How to Use Financial Strategies for Business Success
Financial crises usually expose decisions that looked profitable right up until the risks became impossible to hide. The sub-prime home lending fiasco, the bundling of bad loans into investment securities, and the use of credit default swaps all showed what can happen when organizations chase returns without a clear view of exposure, liquidity, and accountability.
How can you make sure your company succeeds when markets tighten, customers slow down, or credit becomes harder to find? One practical answer is using financial strategies for business success: written plans that connect goals, cash flow, financing, controls, and risk management before pressure turns into a crisis.
What Are Financial Strategies for Business Success?
Financial strategies for business success are the decisions, policies, forecasts, and controls a company uses to protect its financial health while pursuing growth. They explain how the business will generate cash, fund operations, manage debt, invest in capacity, price its work, and respond when conditions change.
A strategy is more than a budget. A budget sets limits for a period, while a financial strategy explains why those limits exist, what assumptions support them, and what management will do if revenue, costs, or financing move outside the plan.
The SBA’s business plan guidance treats financial projections as part of the case for stability and success, especially when a company is seeking funding. That same discipline helps an established business run itself with fewer surprises.
No Financial Strategy Means a Strategy for Failure
Do you think the organizations handing out bad loans, buying securities of bundled bad loans, and selling credit default swaps had well-thought-out financial strategies for business success? Some had models, transactions, and short-term incentives, but that is not the same as a strategy that accounts for the environment, goals, liquidity, transparency, and risk.
Strategy Management Incorporates Goals, Environment, and Risks
A clear strategy and plan not only incorporates goals and the activities needed to reach those goals, but also addresses risks. The risk of handing out loans for hundreds of thousands of dollars without proper due diligence and transparency was not accounted for in the financial strategies of many organizations caught in the crisis.
Having no strategy is really the equivalent of having the worst possible strategy. The same concept moves right up the chain from mortgage sellers to investment banks that were buying and selling credit default swaps they could not cover, and to investors who were buying bundled securities whose real value was indeterminable.
A practical financial strategy asks uncomfortable questions early. What happens if receivables slow down by 20 percent? What expenses can be delayed without hurting customers? Which debt covenants matter? Which assumptions would trigger a management review? Without those answers, a business is relying on momentum instead of management.
Business Success Takes Planning
Conversely, you can find examples of businesses in the financial industry where a well-thought-out strategy prevented them from becoming another victim of the financial crises. Perhaps the most visible was Bank of America. Executives at this institution said they made a conscious decision years earlier not to get involved with the sub-prime loan market because they did not see how risky loans fit their long term financial strategy.
Risky loans to people who could not pay them back were indeed a recipe for disaster. While many financial businesses were facing catastrophe, Bank of America was strong enough financially to grow by snapping up bargains. Recent acquisitions in that period included well-known organizations like Merrill-Lynch, MBNA, and Countrywide Mortgage, as reported in the CBS News coverage of Bank of America under new ownership.
Anyone who has ever watched It’s a Wonderful Life knows that the best time to buy is when others are panicking and selling. But, of course, you have to be in a position to buy, and that is usually the result of a well-thought-out and managed financial strategy.
How important is a clear financial strategy? It can mean the difference between growing your business and going out of business. Planning does not remove uncertainty, but it gives management a way to compare choices, preserve cash, protect margins, and decide when to invest.
Financial Strategies are the Starting Point of Internal Control
For strategies to be effective, they have to be communicated and implemented throughout the organization. That means operations in various departments at various levels have to create their own strategies and plans that align with, and execute, top level strategies.
This is accomplished through training, policies, procedures, review routines, and best practices. Those practices are an excellent starting point for internal control because they turn the financial strategy from an executive idea into daily decisions people can follow.
COSO describes its mission as helping organizations improve performance through thought leadership on internal control, risk management, governance, and fraud deterrence. That connection matters for financial strategy because controls are the mechanism that keeps plans from becoming wishful thinking.
How Do You Put Financial Strategies Into Practice?
A financial strategy becomes useful when it changes how work is done. The business needs a planning rhythm, reliable numbers, clear ownership, and procedures that connect the plan to purchasing, hiring, pricing, collections, reporting, and capital decisions.
Define the Financial Goals
Start with the outcomes that matter most: profitability, cash reserves, revenue growth, debt reduction, working capital, or margin improvement. Then translate each goal into measures that management can review consistently.
Identify the Assumptions
Every forecast contains assumptions about customers, costs, capacity, inflation, financing, and timing. Make those assumptions visible so management can challenge them before the market does.
Assign Decision Rights
A financial strategy should define who can approve expenses, change prices, extend credit, commit capital, or alter payment terms. Decision rights prevent confusion when a manager needs to act quickly.
Review Metrics Before Problems Compound
Most businesses cannot survive on a good financial strategy alone. A good financial strategy does not mean much without customers, capable processes, and employees who can execute. That is why thoughtful strategies must be created and implemented across the balanced scorecard: finance, customers, internal processes, and learning and growth.
Using Financial Strategies For Business Success
There are never any guarantees for business success, but creating financial strategies gives your business direction and guidance. Without that, there is no telling where you will end up. Perhaps owned by Bank of America. Do not let that be you.
Take into consideration everything you have learned about using financial strategies for business success. Define the goals, write down the assumptions, communicate the plan, monitor the metrics, and connect the strategy to policies and procedures people can actually use.
Download Free Sample Financial Procedure Templates to see how easy it is to edit MS Word Templates to build your own policy and procedure accounting management system.
Frequently Asked Questions
What Are Financial Strategies for Business Success?
Financial strategies for business success are the plans, forecasts, policies, and controls a company uses to manage cash, risk, financing, investments, and growth. They connect financial goals to daily operating decisions.
Why Is Planning Important to Financial Strategy?
Planning gives management a way to test assumptions before money is committed. It helps the business understand what it can afford, where risks are building, and which actions protect cash flow.
How Does Financial Strategy Support Internal Control?
Financial strategy supports internal control by defining objectives, risks, responsibilities, and review routines. Policies and procedures then turn those decisions into repeatable work across departments.
What Metrics Should a Financial Strategy Track?
A financial strategy should track cash flow, revenue, margin, expenses, debt, working capital, customer measures, process measures, and learning and growth measures. The right mix depends on the business model.
When Should a Business Update Its Financial Strategy?
A business should update its financial strategy when market conditions, financing, customer demand, costs, or growth plans change materially. It should also review the strategy on a regular management cadence.
