7 Financial Growth Strategies for Finance Executives

It’s no secret the role of the CFO has evolved immensely over the years. No longer are traditional accounting and financial statements the key elements to a fruitful career.

For many CFOs and private equity firms, there are constant variables to keep tabs on, such as:

• Assessing liabilities and operating costs
• Optimizing net working capital during volatile periods
• Wrangling and interpreting data from countless tech and business intelligence applications
• Facing pressure to get the highest return on investment from your ongoing processes
• Complying with new International Financial Reporting Standards (IFRS)and Environmental, Health and Safety (EHS) regulations
• And the list goes on.

Something you shouldn’t have to worry about? Getting to simple trended reporting for the C-Suite —or chasing your finance team for answers to seemingly impossible questions that you need to know by tomorrow’s board meeting. Over the past couple of years, we’ve been fortunate to talk to and work directly with finance executives of manufacturing companies.

Here, we break down seven lessons we learned from firms that have successfully modernized their financial reporting process.

Strategy #1: Build a Scalable Reporting Framework

First things first. How do you build a scalable financial reporting platform when you’re shuffling data between your accounting team, operations, sales, and HR? One area to start is by constructing a system that kills the need to move the data from one place to another altogether.

We hear the term, “single source of truth” frequently, but there’s a reason why so many large businesses are moving in this direction. When it comes to financial reporting especially, it’s important to pull information from various sources and standardize it like a data engineer would—with meticulous attention to detail is important. Data standardization is one of the building blocks to achieving data integrity. As one client put it bluntly, without reliable data you can trust, it’s “garbage in, garbage out.”

FIVE STEPS TO BUILDING THE REPORTING FRAMEWORK

Here are five steps we recommend taking as you build your financial reporting framework.

1. Understand the Purpose, Usefulness and Limitations of the Framework. Understanding the value of having a reporting framework is the first step to building an effective one. The purpose of the framework is to make the company's financial information accessible to investors, shareholders, and other entities, to be able to predict cash flows and make profitable financial decisions. As you build your reporting framework, these should be the goals in mind that should be achieved.
2. Implement Qualitative Characteristics into your Financial Reporting Framework. Qualitative characteristics are what make your reporting framework useful. As you develop the framework, give it these characteristics. There are two categories of qualitative characteristics. The first includes fundamental qualitative characteristics, which have to do with how relevant, material, and faithfully represented the report is.The second is enhancing qualitative characteristics, which relate to how comparable, verifiable, timely, and understandable your financial framework is. A good financial reporting framework must have these characteristics in order to show context.
3. Section Out the Elements of Financial Statements. The next step to take is to categorize your company's operations and transactions framework into the elements of financial statements. These include your assets, liabilities, equity, revenues, gain, losses, income, and expenses. As a CFO or private equity firm, it’s also crucial to keep a close watch on liquidity, gross margin, cashflow, and net working capital. Your financial reporting framework should clearly distinguish each element into which you assign your company's operations.
4. Begin the Process of Recognition and Derecognition to Support IFTS. Recognition entails identifying and providing for the inclusion of the company's resources and transactions into suitable financial elements, either as assets or liabilities. Derecognition involves removing an economic resource from a financial element when it no longer satisfies the condition of classification. This process involves classifying and periodically reviewing the nature of transactions the company undertakes.
5. Carry Out Measurement. This is the process of expressing quantities already recognized as particular financial elements in monetary terms. These terms are usually in the form of historical costs, current value, current costs, and fair value. Attaching a basis of measurement to an asset or liability generates a measure of its revenue and expenses.

Strategy #2: Adjust to Rising Input Costs

There’s no doubt that input costs are rising in today’s economy, and we need to adjust quickly and often. However, adjusting to rising input costs in a highly competitive industry can be quite challenging. It doesn't just affect the cost of a product; it also affects the supply and demand of the product. An increase in input costs will first of all lead to a decrease in supply, then an increase in the price of the good, and consequently, a decline in the demand for the good. These phenomena combine to cause cost-push inflation in the market.

CHANGING MARGINS

High inflation and manufacturing constraints also lead to changing margins. The instability of a company's net margin can inadvertently lead it to bankruptcy or a crash. In this way, a company can have low sales today and still make a profit, but have high sales tomorrow and run on a loss. This can be caused by cost-push inflation, making it necessary to adjust to rising input costs.

WHICH INDUSTRIES HAVE BEEN HIT THE HARDEST?

This economic development has affected many industries, but most of all, restaurant chains, and food and beverage manufacturing companies. The sporadic increase in the cost of raw materials and ingredients, the cost of poultry and animal feed, and the cost of packaging and transportation have led to rising input costs in the affected companies.

As a result, in 2021, the CFOs of Coca-Cola, Nestlé, Mondelez International, Unilever, and General Mills, among many other food companies, announced price hikes or the possibility of hikes occurring, with most of them taking full effect in the market in 2022.

UPDATE STANDARD COSTS ON A FREQUENT BASIS

One major strategy to adjust to rising input costs is for CFOs to update standard costs more frequently. Standard costs are estimated costs of manufacturing materials. Although they are not the actual costs, they are usually close and are used in inventories. They come in handy when there is an urgent need to draw up a budget or inventory, and are typically reviewed once a year.

However, when a company is faced with the problem of rising input costs, the need to review standard costs arise more frequently. In mild cases of inflation, the Pareto principle, in which the price of 20% of the products that contribute to 80% of total costs is updated, can be utilized to maintain low-cost variances. But in extreme cases, CFOs may be left with no choice but to update all product prices.

BUDGET TO ACTUALS

Budget to actual metrics for efficiency has historically been done on an annual basis. In modern times, this needs to be done more frequently to show costs rising. A more frequent review will not only improve the accuracy of financial reports, but it would also help the company adjust per time to changes in input costs across the year.

Something else to note is that with rising input costs comes a delay in carrying time. That is, the time it takes for a product to finally get to the hands of the consumer becomes longer because a price increase may reduce demand. To adjust for this, you may have to reduce the number of manufactured products, or you may end up with many products with prolonged lead times. Another alternative to maintain the price of the product is to cut costs by either reducing the quantity of the product, the size of the packaging, or both.

Strategy #3: Align with the CEO and CIO on Your KPIs

Knowing the most important metrics to track for your business is critical to setting up your financial reporting process for long-term growth. As the CFO, it’s up to you to help yourCEO and CIO to understand the metrics because it will lead to the company’s success.

Here are some tips for leading your executive peers in determining the core metrics that are most important to track:

Your metrics should contribute to the company’s growth and align with its objectives. Leadership should monitor metrics that are core to their quarterly or annual goals. Start by identifying the core metrics that best fit your objectives. Then, be sure your dashboard is set to highlight your most critical business growth KPIs at a glance.

Your metrics should be improvable. You don't want to make use of rigid metrics that keep producing the same results.Instead, your aim should be to adopt metrics that always leave room for improvement.

Your metrics should spur up action. Metric tracking must be clear and concise so that you and your team know exactly how to achieve your goals. The results of the metrics should raise questions and observations about how to improve on them continuously and what strategic course of action to take.

Metrics are categorized into two main classes: the leading indicators and the lagging indicators. The leading indicators point to actions that achieve a particular goal. The lagging indicators show whether you achieved the goal. You have to adopt a strategic blend of both leading and lagging metrics to maximize results.

Strategy #4: Monitor Your Core KPIs and Metrics in Real-Time

Setting up your key performance indicators and then connecting them to the various systems is one of the most important aspects of creating a resilient financial reporting platform. Here are 14 KPIs that every CFO should be tracking:

1. Quick Ratio
2. Current Ratio
3. Working Capital
4. Operating Cash Flow
5. EBITDA
6. Return on Equity (ROE)
7. Total-Debt-to-Equity Ratio
8. Accounts Payable Turnover
9. Cash Conversion Cycle (CCC)
10. Gross Profit Margin
11. Earnings Per Share (EPS)
12. Compound Average Growth Rate (CAGR)
13. Employee Count
14. Interest Coverage Ratio

For a full breakdown on these metrics, download our guide.

Strategy #5: Make it Easy to Spot Trends & Anomalies

Now that you know the core KPIs CFOs should have on their dashboards, the next thing you need to know is how to spot trends or anomalies which will lead to the utilization of the KPIs. Here is a sample process by which the CFO can use to spot trends or anomalies:

Build and plan out multiple scenarios. There is no certainty about what the future holds. Therefore, CFOs have to come up with multiple scenarios or events that can take place in the market, each of them being equally likely to occur. A further analysis of these possible futures using models and figures will narrow them down further, and as the real future unfolds, the CFO can determine the trend it is likely to follow and the anomalies involved.

Determine what indicators are evident and follow them. Depending on the scenario analysis, you’ll be able to identify trends and anomalies. These can help you hypothesize why current business outcomes are occurring and predict outcomes based on changes. In order to determine how to use the scenario analysis framework, you’ll want to develop KPIs that best support the goals of your analysis.

Take action with the data you have. You don’t have to wait for everything to be known about a trend before taking action. While it’s important to be thorough, there will always be more to uncover. Take action with the data you’ve collected to mitigate any predicted risks or anomalies indicated.

Diversify and encourage inclusion. To obtain comprehensive data, you need to listen to and make hypotheses from people with different cultures, backgrounds, and experiences. This way, you broaden your range of information and can make informed decisions that can make your results more efficient.

Strategy #6: Analyze Your Company's Performance with Deep Insights

In order to analyze your company's performance at both a macro and micro level, get involved to ensure these four checklist items are taken care of:

Align your metrics. Look out for similarities or disparities in the KPIs identified and align them together.

Identify & remove internal roadblocks, such as data silos.This will help you build capacity and capability within your company.Invest in employees and they will add value to your company.

Pay attention to your business strategy. Be unique and consistent with it as you take action to aid your financial performance.

Create a spending budget that fits into your financial needs. Be flexible with your resources and analyze the most cost-effective means of allocating expenses.

Strategy #7: Set the Stage to Satisfy a Buy and Build Strategy

DEFINING THE BUY AND BUILD STRATEGY

A buy and build strategy is an expansion strategy in which a company looking to broaden its reach and operations in a particular direction, buys a smaller platform company in the industry that has developed expertise and a setup organization upon which the buying company can build upon.

COMMON CHALLENGES FACED WITH THE BUY AND BUILD APPROACH

‍To satisfy stakeholders when pursuing a buy and build strategy, it’s important to face challenges head-on. Be sure your reporting platform is consistently aligned with your KPIs and is ERP agnostic. This way, whether you’re using NetSuite,Oracle, or a legacy system, you’re not beholden to an ERP overhaul.

TRENDING UPWARD

In 2022, the buy and build strategy has become so rampant that companies who buy just one or two platforms are usually no longer regarded as having implemented the strategy. Of all buy and build deals in 2003, 21% of them had sequentially acquired at least four companies. By 2019, it had risen to 30%, with10% of them acquiring at least ten companies sequentially.

CONCLUSION

The growth of businesses and private equity firms depends on many factors. We’ve broken down the seven strategies modern CFOs and private equity firms use to grow their business:

1. STRATEGY 1: Build a Scalable Reporting Framework
2. STRATEGY 2: Adjust to Rising Input Costs
3. STRATEGY 3: Align with the CEO and CIO on the core metrics
4. STRATEGY 4: Monitor your Core KPIs and Metrics Often
5. STRATEGY 5: Make it Easy to Spot Trends and Anomalies
6. STRATEGY 6: Analyze Your Company’s Performance with Deep Insights
7. STRATEGY 7: Set the Stage for a “Buy and Build” Strategy

By setting up the financial reporting framework to understanding and monitoring KPIs for the company, the CFO must have a vast knowledge of financial metrics in order to make profitable business decisions. From there, being able to adjust to rising input costs will help you to not only survive as a business but also to employ real-time data to help you pivot quickly.