Bridging the gap between business strategy and financial reporting: Blueprint for business analyst & managers

Introduction:

It’s important that business analysts and financial advisors understand that the concept of business strategy differs from financial reporting, and as the business environment grows more dynamic, a distinct approach for both factors would pave the way for higher organisational goals. While a business strategy entails the plan and roadmap to allow a business to have an edge over competitors, a financial report provides insight on a company’s financial condition. The financial health of a company is linked to the efficiency of the overall business strategy; hence, the great need for alignment.

Deloitte’s 2021 survey revealed that 70 percent of executives believe alignment between business strategy and financial reporting is crucial for risk management and long-term growth. Misaligned elements can lead to poor financial outcomes, wrong decision-making, and decreased stakeholder trust. This article explores how to bridge the gap between business strategy and financial reporting using accurate statistical references and relevant case studies, providing practical strategies for achieving alignment and determining business trajectory.

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Business strategy: Financial reporting

A well-defined business strategy is a blueprint for a business that encompasses the mission, vision, and futuristic goals of an organisation, guiding decision-making and resource allocation. This strategy informs a company’s stakeholders about fixed objectives and the rationale behind the business operation. It hints at defined steps that would land the company a favourable spot amongst competitors and also develop plans that serve as a shield during market complexities. The effectiveness of a business strategy lies in the results of the study of McKinsey & Company, where companies with a clear strategic form of alignment are found to outperform their peers by 30 percent in terms of revenue generation and growth.

Financial reporting is an official, seasonally curated report that communicates a company’s financial stance, strengths, weaknesses, and improvement opportunities. It helps stakeholders understand their investment and promotes organisational ethics. Key components include Cash flow statements (CFS), Statement of financial position (SFP), Income statements (IS), Value-Added Statement, notes to financial statements, and loan predicaments. These reports provide a comprehensive view of a company’s financial health.

Business strategy and financial reporting are elements that must not be divorced from each other. An interconnection between both variables strikes as crucial to the overall growth of a company, where financial reports not only reflect financial performance but also throw insights on how business strategies are executed. If a business strategy involves penetrating into a new market, the financial strength of that company should be able to boast of the high capacity level of the venture.

Key challenges in aligning business strategy and financial reporting

Most companies grapple with a lot of challenges when attempting to align business strategy and financial reporting, one of which includes the use of inconsistent metrics to measure performance for both variables. This corroborates with the report of PwC, revealing that 60 percent of organisational executives believe that their organisations do not possess standard metrics used to measure financial and strategy performance, leading to inaccurate evaluation. When the true essence of both performances is not captured, it becomes an inconsistency problem, ultimately leading to confusion regarding a company’s overall performance.

The lack of effective communication between the finance and business development teams in organisations also leads to misalignment between both elements. Finance professionals may operate in a silo, and this might lead to the production of reports that are devoid of strategic initiatives, leaving decision makers in a dilemma of confusion. This point is backed up by the recent survey carried out by Accenture, revealing that 55 percent of executives report that there’s an uneven communication level between finance and strategy teams, which forms a barrier for credible decision-making.

Another roadblock to the alignment of business strategy and financial reporting is the complexity of the strategies of some companies. The chosen long-term strategies for some companies require huge financial commitment, and this might negate the financial report revealing the incapability of such ventures, especially as immediate returns are not assured. When this happens, it becomes difficult for the finance team to provide official financial statements, which raises scepticism among stakeholders whose feelings may question the effectiveness of such business strategies.

Bridging the gap between business strategy and financial reporting demands that:

1. Business analysts and financial advisors should ensure that organisations develop integrated performance metrics by establishing key performance indicators (KPIs), which directly connect financial metrics with strategic objectives. An instance in this regard is by aligning the revenue growth of a company with the market expansion strategies. When factors are matched, financial reports are assured to reflect strategic goals.

2. Management of organisations should enhance cross-departmental collaboration. This collaboration is among finance, strategy, and other departments such as sales, marketing, customer service, etc. This collaboration is essential, as it’s a medium that breeds understanding. The more they share information or work on projects together, the faster and better goals become achieved. Harvard Business Review finds that organisations with high cross-functional collaboration witnessed a 20% increase in successful projects. This collaboration would allow financial reports to present a more holistic view of the organisation’s strategic input, balanced with financial insights.

3. Business analysts and financial professionals should implement forward-looking reporting using predictive financial models. These models would align financial background with future strategic goals, allowing organisations to have future business goals reflected on their financial reports, which gives stakeholders information on both the present and future impact of strategies in place.

4. Financial professionals should adopt transparent reporting practices, ensuring that reports are clearly emphasised and possibly matched to reasonable factors. Say, the expense lineup should evidently show its effect on total income generated. If there’s transparency in reports, there’s a higher chance that stakeholders’ trust level will increase. Companies should ensure stakeholders fully understand how financial reporting relates to their strategic initiatives, fostering trust and confidence.

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Looking ahead, the impact of technology shouldn’t be undermined when it comes to aligning business strategy and financial reporting. Digital tools like enterprise resource planning (ERP), data analytics, and financial analytics platforms all contribute to a more encompassing form of report as data from various departments is collated to ensure that insights correlate with real-time figures. According to the survey conducted by SAP, about 70 percent of organisations utilising advanced analytics tools not only experience improved reports but also improved decision-making.

Furthermore, using AI and predictive analytics helps in the accurate forecasting of financial outcomes based on strategic initiatives. Financial teams are implored to adopt these tools to increase accuracy and efficiency levels, producing an overall healthy organisational performance.

Conclusion:

Business strategy and financial reporting are two important elements of every organisation. It’s therefore important that any gap that sets both elements apart, working against each other, should be bridged, as correlation between both units ensures long-term organisational success. Financial professionals and business developers must ensure that they integrate the culture of collaboration, forward-looking reporting practices, and utilising technology to ensure that there’s credible alignment such that financial reports capture strategic initiatives. As the business landscape continues to evolve, the need for this alignment becomes critical to improve decision-making, foster stakeholder trust, and drive exponential growth.