The Rise of Strategic Finance
What Exactly Is Strategic Finance?
Just about nothing is more crucial to the health and success of a startup than its finances. And when it comes to managing and approaching financial goals and decision-making, there’s a rising trend in the startup space: strategic finance.
Today, more and more startup leaders are turning to strategic finance in order to plan for the future of their business, leverage their finances for success, and execute precise financial plans in order to accomplish future goals. But what exactly is strategic finance, and why is it so powerful for helping companies (and especially startups) achieve long-term financial goals and sustained, specific growth?
Strategic finance refers to taking a long-term approach to a startup’s finances. When leaders are using strategic finance, they’re usually thinking about their business several steps ahead, identifying specific future goals, and making decisions with those goals in mind. Strategic finance is useful for many things, but it can be particularly beneficial for making the best financial decisions during tumultuous rough patches, which can hit startups hard, and without much notice. Not only that, but it also highlights potential issues early, allowing companies to pivot as needed in a more timely manner.
In general, strategic finance can help startup leaders make better decisions. The top reason that startups fail is because they run out of cash. The fact is, poor financial management and business financial planning can lead to poor financial decision-making. With strategic finance, however, leaders are better prepared to make smarter decisions for the future. But, in order to execute strategic finance, a startup’s accounting processes need to be in good health and optimized for analysis.
How Does It Differ From Just Budgeting?
You might be wondering how exactly strategic finance differs from budgeting – if it’s even different at all. But yes, strategic finance is distinct from budgeting. One of the main differences is that budgets look at a stable present in their financial planning. Even if they account for variables, budgets are not designed to project and hypothesize on growth. At the end of the day, budgets are static models that leaders can use to compare actuals against on a regular basis, reporting primarily on a historical basis.
Strategic finance involves creating and evaluating results in different scenarios, based on financial data. This data comes from thorough financial analysis, which can then help leaders make unbiased decisions for the future.
Budgets and strategic finance also operate in different time frames. Strategic finance is used to model long-term financial goals and outcomes. But budgets are designed to help dictate daily operations and short-term financial outcomes.
5 Aspects of Strategic Financial Management
Strategic finance goes beyond standard business financial tasks, such as monthly financial reporting. Here are 5 aspects that set it apart from general financial management.
One of the key aspects of strategic finance is forecasting. Creating a forecast for a startup requires leaders to identify its overall goals, in order to outline how money will be spent and earned in a certain period of time. Forecasting requires leaders to project how much money will be needed in different areas and divide up the money that is available to the company as a whole. This is a crucial aspect of strategic financial management because it allows leaders to identify exactly where funds are to be allocated to meet future goals, while giving them the data they need for educated financial decision making.
2. Assessing Risk
Financial risk is inherent in startups, but when it comes to strategic finance, leaders go to great lengths to ensure that risk is deeply understood and managed. Whether it’s an investment or another type of financial decision, startup leaders should carefully analyze risk before decisions are made in order to make the wisest financial decisions possible. Properly utilizing a forecast will help highlight these risks early.
3. Product Development
When it comes to strategic finance, decisions are made with the long game in mind. This means that when it comes to product development, financial decisions are made with long term goals and financial impacts as the main consideration. For example, let’s say a new product is projected to cost the business quite a bit of money up front, but is then projected to be extremely profitable in the following months. If a startup is utilizing strategic finance, they’ll choose to take that loss up front, in order to ultimately earn more in the long run. Strategic finance and forward looking forecasting allows founders to track their run rates and progress towards hitting goal metrics.
4. Growth Trajectories
Strategic finance is forward-thinking, goal-oriented, and growth focused. Leaders set goals, and then establish specific financial plans and guidelines to help the company meet projected targets. One important factor in this process is the company’s valuation, which can be determined through a 409A valuation.
A 409A valuation is a formal report that tells you the value of your company’s common stock. When a startup issues stock options to employees, the IRS requires that the stock options be issued at fair market value to avoid being considered taxable income. This valuation is important for startups as it can significantly influence financial strategies, fundraising, and the overall growth trajectory of the company.
When startup leaders are utilizing strategic finance, they’re making decisions that help the company move along on its overall growth trajectories, based on timely and accurate financial insights, including their 409A valuation. This information can provide valuable insights to guide the strategic finance process.
5. Confident Hiring Decisions
Hiring decisions shouldn’t be haphazard or questionable. Hiring decisions should come from a place of financial confidence. No startup should wonder if a new hire is going to put them in the red (especially for executive, C-Suite, or leadership positions). Strategic finance provides for useful insights to inform hiring decisions, and to plan for future new hires.
What Are the Benefits of Strategic Finance?
In general, strategic finance offers many benefits to startups and their decision makers, because it allows businesses to make well-informed decisions that help them achieve future goals. Here are some of the top advantages of using strategic finance:
Unbiased Decision Making
When it comes to startups, sometimes decision-making can be tricky, complicated, and even emotional. But with strategic finance, leaders can simply rely on insights and data to influence their decisions, instead of running on thought, feeling, or bias. This can help with making choices that boost profits, improve metrics, and maximize the overall value of the business.
Sometimes, it can be tough to get buy-in for new initiatives, especially when it comes to financial decisions that involve investors or the board of directors. Without strategic finance, it can be all-too-easy for new financial initiatives and decisions to be met with some apprehension. But when leaders use strategic finance, they’re using facts, figures, and numbers to make financial decisions that are destined to benefit the business. With this data to back up decisions, it’s far easier to get buy-in from other key players.
Aligns Performance and Management Goals
When performance and management goals are misaligned, it can lead to a chaotic workplace. But with the help of strategic finance, management can have a clear understanding about how the work of their team impacts the overall goals of the company. When strategic finance is used as the common denominator, everyone can work towards the same collective objectives, meaning that performance and management goals are designed to reach the same outcomes.
Creates a Competitive Landscape
With strategic finance, startups aren’t only planning for how the market is today, and what their competitors are doing now. Instead, it plans for future scenarios and long-term goals, including changes to the market and the competition. This financial strategy enables startups to constantly reassess the market and their competitors to make sure that they aren’t caught off-guard by sudden shifts, and to continuously stay ahead of their competition.
How Does This Connect With Having a Virtual CFO?
Deploying strategic finance means conducting thorough financial analysis and research, and making assessments and analysis from this data. While startups certainly can deploy this practice on their own, owners and founders typically specialize in other aspects of the business. For example, in one survey, 40% of business owners said that finances are their least favorite part of owning a business.
With that in mind, strategic finance can be handled by a Chief Financial Officer, who can easily interpret financial data, and align it to a company’s goals. But many startups might find that they’re not yet in the position to bring on board a CFO, because the truth of the matter is that a CFO isn’t really suitable if there isn’t enough financial data to interpret. Because of this, many startups choose to work with a fractional CFO in their earlier stages, before they’re ready for a fully-fledged CFO.
When is the right time to bring on a fractional CFO to help with strategic finance? Typically, startups with $2-3M in revenue is the optimal point to bring on a fractional CFO. However, some smaller companies may also consider bringing on a fractional CFO.
What Happens Without Strategic Finance?
What do a startup’s finances look like without the use of strategic finance? Research tells us that in general, 80% of businesses fail to track their business goals. Without strategic finance, leaders might make decisions with short-term goals in mind, which might be useful for those decisions in the moment, but that might not contribute to the larger goals and overall success of the company.
A lack of strategic finance can also lead to haphazard decision-making, based on factors aside from the long-term financial implications. While this sometimes can bring positive results, it can be far less data-based than strategic financing, which uses concrete figures and financial planning to fuel decisions with long-term outcomes in mind.
We do strategic finance a bit differently over here at hiline.
Here’s the thing about strategic financing: it’s not only about setting goals and running the numbers. It’s also about conducting in-depth analysis, and making complex financial decisions. This can be tricky without proper tools and guidance.
At hiline, we not only offer robust business accounting and bookkeeping services (specifically designed for startups), we also provide businesses like yours with strategic finance to help take your business to the next level.
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