Arrows in the Quiver: Finance as a Competitive Advantage

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What are the traditional sources of competitive advantage? Having the best product or customer service, the leanest cost structure, or perhaps just being the only game in town? Things sure have changed in the era of “continuous disruption.” Even if you have an edge in one or more of these areas, that lead could vanish in one fell swoop.

Great product or service? Might lose traction against a bottomless marketing budget, and having the lowest costs doesn’t mean you have the lowest price when funded start-ups are chasing market share at all costs (literally).

Only game in town? Never been easier to start a business, local physical presence/office optional. Your geographic territory is always up for grabs.

Great people? That certainly helps, but there are lots of amazing people and your competitors probably have some of them too.

So where do you find the edge? How about in how you run your business.

Arrows in the Quiver

All of these things still matter, deeply. You must consistently improve your product and invest in people. However, these are arrows in every company’s quiver. If they are in every quiver, it’s not a competitive advantage, but a basic necessity for survival. Finding arrows that are less available, but highly valuable, is a different way to out-fox and out-last the competition.

For small to midsize companies, one of these coveted arrows is financial planning and analysis (FP&A). There are two primary FP&A functions, 1) data analytics and business intelligence (BI) to synthesize actionable insights from performance data, and 2) forecasting and scenario analysis to plot the course, sensitize upside/downside outcomes, and act proactively. The two work in tandem, as the analytics are needed to improve forecasting accuracy.

Here are three ways FP&A can be leveraged inside your business to get an upper hand.

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Pricing Leverage vs. The Competition

A competitor’s account is going up for bid, and you want it. Price is a major factor, so you want to thread the needle on bidding to win while not losing your shirt. Understanding your costs is important, but it’s not the only thing that matters. Two other components are critical: operational capacity and the value of the long-term company relationship.

Would you lose money on an immediate deal to get a profitable long-term relationship? The answer, of course, is “it depends.” How much would you lose, and how certain is that long-term relationship and its profitability?

Fitting a big new relationship into capacity isn’t information you can find in your accounting system. It’s a function of operational data access, backlogs and/or pipelines, and forecasting processes. Capacity visibility helps you price the first deal, but also gives you 1) the opportunity to position deals two, three, and four as part of that initial bid, and 2) the ammo to inspire confidence with customers that you are going to be there to meet their needs. Just because price is a major factor doesn’t mean it is the only factor.

Fire Prevention vs. Suppression

Surprise! A fire is raging that you didn’t see coming. Cue the fire drill, with all hands on deck rushing to react. Companies that are constantly caught by surprise risk developing a “fire drill culture” that lurches from one problem to the next. Even with talented firemen and firewomen solving today’s problems, this is a reactionary mechanism that takes eyes and time away from higher value activities (those that create long-term value).

Since we are discussing FP&A, we’re limiting this discussion to surprises that could otherwise be avoided. Nobody would claim that finance capabilities alone can fully insulate you from a natural disaster, global pandemic, field accident, equipment malfunction, etc. However, getting into a liquidity jam, experiencing an inventory shortage, or failing to meet production timeline commitments are all types of “fires” that data analytics and forecasting can help you avoid.

Even if you or team leaders have daily oversight and an intuitive feel over everything that could lead to these types of fires, institutionalizing business intelligence, forecasting, and scenario analysis processes reduces key man and turnover risk. Sometimes the biggest fire drills are due to knowledge walking out the door. This can have a dramatic impact on your operations, your finances, and the value of your business! Fire prevention has value beyond minimizing the damages of a blaze.

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Getting Deals Done, On Terms and On Time

FP&A’s finance function counterpart, corporate finance, is focused on debt/equity financing and mergers, acquisitions, and divestitures (M&A). Corporate finance is its own arrow, but it is stating the obvious that access to flexible, cost-efficient capital and transaction process experience are positives and competitive advantages. What is less known is the role FP&A capabilities play in these processes.

Transactions are a lot of work, taking critical leaders away from their day jobs to “deal with the deal.” The worst? Deals that get re-traded to lower economic terms and that take longer than originally anticipated. Arguably, those outcomes are worse than a deal not happening at all, because if you figure out early that parties should walk away, there is value in getting to that answer as quickly as possible.

Deals are really about two things: the assessment of performance to date, and the outlook. If I am buying, I want to know what I’m getting and what my prospects are. FP&A is a primary credibility driver for both. Performance analytics, driver-based forecasting, repeatable and scale-able data processes, and teams versed in using these capabilities to drive decision-making and accountability.

Every business wants to do a deal based on the terms and timeline in a letter of intent (LOI). Yet, how many actually happen on that basis? The saying goes “it never gets better than the LOI” so deals that happen on terms and on time are huge wins all around for every stakeholder. FP&A is a critical arrow in the quiver to identify potential risks and opportunities, and inspire credibility in your team, business, and outlook.

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