Modern business is data-driven. Financial information offers realtime insights that allow on the fly decision making, and provide critical input for long term strategy formulation. However, there is a flipside to this. An overly strong focus on financial data can put the strategy on the backburner and lead to confusion within an organization, warns Susan Hansen. She teaches the course Essentials of Finance for Executives at the Amsterdam Institute of Finance.
As a chartered accountant who has worked in financial services since 1980, Hansen strongly believes that having an understanding of the basics of finance is critical for almost anyone in business. “When you look at a balance sheet or a P&L, and have the ability to see what it is you need to look into further, that’s a very powerful skill because it helps you to quickly understand what’s important.”
Knowing the different tools within finance and understanding when it is appropriate to apply them is fundamental. “What is the point of budgets, why should we forecast as well, and how far out should we forecast? These are everyday questions in business that are seldom answered completely.”
Laying a jigsaw puzzle
Finding out how an organization creates value, but also where its weak spots are, is like laying a jigsaw puzzle, she elaborates. “That’s really about asking questions and being curious, about wanting to find out more about the organization and its value drivers. If you don’t know how to navigate your way around financial statements, you won’t ask the questions.”
When it comes to formulating a strategy, this can also be a very powerful tool. Financial data can inform strategic choices like whether to enter a certain market, or which customers to target. Hansen: “That is about taking all the data about financial performance into account, stacking the strategy, and then feeding it back so you’re making good, consistent decisions that will create value.”
Strategy comes first
Critically, it should always be the data assisting the strategy, not the other way around, she warns. “Your strategy comes first, and then you make a link to your financial decision-making. For example, if your strategy is to never, ever disappoint a client, that means you need to have working capital so that you’ve always got enough stock on hand. During the Covid pandemic, you saw people who had two days of stock while their strategy had been to never disappoint a client. Now, there they were with two-day stock because their accountant had told them they were sitting on too much working capital.”
Finance team coming in
It happens quite often that finance teams take positions that are contradictory to the strategic choices that were made earlier. “So often you see a finance team come in wanting to drive down working capital by, for example, asking customers to pay within thirty days. However, if your strategy is that you want to move into a market, when it turns out that market can’t pay you within thirty days, it’s the financial norms that have got to change, not the strategy.”
Another example is that of finance wanting to act opportunistically. “When interest rates were very low, you had finance teams that said ‘let’s borrow some money’. But if you have a strategy that says your risk appetite for debt is zero, it should be the strategy which leads the finances and not the other way around.”
Confused organization
This can have major repercussions, since there is a direct line connecting strategy, financial performance and long-term value creation. “Of course, there are many different ways to run an organization, but the most important thing is that everyone’s running it the same way. Organizations need consistency. You don’t want to have people in the organization thinking that the strategy is about process improvement, or brand awareness, while someone else thinks it’s about cost reduction. You’ve got to make sure there is consistency. Otherwise you’re going to have a very confused organization. I know it’s easier said than done but you’ve got to make sure that everyone is in agreement.”
Confidence to be curious
This means people involved in decision making have to be able to push back. “They need to have the confidence to be curious and to ask what things actually mean and what the impact on the company will be. Just knowing the language, knowing what EBITDA and discount rates are, what all these terminology means, that would make a huge difference. The best thing I ever did was to learn finance. So I think it’s a fantastic tool to have that gives you a big advantage over other people. It’s a privilege to share the skills, tools and experience that I have gained over my career.”
Take a walk on the wild side. Embrace the numbers. Join Susan Hansen on the 3-day Essential of Finance for Executives program at AIF. Learn more & reserve your place here.
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