well as decision making. Here are some of the financial metrics which can significantly help in this process:
- Cash Flow
The cash flow helps to measure of the firm’s financial position and shows how efficiently its financial resources are being utilized to generate additional cash for future investments. It gives a clear indication of the net cash available after deducting the investments and working capital increases from the firm’s operating cash flow. This metric can be used when they anticipate substantial capital expenditures in the near future or follow-through for implemented projects.
- Economic Value
Management has the responsibility to make efficient and timely decisions to expand businesses that increase the firm’s economic value and to implement remedial actions in those that are destroying its value. This can be determined by deducting the operating capital cost from the net income. Organizations usually set economic value-added goals to measure their businesses’ value contributions and enhance the resource allocation process.
- Asset Management
This involves the proper management of current assets and current liabilities, turnovers and the enhanced management of its working capital and cash conversion cycle. This practice can be used by companies mostly when their operating performance falls behind industry benchmarks or benchmarked companies.
- Profitability Ratios
Profitability ratios are a measure of the operational efficiency of a firm and also indicate inefficient areas that require corrective actions by management. Basically, they measure profit relationships with sales, total assets and net worth. It is a good thing for companies to set profitability ratio goals when they need to operate more effectively and pursue improvements in their value-chain activities.
Growth indices help in evaluating sales and market share growth and determine the acceptable trade-off of growth with respect to reductions in cash flows, profit margins and returns on investment. Usually, growth drains cash and reserve borrowing funds, and sometimes, aggressive asset management is required to ensure sufficient cash and limited borrowing. Hence, companies must set growth index goals when growth rates have lagged behind the industry norms or when they have high operating leverage.
- Risk Assessment and Management
One of the major concerns of companies is to address key uncertainties by identifying, measuring, and controlling its existing risks in corporate governance and regulatory compliance, the likelihood of their occurrence, and their economic impact. From there, a process must be implemented to mitigate the causes and effects of those risks. These assessments should be made when companies anticipate greater uncertainty in their business or when there is a need to enhance their risk culture.
- Optimizing Tax
It is important for business units to manage the level of tax liability undertaken in conducting business and to understand that mitigating risk also reduces expected taxes. Besides, new initiatives, acquisitions, and product development projects must be weighed against their tax implications and net after-tax contribution to the firm’s value. Generally, performance must, whenever possible, be measured on an after-tax basis. It is wise for global companies to adopt this measure especially when operating in different tax environments, where they are able to take advantage of inconsistencies in tax regulations.
Corporate Training as a means to improve skills:
Based on the above financial metrics, it is certain that finance plays a vital role for strategic planning and decision making. Managing the finances effectively starts with a good training and development program. Through an innovative and engaging training, employees are more likely to understand the implications of good financial decisions and strategies. At Procurement Academy, the cost management training includes the core elements required to help in the successful deployment of a performing cost management strategy. The courses are delivered through application-based e-learning solutions in the form of scenario-based video training. Such training proves to be more engaging and can significantly improve the performance of employees and allow them to have a broader understanding of finance and cost.
Financial metrics allow companies to implement and monitor their strategies with specific, industry-related, and measurable financial goals, ultimately strengthening the organization’s capabilities. Therefore, they create sustainable competitive advantages that maximize a firm’s value. To achieve such results, investing in a good training and development program can prove to be highly beneficial for employees. This will help them acquire the necessary skills and knowledge to manage finances and costs effectively.