Objectives and Goals of financial strategy
When a business consistently is losing money, top leadership may vent a frustration and an urgency that department heads are not doing the kinds of things necessary to prevent the operational demise that is unfolding and to deal with it effectively. To right the organization’s operating ship, senior executives may formulate fresh financial and strategic goals that functional heads must follow to the letter.
Financial goals touch on everything money-related that a company wants to achieve within a given period — say, one month, quarter or fiscal year. These objectives may span a shorter stretch if top leadership must cope with an immediate operational crisis, the kind that may happen if a major customer owing substantial amounts suddenly files for bankruptcy. For a company, economic objectives may be making a specified amount of money at year-end, increasing sales by 15 percent, cutting costs by 20 percent in segments that are bleeding cash and raising long-term debts on credit markets by targeting interest rates between 4 and 5 percent and avoiding lender restrictions that are too stringent.
Formulating strategies is what company executives do to cope with competitive tedium, understand the tactical moves that rivals surreptitiously are making, deal with the hybrid problem of customer loyalty and brand positioning, hire competent professionals and nurture the company’s mid-level brass. Strategic objectives may cover things like expanding market share overseas and domestically by 8 percent and 10 percent, respectively; reducing the corporate employee turnover ratio by 2 percent; cultivating more amicable ties with lenders, business partners and shareholders; and communicating with regulators more effectively. Employee turnover deals with how many employees leave a company compared to its total work force.
Notwithstanding their conceptual distinction, financial objectives and strategic goals flow symbiotically in the way a company runs its businesses. Both concepts are mutually inclusive — meaning, a major strategic move the organization makes has financial repercussions, and vice versa. For example, if a business wants to expand overseas but does not have a deep operating pocket, it must raise funds by selling stocks or bonds. These activities have financial consequences in terms of dividend or interest remittances.
When pondering strategic and financial objectives, an organization’s leadership must review not only internal factors but also external factors. Business commentators group the latter factors under the PEST acronym, which stands for politics, economy, social and technology. Reviewing PEST factors helps department heads formulate strategic and financial blueprints that align with ground conditions.
One of the main goals for your finance department should be to create and monitor not only your overall company budget, but a variety of functional or departmental budgets, as well. Budgeting requires research to estimate accurate revenue levels based on demand forecasting. Using annual budget projections, your accounting staff can help you set targets for profit goals and for overhead and production spending levels. Overhead includes costs such as phones, rent and marketing, while production costs are those related to making your product. Create monthly or quarterly budget variance analyses to see if you’re on track with your revenues and spending or if you need to make changes before expenses get out of hand.
To ensure you get the best quality at the lowest price for materials, supplies and services, make purchasing management one of the duties of your finance department. Require that employees get multiple bids or present some justification for large purchases, and have your vendors, suppliers and contractors rebid their contracts each year. Look for trends in spending levels to determine where you can cut costs without sacrificing quality.
Cash Flow Management
Knowing when your bills are due and when you can expect payment from customers you’ve billed or other sales revenues is critical for any small business. It’s not enough to show a profit on paper, and your finance function should help you manage your working capital and credit to ensure you have enough to pay your bills at all times. Make receivables management a key role for your finance department.
Letting your debt get out of control can have serious long-term impacts on your business. Keep an eye on your credit use, including interest amounts you’re generating, the scheduling of your payments and the status of your credit report and scores.
Don’t wait until the end of the year to find out what your income tax liability is. Use proactive strategies to lower your tax burden, such as depreciating assets and offering voluntary benefits to employees that help you lower payroll taxes.
Accurate Record Keeping
The most important objective of any finance department is to keep accurate financial records. This includes helping you meet your legal requirements and ensuring you don’t spend more than you have by accident. Consider external audits to prevent fraud, and institute policies and procedures for controlling contracts and payments.