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've set a plan for your business, look at the numbers to see if your plan will provide the financial results that you want for your business.
Prepare a budget based on your business plan objectives. For example, if you've decided to increase your sales, this could mean extra staff, stock and/or increased marketing. You'll need to prepare a budget that shows not only increased sales, but the increased expenses required to achieve the increase in sales.
A budget is the financial strategy for your business.
Benefits of setting a financial strategy
As you put together your financial strategy, you'll develop a plan of action for your goals and objectives, which 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 – find out 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 – you can measure these against actual results
- improved profitability – by having a budget and comparing this to actual results, you'll quickly see what's working and what's not – and make changes so your profit can be improved easily
- increased efficiency in the use of resources and assets – monitoring your resources to budget expectations will ensure you get the most efficient use of your business resources. For example, you can look at the time taken from customer order to completion of the job and then payment, and determine if the time-frame can be shortened – this will mean you'll receive payment quicker and have your staff move on to the next job earlier.
Key elements for good financial strategy include:
- the development of realistic targets that align with both your 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 sources 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 won't be met.
Budgets and forecasts
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:
- the budget sets out the financial goals of the business in line with the strategic plan
- 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.
Once you've set your financial strategy, regularly review the potential future financial position of the business to assess the ability of your business to meet the business strategy.