How a Strategic Plan can help to demystify a company’s uncertainty

The current financial and economic uncertainty faced by businesses in the world poses a variety of strategic challenges to professional managers.

One tool that can help to demystify or temper these strategic challenges is the application of a strategic plan across a company, its business units, assets and projects. This sophisticated financial model offers executive management two important primary benefits; it is a robust corporate governance tool, and secondly it is a “lean finance” solution for a company.

The Oxford Dictionaries website defines uncertainty as “the state of being uncertain” or “something that is uncertain or that causes one to feel uncertain”, which is clearly the essence of a strategic plan and the modus operandi of a strategic professional.

The current economic uncertainty of the world economy

Evidently the demands on strategic professionals and executives to decipher the challenges a company faces in the future are enormous, and they are compounded by the bearish sentiment and the exceptional events since 2008. The strategic plan must attempt to model and account for a myriad of risks, which could adversely impact a company’s financial health and performance.

The mechanics of a Strategic Plan

A strategic plan encompasses value-adding financial analysis, strategic forecasting and financial planning of a company’s financial statements. If this financial model is built in an integrated manner, then iterations or updates to a company’s strategic plan will be effortless and enable more value-adding strategic analysis; as opposed to hours spent reworking or even rebuilding an existing strategic plan.

The true power of a strategic plan lies in its analytical power to demystify this financial and economic uncertainty. The financial model will deliver a qualitative and quantitative projection of the company’s anticipated and strategic financial direction.

Corporate Governance and Uncertainty

As I discussed in, Why a best-practice financial model is an important corporate governance tool, the Cadbury Committee (1992) in the UK defined corporate governance as “the system by which companies are directed and controlled”. A financial model such as a strategic plan will improve executive management decision making and better predict the future direction of the company – thereby demystifying the company’s future uncertainty.

The disciplined nature of monthly financial reporting, in terms of comparing actuals to budget, can help companies to partly unlock the uncertainty of its future financial viability. A thorough strategic plan, which receives buy-in from numerous areas of a company, will force relevant stakeholders to be held accountable for their various functions and areas of operation.

A “Lean Finance” tool to combat Corporate Uncertainty

My article, A Best-Practice Financial Model. A Lean Finance tool, defined the move towards lean finance as the use of “tools to streamline and enhance productivity and effectiveness” (Chartered Institute of Management Accountants, UK 2012), which will lead to improved financial reporting, model risk and time spent developing and operating the strategic plan.

The introduction of seamless best-practice financial models such as a strategic plan can help to reduce cost and improve productivity of employees. Instead of a team of analysts reworking or rebuilding a strategic plan on a periodic basis, they can instead add more value by undertaking scenario or sensitivity analysis to alleviate financial uncertainty, which a dramatic change in consumer spending or exchange rates might have on a company’s bottom line.

Multiple-pronged approach to a company’s strategic plan

Different strategic professionals will have various approaches to designing a company’s strategic plan. Some companies prefer their best-endeavours approach to forecasting; understandably they believe you can only have one view of the future – your business will either grow or it will contract. However corporations are very complex to predict, and many executives prefer to have two or three scenarios of their forecast. Equally as understandable, they like the resource of the strategic plan to show them a floor (worst case scenario), a median (mid case scenario) and a ceiling (best case scenario) of their future financial plan to demystify the company’s uncertainty.

The multi scenario strategic plan may be necessary if the corporation is seeking a capital rising, where potential investors may require multiple valuations of the business, which is naturally sourced from the strategic plan.

To be continued …

As discussed in the above, a strategic plan can help demystify a company’s uncertainty, because it tackles the array of risks that a company will face in the future. Further the strategic plan’s analytical power, ability to improve corporate governance, improve efficiencies and its ability to model a company’s future under multiple scenarios are all approaches that help to debunk this uncertainty.

In Part 2, the advanced financial modelling analytics and the end benefits to the company; courtesy of the delivery of the strategic plan will be examined.