Integrating Your Financial and Operational Strategy

Integrating Your Financial and Operational Strategy

by Gregory R. Smith

Every business has an operational side and a financial side. Small business owners and managers often think of strategic planning in terms of an operational strategy and a separate financial strategy, not realizing the two are so interwoven. If they are not designed to integrate and support each other, that doesnโ€™t bode well for successful operations or future growth.

 An Integrated Approach Works Better

From an operations perspective, you have a product or service. But financial issues will bubble up if you havenโ€™t adequately considered the financial ramifications of desired growth. You want to achieve your goals, but cash flow management is critical.

Operations planning involves identifying what you want to accomplish and by when, both short and long-term. Good CEOs thrive in this space. They are visionaries who see opportunities and pathways that are not clear to everyone else. 

Financial planning involves creating projections and models that enable and support the desired growth. Traditionally this work rests on the shoulders of the CFO. They should be able to see the vision laid out and identify risks that could jeopardize it.  By offering the CEO, or full leadership team, options for mitigating potential risks, a CFO becomes an integral part of achieving operational success.

If your financial and operational strategies are not aligned that can leave you vulnerable because your financial resources directly impact your ability to carry out operating plans and bring in the revenue you may have projected.

For example, letโ€™s say your operational strategy calls for building a new facility. You sign up a big customer for the widget will be produced at that facility, and your future looks bright. But then the cost of constructing your facility goes over budget and the new customer orders considerably less than anticipated.

If your financial strategy doesnโ€™t include a contingency plan, your business could be in trouble. In todayโ€™s economy, no matter your industry, it is crucial to build flexibility into your strategic planning so that you can adapt readily to rapid change.

Smaller and mid-size companies where it may not make financial sense to have a full time CFO on staff can rely on a fractional CFO model during strategic planning. By bringing in an experienced CFO for a limited engagement only one or two days a week you can still get the support you need to align your financial and operational strategies. 

A fractional CFO can help a CEO avoid the feeling of โ€œflying blindโ€ when it comes to the financial side of their business. They can step in to learn about your company, review current financial status and processes, identify gaps, help you set strategic planning priorities, and advise you on how to get there most effectively.

A fractional CFO can act as a catalyst to drive budget variance analysis and as an advisor on โ€œfooling yourselfโ€ situations when it comes to business model assumptions

Tips to Blend and Balance Operations and Finance

Whether you work with your full time CFO, a fractional CFO, or take on the risk of aligning financial and operational strategies all by yourself, here are some best practices to follow. 

  1. Create 1, 3, and 5-year operating plans with P&Ls, Balance Sheets and Cash Flows. This is what we call business modeling.
  2. Do a โ€œsensitivityโ€ analysis on the plans with worst-case/mid-case/best case views, mainly to understand cash flow and working capital.
  3. Drive budgeting down to mid-level managers so they are invested and understand how their decisions impact the financials. Giving team members the chance to experience first-hand how operations and finance relate can help build leadership as well as accountability.
  4. Do variance analysis on your budget to find actionable events.
  5. Understand the capital requirements of your operations plan and back-up plans for short falls, i.e., more equity or bank financing. Create a strategy to attain needed capital, understanding the time it will require.
  6. Hold an annual strategic planning session that incorporates both operational and financial aspects. This is your opportunity to envision the future but also to get specific. Set priorities and KPIs and regularly review progress in all areas.
  7. Understand the financial ramifications of products, people, and processes within your organization

download the financial checklist for business leaders at this link

Gregory R. Smith

Gregory R. Smith

Greg Smith is a director and practice lead of the Accounting and Management Outsourcing (AMO) group at Redpath and Company. He provides oversight and direction to each of the accounting, payroll consulting and Fractional CFO/Controller areas within AMO as well as directly providing Fractional CFO services. Greg began his career in the entrepreneurial services group at EY in audit and has been a Controller and CFO in public and private companies for over 20 years. Over that time, he has gained experience in a wide range of industries including manufacturing, services, software/internet/high tech, med tech, and real estate. Greg joined Redpath and Company in 2021.