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Finance’s Role in Business Strategy
Organizational goals are a critical part of any business strategy. To achieve them, organizations need to have a financial strategy that will build a roadmap for reaching there. This helps with the development of a vision for success which becomes a set of controlling principles under which the business operates.
A financial strategy is considered a personal document. That’s because it reflects the unique business climate that you operate in and the position of the organization in the marketplace.
Every organization is trying a different niche which is reflected by their financial strategy. Remember that at its foundation, a business strategy is just a financial strategy.
Your organization’s assets, cash flow, and liability are involved in every business decision. Thus, a business strategy must examine the current business income.
There must be information on whether outside financing is required and a schedule for when funding can be attained. The position of the current cash flow must be known including the taxes that are paid annually.
Your funding, objectives, and how all these relate to your mission is crucial in coming up with a business strategy. Simply put, it’s difficult to create a business strategy without a financial strategy.
The Role of Finance in Business Strategies
Finances in organizations are handled in different ways when developing business strategies.
Some organizations hand down financial mandates to the various departments. Other organizations solicit input from different departments. The finance department then uses these inputs to shape the process’ financial planning in the organization.
Note that the organization’s goals and objectives always remain the same no matter how the process unfolds.
Your organization must manage its finances and carry out its strategies in a manner that helps it attain its key goals and objectives.
1. Reality Check
Organizational managers are sometimes too optimistic about what their departments can achieve.
The finance department is tasked with preparing the organization’s budget and analyzing the actual results for the business to carry out its operations.
Their knowledge with numbers gives them the ability to know which goals are realistic and which ones are not based on the available resources.
The input of financial experts in the strategic planning process of an organization is very important. That’s because it helps in determining whether some of the wildly optimistic goals need to be tempered with.
Remember that finance professionals understand the concept of risk.
They know that spending a lot of money on a project can jeopardize the financial health of the business. Thus, even if the project is an important part of the strategy, they know what the organization can afford and what it cannot.
2. Projecting the Results
Business strategies are statements of what the management team intends to do to reach the set objectives. The primary objective is usually to grow the business by increasing sales.
To predict the financial results of the strategies, the financial experts must develop a financial model using the spreadsheet software. They then create statements of possible profits and losses.
To achieve this, the finance department works with other departments in developing assumptions that get into the financial model.
The revenue model, for instance, must include assumptions on how many customer leads are generated, including the conversion rate of leads into paying customers.
3. Asset Management
Asset management involves increasing an organization’s wealth by buying and maintaining investment. The investment may include short-term rental properties, mutual funds, private equity, or even exchange-traded funds.
Such assets can be used by the business to fund their operations or grow their presence over time. If the finance team presents profitability issues with a strategy, the strategy can be revised.
The revision can sometimes involve the use of the organization’s assets. They can, for instance:
- Adjust the monthly amount that’s invested
- Sell an investment to free up capital for more effective endeavors
- Internally managing the organization’s assets instead of hiring an asset management organization
4. Determining Profitability
Profitability is relative and it refers to the organization’s ability to earn a good return on investment. Similar to profits, profitability is the goal of the business.
Profitability is the ability of the business to sustain itself with its current resources. Businesses can use profitability to inform their strategic planning.
If there’s no profitability, then there’s no chance that the existing strategies will be worked on. Unless of course, you change your strategy.
To ensure profitability, an organization can alter its strategies to:
- Opting for cheaper supplies
- Altering the business model and pricing the products much higher
- Create goals that will bring more customers who will scale the business
- Invest in new services and offerings that will attract higher-paying customers
5. Measurable Metrics
It’s important for top managers in an organization to know how successful the strategies were. That’s because the information will enable them to make decisions about changing business strategies once the strategic plan is formulated for the next financial year.
Finance helps in designing the measurable metrics used in tracking the success of strategies. These metrics are reported every month. However, their greatest value comes from seeing trends in numbers over time.
A new advertising campaign, for instance, may take a long time to yield results.
A metric that measures the number of phone inquiries coming into the organization after the ads are run helps to decide whether placing the ad was a sound strategy to begin with.
The finance department then seeks to find the metrics that will be meaningful to departmental managers. Numbers that will help them see the reasons for either success or failure of a strategy.
When formulating business strategies, organizations must obtain inputs from everyone in the management team. This is important because they can all contribute the knowledge and wisdom that will make the strategies more market-ready.
The finance department in particular is very important. The financial experts can help in shaping the business strategies and ensure that they are well suited to the competitive environment you operate in.
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