Corporate Sustainability and Finance to Empower Organisational Leaders
Part 1: Corporate Sustainability for Financial Success
In today’s world where the future is uncertain, sustainability is becoming more of a core factor to think about running a business. Research shows that 62% of the top business executives consider sustainability as a necessity to be competitive and another 22% say this would be in the future (Haanaes, 2016).
As these benchmarks and expectations of corporate social responsibility increase on a daily basis, and as social media increasing the level of transparency, organisations are forced and have recognized the need to act sustainably in business.
Sustainability is becoming an integral part of a corporate business strategy. As Harvard Business School Professor Rebecca Henderson notes “you cannot use business to do good in the world if you’re not doing well financially. Doing well and doing good are intertwined, and successful business strategies include both”.
So far there has been a negative relationship around sustainability and finance but in today’s term, these are interrelated. Sustainability doesn’t necessarily mean sacrificing organisational profits, having effective corporate sustainability as part of the business strategy could contribute tremendously to the bottom line of the company.
Let’s look at 4 different ways of how sustainability contributes to the financial success of an organisation (Business Insights — Blog, 2019):
1. Help the organisational brand and mitigate risk
As a developed or developing organisation, its reputation and or the branding of the company plays an integral role in its success journey. Improper practices could damage or impact an organisational brand significantly. It’s the duty of leaders to think about governance, ethics and the impact on the environment or society in making everyday business decisions.
A company which is able to use an effective strategy to contribute more to the environment and society will gain popularity and reputation in the industry, creating brand awareness globally. This helps organisations mitigate the risks caused by negative damages, eventually contributing to the overall bottom line of the company.
2. Being value-driven can help gain a competitive advantage
An organisation with a vision, purpose and value creation will always stand out in the community. They would be able to attract a highly motivated and skilled workforce, which could contribute to the financial success of the company.
Research shows that 89% of organisational leaders believe that a company with purpose and who make an impact will have greater employee satisfaction and gain a competitive advantage when attracting a highly skilled workforce.
3. Increasing demand for sustainable goods
There are several studies which show that the consumers are willing to change their consumption behaviour in order to positively impact the environment. Since 2014, there has been an increase in sales of sustainable products by close to 20%. Sustainable products are also gaining high popularity among the millennials, who are happy to pay a premium for such products.
As an organisation which practices sustainability principles and produces sustainable products are more likely to gain market share and increase revenue.
4. Collaborative action could drive a change
When successful and powerful companies, innovate and collaborate to solve complex global problems it drives tremendous change on how it’s been done.
To illustrate let’s look at the consumer goods giant Unilever, from 2008 Unilever committed to using palm oil from certified sustainable sources. The organisation collaborated with governments, NGO’s and other organisations to lead its way to industry-wide adoption of sustainable palm oil.
This measure Unilever has a brand to continue to thrive and the world being able to consume environmental benefits through sustainable palm oil harvesting practices.
These summaries the value of sustainability practices which could contribute to business and as a leader its each of our duty to take steps to reinvent on how we do business sustainably.
In this second part of the article, let’s look at how finance can be an essential tool for an organisational leader.
Part 2: Leading with Finance
The world is becoming complex on a daily basis and being a great leader requires an individual to wear multiple hats in making effective business decisions and having a thorough understanding of finance could be an essential toolkit for any leader.
Having finance skills will provide leaders with the confidence to work with money, also help them make strategic business decisions at a holistic level.
Let’s look at the top 4 financial skills required by every leader (Business Insights — Blog, 2019):
1. Reading and understanding financial statements
These are valuable resources to measure the overall health of an organisation. Whether you want to evaluate the performance of your business unit or the company as a whole, this is the right place to start. Being able to analyse these 3 types of statements would help you understand the company on its financial standpoint.
Statement of Financial Position — The statement of financial position or the balance sheet provides you with the snapshot of the resources owned, controlled and financed by the organisation at a given point in time.
Statement of Financial Performance — The statement of financial performance or the income statement summaries the total revenue and expenses made by the organisation over a period of time. This statement shows the performance of the company in terms of numbers, the positive bottom line is what determines whether the company is profitable or whether it’s loss-making.
The Cashflow Statement — This report shows the total cash receipts and outflows during a specific time period from 3 core activities of the business: operating activities, investing activities & financing activities.
By being able to read and understand these 3 statements you are able to understand the bigger picture of the organisation on where it stands in terms of numbers and this would eventually help leaders make better business decisions.
2. Ratio Analysis
Ratio analysis makes interpreting financial statements fun and easy to read. Ratios can provide insightful meaning to numbers in order to make financial decisions. Ratios make it easy to compare results against past performance and against companies and industries.
The ratios mainly fall under 4 categories:
Liquidity Ratios: Liquidity ratio measures the overall risk of running out of cash in the organisation.
Profitability Ratios: This ratio helps assess the earnings of the company.
Leverage Ratios: Leverage or gearing ratios shows the level of debt used to finance the assets.
Productivity Ratios: This assesses the firms’ ability to produce output efficiently and effectively.
These ratios can be valuable in understanding the financial strengths and weakness of the company and help you make strategies decisions focusing on these metrics.
3. Managing Cashflow
Cash is king in finance. Looking at the cash flow is vital to determine the economic returns of the company. Recent research shows that 29% of startups fail due to inefficiencies in managing their cashflow.
A step towards understanding cashflow is understanding the following:
EBITDA: Earnings before interest, tax, depreciation, and amortization. This helps to understand the snapshot of the company before the effects on loan interest payment, taxes, and other non-cash items such as depreciation and amortization.
Operating Cashflow: Operating cashflow helps determine how the day to day working capital is being managed and understand both positive and negative consequences it could have on the working capital
Free Cashflow: This could be a strong indicator of the organisational overall profitability, helps to analyse the cash available after paying out the expenses for investments and or distribution to the shareholders
4. Ability to forecast
Forward-looking is a critical aspect of a business, as leaders of businesses we should be looking at things over the long term and finance act the same. In making investment decisions forecasting can be a pretty valuable tool to master, this could be using discounted cash flow, NPV, IRR, Payback period and even doing a simple break-even point analysis will help make more strategic and profitable business decisions.
As organisational leaders knowing finance can be a big plus in making informed and sound decisions across all levels of an organisation, helping you understand your industry more and help your business scale new heights.
In summary, we saw how corporate social sustainability and knowledge of finance could help leaders empower and contribute to the growth of the company.
Change, Innovation and Continuous Learning is an essential element of today’s leadership, as leaders how making sustainable decisions has helped you or will help you to achieve success? Or as Non-Finance professional how do you think finance knowledge could add value in your everyday decision making? Feel free to share your comments below.
