Why Finance Skills Are Essential for Strategic Consulting

Introduction

Many consultants have been trained in Strategic Consulting - the practice of working directly with a company to assist it in planning for the future. Strategic decisions might involve anything from opening new locations, to introducing a new product line, to downsizing personnel. Although when thinking of strategic consulting it can generally feel like an abstract concept that focuses on the present vision, it is important to know that each decision made should provide economic justification. Therefore, having finance skills is essential within the realm of strategic consulting, because without solid finance knowledge, a consultant might propose ideas that seem reasonable, but ultimately do not provide adequate returns on the investments involved. A finance background will also give the consultant the tools necessary to analyze whether or not a strategy is attainable, has potential for profit, and is sustainable in the long run.

Understanding Strategic Consulting in Simple Terms

Advising businesses on how to improve and growing their business through consulting is known as Strategic Consulting. Strategic Consultants conduct research into an organisation's current state and then provide analysis and insight on the company's future actions (or "next steps"), as well as recommendations on how to enhance the efficiency of those actions. There are many different kinds of actions that a strategic consultant might recommend, including developing strategies for growth, reducing costs, creating a competitive market presence, and improving operations. Strategic Consultants utilize a significant amount of data to aid in their recommendations, and therefore finance skills are very important to the consulting process because almost every recommendation made by a consultant has an impact on a company's revenue, expenses, profits, cash flow, and equity.

Finance as the Language of Business

The term finance is often used in conjunction with business as it allows businesses to convert their business activities into numerical form that can be measured. Some of the key indicators of a company's financial health are sales growth, profit margins, return on investment and cash flow. In order to effectively communicate with senior management, investors, and stakeholders, strategic consultants need to be familiar with the financial language and the concepts associated with it. When they are using financial terminology, their recommendations will have credibility and will be clear to their audience. Consultants with financial skill will be able to convert strategic ideas into measurable results that the business leaders can rely on.

Every Strategic Decision Leads to Financial Consequence

Every strategic decision has financial repercussions. For instance, expanding into a new market requires an investment in marketing efforts, infrastructure and human capital. Additionally, launching a new product includes expenses associated with research, production and pricing. Finally, cost-cutting measures can have an effect on employee morale and productivity, ultimately affecting long-term profits. Consultants use their finance skills to assess the financial consequences of every recommendation before they make a recommendation. Through the use of finance analysis, consultants are able to determine estimated costs, projected revenues and profitability. Therefore, when developing a strategy, a consultant uses financial analysis to ensure that the strategy will not detrimentally affect the company's financial condition.

Finance is Essential to Develop Strategic Thinking

The benefits of developing your Strategic Thinking are compatible with developing the necessary creativity, discipline and analytical skills of finance. Finance provides the framework or structure for that discipline, and its tools — financial statement analysis, ratio analysis and trend analysis — aid Consultants in understanding a company's strengths and weaknesses. For example, if a company's profits are declining, this could indicate either pricing or cost pressures. If the company has insufficient cash flow, this could indicate operational inefficiencies. By using financial analytical tools to analyze a company's financial data, Consultants are able to determine the root causes of problems instead of simply treating the symptoms. This enables Consultants to make the most accurate strategic recommendations possible and to implement those recommendations effectively.

Connect Strategy to Profitability

A successful strategy improves a company's profitability over time. Using the discipline of Finance, Consultants can determine whether or not a proposed strategy will result in an increase or decrease to the company's profits. For example, while a Growth Strategy may produce increased Company Revenues, it may also produce lower profit margins if the costs associated with producing more revenue are growing faster than the revenue itself. Thus, Finance can be used as a tool for Consultants to examine the trade-offs between a growth and a profit strategy, thereby developing methods to design effective strategies that balance ambition with financial constraints.

Why Financial Models Are an Essential Tool for Consultants

Strategic Financial Modeling is one of the most critical components of consulting. Using a Financial Model, consultants can analyze the outcomes of different strategies by running simulations to see how changing different variables or scenarios will impact the results of a specific project. For example, if a consultant were going to enter New York City or Los Angeles, a Financial Model would allow the consultant to analyse both strategies' financial impact on a specific company. This type of analysis allows a consultant to understand how changes in a Financial Model will affect Future Profit and Cash Flow. Without Financial Modeling skills, it is unlikely that Consultants could create sound recommendations for clients relying on financial data versus intuition.

Using Financial Skills to Detail the Risk Portions of any Strategy

Every strategy has inherent risks. Market demand may not grow as rapidly as expected; costs may continue to rise; competitor responses would be aggressive. Finance Skills provide a consultant with the tools to quantify the anticipated risks associated with each strategy through Sensitivity Analysis, Scenario Analysis and Stress Testing, enabling the consultant to demonstrate which strategies will provide a greater Probability of Success while also protecting Management against potential risks associated with those strategies.

Cost Structure Understanding Is Critical

The cost structure of an organization is critical to strategic consulting. Costs can be fixed/variable, direct/indirect. Understanding costs enables consultants to understand the behaviour of costs within the organisation and where there is an opportunity to improve. For example, organisations with high levels of fixed costs may be at greater risk when confronted with an economic downturn. A consultant with finance expertise would be able to provide insight on strategies that can improve a company’s flexibility towards its fixed costs through the use of outsourced resources and/or automation, improving an organisation’s operational efficiency and financial stability.

Financial Analysis as a Basis for Competition Strategy

There are many ways in which organisations compete within their respective industries (Cost Leadership, Differentiation, Focus). Decisions regarding which of these strategies to pursue are based on the financial capabilities of an organisation. For example, if an organisation chooses a Cost Leadership strategy, it will need the ability to control its costs effectively and operate in an efficient manner. On the other hand, if the selected Competitive Strategy is based on differentiation, marketing and innovation costs will be greater in relation to production costs.

Consultants apply financial analyses to understand whether or not an organisation has sufficient resources and/or profit margins in order to implement its competitive strategy effectively, ensuring that competitive positioning and financial capability align with one another.

Capital Allocation Decisions Need Finance Expertise

Capital allocation decisions are made by companies that typically have limited resources available to invest. Consultants help businesses allocate their capital to maximize their return on investment. Because financial skills are used by consultants to analyze and compare project opportunities using a number of different types of financial metrics (e.g., net present value [NPV], internal rate of return [IRR], and payback period), consultants are able to allocate capital for those projects that provide the greatest value and return for the capital invested. In the absence of a solid financial knowledge base, the capital allocation decisions made by consultants would be based more on emotion or company politics rather than on a clear understanding of the underlying financial returns on those investment opportunities.

Financial Decisional Support - Mergers & Acquisitions

Mergers and Acquisitions (M&A) are complicated business decisions that have significant financial consequences. The consultant role in evaluating potential M&A transactions is particularly important because the vast majority of merger activity is evaluated by financial analysts. Consultants with solid financial skills are able to evaluate the valuation of potential acquisitions, identify synergies between companies, assess integration costs between companies, and evaluate financing transactions. If a consultant does not have a solid financial background, he or she is unable to accurately evaluate whether a potential acquisition will create value for the acquiring company or destroy it. Therefore, all M&A strategic recommendations must have substantial financial analyses to ensure they do not create significant costs associated with the execution of a merger transaction.

Financial Control's Importance in Strategy Implementation

If an organization cannot execute a strategy efficiently, it is worthless. The ability of financial skills to facilitate the implementation of strategies through the development of budgets, performance measurement systems and monitoring systems provides consultants with the necessary information to assist the organization in executing its strategic plan successfully. Furthermore, it is necessary to establish an effective form of control over executing the strategy, and the act of linking the strategy with financial targets allows consultants to effectively measure organizational progress and adapt in a timely manner from one point of strategy to another. In essence, this allows consultants to develop strategies that transition from a strategic plan that is hypothetical in nature to that of an actionable plan.

How to Deliver the Strategy to Stakeholders

Consultants typically deliver strategic plans to their clients, such as senior management, boards of directors, and investors, who all typically operate through a financial lens. The consultants' financial skills allow them to easily articulate and effectively provide information to their clients' stakeholders regarding a given strategy. When the strategic plan is accompanied by a financial projection, accompanied by supporting assumptions that are clearly articulated, stakeholders tend to feel more inclined to support a company's strategic actions. By having financial communication capabilities, the consultant is able to build trust among stakeholders while also minimizing resistance to strategic changes.

Aligning the Strategy with Shareholder Value

Maximizing shareholder value is one of the key goals of the majority of organizations. Therefore, a strategic consulting engagement must incorporate the maximization of shareholder value as one of the driving forces. Consultants must use their financial skills to evaluate and understand how the organizations' strategy will ultimately affect their earnings, cash flows, and valuation. By demonstrating how a strategic initiative drives value, consultants are positioned to build long-term investor confidence with their recommendations. Therefore, alignment of the strategic initiatives with the organization and its shareholders is critical, not only for public companies but also for private organizations.

Why Finance Skills Improve Consultant Credibility

Effective consultants utilize their understanding of finances to establish credibility with clients. A consultant's credibility increases when they can demonstrate to their clients why they should undertake an activity, as well as how that activity will impact a company's financial outcome/ranking. By having an understanding of finances, consultants are able to reduce any uncertainty that their clients may have regarding the recommendations they are making, thus strengthening the effectiveness of the recommendation. Additionally, having finance knowledge allows a consultant to question any assumptions a client may make regarding management, thereby enhancing the client's overall likelihood of being successful with its strategic initiative or initiatives. A consultant's credibility in strategic consulting stems from his or her ability to blend insights with financial rationale.

Finance Skills Help Measure Strategy Success

Successful strategic consultants utilize the finance aspect of finance for measurement purposes. The use of financial metrics allows consultants to evaluate the success of a strategic initiative by evaluating its financial performance. Commonly used financial performance indicators in consulting include revenue growth, improving margins, ROI, and cash generation. Consultants evaluate these financial performance indicators to determine whether a strategic initiative is producing the expected outcome(s) and gives feedback as to how to refine the strategy and to improve it over time.

Role of Finance in Long-Term Sustainability

Strategic consultants are concerned not only with the short term but also with long-term sustainability. Through the use of finance, consultants evaluate whether their recommendations are financially sustainable in the long term with regard to cash flow and profitably. Excess debt, low margins, and poor working capital can lead to failure; thus, through the use of finance, consultants can evaluate and weigh the potential for a client organization to carry out strategic initiatives while maintaining financial viability and remaining competitive.

Conclusion

Finance and Strategic Consulting are interdependent. The Strategy will provide direction while the Finance will provide Feasibility, Value and Sustainability to the strategy. Without Financial skills, the Strategic Recommendations are incomplete and risky. Finance brings the necessary Structure, Discipline, and Clarity to Strategic Thinking and the ability to evaluate the options available, assess/manage risk, communicate effectively, and measure success. With the current highly competitive, data-driven business environment, Finance skills are a prerequisite for Strategic Consultants, not optional. A powerful combination of Strategic Insight and Financial Expertise empowers the Consultant to provide recommendations that are not only Visionary but also Practical, Profitable, and Impactful.