Plan Your Work; Work Your Plan — December 2015

This post concerns strategy.

The CFO is not solely focused on recording and reporting performance. An effective CFO must partner with others in the company to mitigate risks, drive strategy, and add value. Industry knowledge and depth of exposure to other functions in the firm are critical for strong relationships and astute perspectives. These factors, along with an understanding of how the market views the company from a competitive standpoint, are crucial to developing an effective strategy. The CFO can play a crucial role in developing the company’s strategy. Accordingly, the CFO must be involved in all aspects of the planning process.

We view the planning process and the resultant output as the key to and effective competitive strategy. The important components of this process are the Business Plan, the Strategic Plan, and the Financial Plan or budget. The CFO has an important role in each. This role is enhanced by industry knowledge and a command of all parts of the business as described above. The CFO’s role in the Business Plan is support; in the Strategic Plan support; in the Financial Plan acting as the driving force.

The Business Plan is a document that transforms the entrepreneur’s dream into a practical framework to “live the dream.” It helps identify and refine the entrepreneur’s vision and sets out bold parameters as to how the vision will be achieved in the long run. The key audiences for the Business Plan include: investors; lenders; employees; customers; suppliers; and potential partners such as joint venture partners and subcontractors. We believe the Business Plan should be reviewed and updated, if necessary, every two years.

Among the critical elements to be addressed in the Business Plan are keys to success; core competencies; benefits to customers; payback process; milestones; and an exit strategy. Theses elements are addressed within a framework that describes the functional attributes of the business and the environment in which it operates..

The Business Plan must acknowledge the firm’s operating environment in which the firm will operate and how it will be successful. The key topics to contemplate in this respect are:

• Industry Analysis: Barriers to entry; regulatory issues; technological factors; seasonality. The CFO can help by providing information regarding the relevant regulatory issues.
• Market Analysis: Size and growth; trends; targeted segments; key customer needs; product positioning. The CFO can help by providing important statistical data.
• Competition: Profile; market share; competitive strengths; competitive weaknesses. The CFO can help by providing market share data.
• Marketing and Sales: Products; pricing; promotion; distribution.
• Operations: Product development; production process; quality assurance.
• Management and Organization: Management team; Board of Directors; key personnel and expectations of positions the hold; organization chart.
• Capitalization and Structure: Legal structure; current and pro-forma capitalization, projections and lenders; exit strategy. The CFO can be helpful in providing descriptions of the legal structure and pro-forma financial data.
• Development and Milestones: Financial commitments; product development breakeven timing; expansion. The CFO can provide relevant financial information regarding breakeven points, expansion costs, and quantify financial commitments.
• Risks and Contingencies: Loss of key employees; regulatory changes; technology advances; entrance of a well heeled competitor.

Once the Business Plan is complete it must be complemented by a Strategic Plan. The Strategic Plan details the tactics to achieve the vision set out in the Business Plan. The basic Strategic consists of five key elements. These are:

• Mission Statement: Describes the basic purpose of the company. Included are which customer needs are intended to be met with which product or service. Typically this statement will change over the long run.
• Goals: Describes specific goals the company must reach if the mission is to be accomplished.
• Strategies: The policies and actions that must be implemented to achieve each goal.
• Plans of Action: Specific step by step process implemented for each strategy.
• Feedback: A method to monitor progress of the plans of action.

The Strategic Plan is not a static document. Some things will remain constant, others will change dramatically. Accordingly, strategic planning is a continuous process. Information about challenges and resources is constantly collected and the Strategic Plan is adjusted as appropriate. The CFO plays an important role in collecting, organizing and analyzing the data so that optimal adjustments can be implemented with the leadership of the CEO and perspectives from key constituencies. The CFO also quantifies the goals that must be reached for the company’s Mission to be achieved.

The Financial Plan, commonly called the budget, is driven by the CFO and quantifies, in detail, the goals set forth in the Strategic Plan. The Financial Plan matches the company’s financial resources to the planned efforts. This endeavor is necessary to determine that there are adequate resources to achieve current objectives as well as create or reserve additional resources to provide for future goals. An effective Financial Plan acts as a tool that aids in planning, training, and monitoring the use of resources.

The Financial Plan should address several quantitative objectives. First, what are the anticipated revenues, expenses and cash flow. Second, what are the time frames involved for the investments and returns for key stakeholders. Next, how reasonable are the assumptions that underlie these financial projections. Another objective is to compare the anticipated return to existing benchmarks or industry standards. Also, the Financial Plan must display and interpret key ratios (margins, turnover, etc) . Finally, the Financial Plan must address incremental expenditures or investments that affect stakeholders.

The Financial Plan should present the foregoing information in the form of Income Statements, Balance Sheets, Cash Flow Statements, Financial History and Ratios, and an Analysis of Returns. This information should represent at least five years of forward looking information. We believe the first year should show monthly information; the second year should display quarterly information; and years 3 -5 should display annual information.

We cannot stress enough that the Financial Plan reflects the firm’s mission, goals, and objectives of the other Plans we have discussed. It is up to the CFO to determine that the financial components are harmonious with the other sections of the Business Plan and the Strategic Plan. This will enable the CEO and other key constituencies to assess the reasonableness and achievability of the plan. An important tool to aid these efforts is to incorporate key performance indicators (KIPs), which are non-financial in nature. Examples include volume, new customers, and distribution channels.

Succession planning for developing a CFO to fulfill the roles we have described is also important. We suggest promising employees be rotated through a variety of financial and operating assignments. This will enable the young professional to understand the functions of other employments and corporate functions as well as develop an understanding of how all the pieces fit together.

We also suggest that promising employees as well as the CFO exert significant effort into developing communication skills. Learning to condense important information into a form that presents the substance of the matter at hand in an understandable form is crucial. This enables the strategy to be effectively communicated to the lowest level staff member as well as high ranking Board members.

An effective CFO must partner with others in the company to mitigate risks, drive strategy, and add value. Industry knowledge and depth of exposure to other functions in the firm are critical for strong relationships and astute perspectives. These factors, along with an understanding of how the market views the company from a competitive standpoint, are crucial to developing an effective strategy. The CFO can play a crucial role in developing the company’s strategy. Accordingly, the CFO must be involved in all aspects of the planning process.

We view the planning process and the resultant output as the key to and effective competitive strategy. The important components of this process are the Business Plan, the Strategic Plan, and the Financial Plan or budget. The CFO has an important role in each. This role is enhanced by industry knowledge and a command of all parts of the business as described above. The CFO’s role in the Business Plan is support; in the Strategic Plan support; in the Financial Plan acting as the driving force.

Capitol CFO Solutions serves clients in Washington, DC, Maryland, and Virginia. Please contact us for a free consultation.