Components of financial strategy
There are many feasible financial strategies but for clarity and to aid understanding, financial strategies may be classified as two distinct types:
Operational financial strategy, meaning plans (physical strategies) as identified, reported and implemented using financial models, measures and responses. The strategies that plan, report and deliver results: profits, cost reductions, efficiencies and so on.
Without an operational financial strategy there is no continuing business. Operating strategies may have to be very nimble, responsive to the sudden changes faced by many industries today, for example in the service sector.
Operating strategies may be very consistent and boring – but they still need to exist and to be constantly monitored and improved if possible.
Structural financial strategy, meaning plans to finance the business in an efficient and effective manner. Examples are gearing up a balance sheet, leasing as opposed to purchasing equipment, and factoring debts. Unless you are large and powerful or have generous and willing friends and supporters (as you must have to be able to work a private equity strategy), financial strategy is very much constrained by external parties, in particular funders – the banks.
The two distinct types of financial strategy give rise to many different approaches with aims that should be complementary or aligned (to use another overused word). The overall operational or structural strategy will have sub-strategies or tactics to aid its delivery.
When making a financial strategy, financial managers need to include the following basic elements. More elements could be added, depending on the size and industry of the project.
Startup cost: For new business ventures and those started by existing companies. Could include new fabricating equipment costs, new packaging costs, marketing plan.
Competitive analysis: analysis on how the competition will affect your revenues.
Ongoing costs: Includes labor, materials, equipment maintenance, shipping and facilities costs. Needs to be broken down into monthly numbers and subtracted from the revenue forecast.
Revenue forecast: over the length of the project, to determine how much will be available to pay the ongoing cost and if the project will be profitable.
Strategic financial management is applied throughout a company’s organizational operations and involves elements designed to make the maximum efficient use of the company’s financial resources. Key elements of strategic financial management include budgeting, risk management, and ongoing review and evaluation.
Careful budgeting of a company’s financial resources and operating expenses is essential in strategic financial planning. Budgeting helps a company function with increased financial efficiency, reduced waste, and it aids in identifying areas of the company that incur the largest amount of operating costs or that regularly exceed budgeted cost. Budgeting includes ensuring sufficient liquidity to cover day-to-day operating expenses without accessing outside financial resources unnecessarily. Budgeting also addresses the question of how a company can invest earnings to achieve long-term goals more effectively.
Strategic financial management also involves risk assessment and risk management, evaluating the potential financial exposure a company incurs by making capital expenditures (CAPEX) or by instituting certain workplace policies. Financial companies may also employ strategies such as value-at-risk (VaR).
Since strategic financial management is all about maintaining focus on attaining a company’s long-term business goals, it necessarily includes developing and putting in place regular procedures for review and evaluation of how well the company is doing in terms of staying on track.