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What is financial discipline and how can it be achieved?

Financial discipline is about knowing your numbers. If you cannot measure it, you cannot manage it. The concept is as simple as that.

In order to cultivate financial discipline in a company, there are of course many ways how it can be achieved. As a student of Finance, in my more than twenty years’ experience as a professional, I have always seen and experimented Finance in my own ways and was fortunate to be able to address different challenges in different roles for different organizations.

financial discipline

Some of those challenges were on finance, marketing, supply chain, project planning and implementation, operations, strategy formulation and execution and most importantly people management.

In my opinion, we may proceed through the following steps to bring positive outcome and ensure financial discipline in an organization: –

  • The very existence of an organization is to produce something and sell in the market to make profit. One wing of Finance is supply side or source of the fund; say equity, retained earnings, and short-term long-term debts. The other side of Finance is demand side or investment for man, machine, land, building, system, and entrepreneurship.
  • Strategic alignment of all activities of a company is a tricky thing and single most important element for success. A strategic plan is required to achieve the mission and vision of a company, keeping in mind the core values of the company. First, a SWOT (Strength, Weakness, Opportunity, and Threat) analysis is done to set a number of strategic goals. The purpose of having a strategic plan is to set some strategic goals for the company, cascade it down to operational activities to achieve those goals and keep the actual activities on track in order to connect the dots between people, customers, stakeholders, and system.

The owners need to validate their vision, mission, and core values to business professionals to set strategic goals. Professionals eventually cascade it down to different activities to achieve strategic goals. Business professionals can do the job of connecting the dots well only if they are given the responsibility with appropriate authority to fulfill the professional responsibilities.

In many of the cases, the owners are reluctant to delegate the authority for lack of confidence and trust on professionals where management consultants can be used as a bridge to develop the leadership and appropriate system for the company. Eventually, strategic planning needs to be left with the internal business professionals as done by top business houses throughout the world.

  • Roll out the annual budget, marketing plan, operational plan, investment plan, financing plan, and Human Resource development plan based on the strategic plan required to achieve the strategic goals. In order to make it clear and easy for all to understand in the same wavelength and avoid ambiguity, try to define the strategic goals, activities, and KPIs (Key Performance Indicators) in measurable units; numeric and/or non-numeric.
  • During the execution of the above plans, there must be deviations. It is important to continuously monitor the activities against the plan and actual, find out reasons for positive or negative deviations and take corrective actions to keep things on the right track. We can call it strategic business alignment.
  • Finally, we need to evaluate the achievements versus plans to reward based on performance and take future strategic plans based on the experience of the previous plans.
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