On this page
- What is financial strategy
- Benefits of setting a financial strategy
- Key elements for good financial strategy
- Difference between budget and forecast
What is financial strategy
Effective business planning will determine what business success looks like and what needs to be done to achieve it. Once you have set a plan for your business, you need to look at the numbers to see if your plan will provide the financial results that you want for your business.
This is done by preparing a budget based on your business plan objectives. For example if you have decided to increase your sales, then this may mean extra staff, stock and/or increased marketing. You will need to prepare a budget that shows not only increased sales but increased expenses that will be required to achieve the increase in sales.
A budget is the financial strategy for your business.
Benefits of setting financial strategy
As you put together your financial strategy, you will develop an action plan for your goals and objectives. A plan of action will guide you and your business activities towards improved business performance. The benefits of having a financial strategy include.
- clarity on the key drivers of your business – what are the key aspects of your plan that need to be achieved in order for you to reach your expected budget results?
- tools to measure and monitor performance – your budget can include key performance indicators such as minimum monthly sales, maximum level of expenses etc. and you can then measure these against actual results
- improved profitability – by having a budget and comparing this to actual results you will quickly see what is working and what’s not and make changes so that your profit can be improved easily
- increase efficiency in the use of resources and assets – monitoring your resources to budget expectations will ensure that you get the most efficient use of your business resources. E.g. you can look at the time taken from customer order to completion of the job and then payment and see if the time frame can be shortened – this will mean that you will receive payment quicker and have staff move on to the next job earlier.
Key elements for good financial strategy include:
- development of realistic targets that align with both the strategic business plan and historical trading activities
- a review of industry trends and other information available that will assist in preparing credible assumptions and targets
- documented assumptions, including source of information
- budgeted timelines that align to both the strategic business plans and the preparation of financial statements
- regular comparison of budgets against actual financial results
- the scope to amend activities and targets where actual results indicate that budgeted outcomes will not be met
Difference between budget and forecast
Once you have set your financial strategy, you will need to regularly review the potential future financial position of the business to assess the ability of your business to meet the business strategy. Budgets and forecasts are critical tools that can be used to predict the future financial position of your business.
The difference between a budget and a forecast is that the budget sets out the financial goals of the business in line with the strategic plan and a forecast tracks the financial outcomes in line with budget predictions, providing a valuable tool to assess the likelihood of the achievement of the budget.