Even if you don’t consider yourself a finance expert, as a business professional, there are basic finance concepts you need to know. Understanding these basics will help you maximize profits and work toward your goals.
This includes the basics of strategic planning, which involves setting objectives and thinking long-term. So, what does strategic planning entail and how can you maximize success when it comes to implementing a strategic financial plan? Let’s dive in.
What Is Strategic Financial Planning?
Creating and implementing a strategic plan starts with understanding what strategic financial planning entails. It’s also important to know the key differences between strategic and tactical financial management.
Definition and Importance
Specifically, strategic financial planning refers to a process that a business or organization uses to reach its short- and long-term financial goals. It can be helpful to think of a strategic plan as a sort of roadmap to success, with success often being determined by profits and return on investment (ROI).
More specifically, strategic planning draws on such resources as data analysis, team management, and precise methods to work toward short- and long-term growth.
It’s important to understand the difference between strategic planning and general financial planning, too. Whereas strategic planning is more focused on the steps needed to achieve a company’s short- and long-term goals, financial planning is more about how a business will be able to carry out those steps from a cost perspective.
Strategic vs. Tactical Financial Management
When you read about financial management or strategic planning, you’ll often see the terms “strategic” and “tactical” come up quite a bit. These terms have some very different connotations in the realm of strategic planning, so it’s important to understand the differences between each.
In the business world, tactical planning tends to be more focused on the steps a business can take to achieve short-term success. With this in mind, tactical planning also looks less at the big picture and more at day-to-day operations. Strategic financial management, on the other hand, looks more closely at long-term prospects with less concern over what could happen in the next few years.
Components of Strategic Financial Planning
Now that you have a better understanding of strategic planning and why it matters in the business world, you may be wondering what specific steps you can take to start creating a strategic plan for your business. While each business is unique and these exact steps may not apply to every single situation, this guide can help you get started.
Defining Objectives and Goals
First and foremost, it’s important to define the ultimate objectives and goals of your company’s strategic plan. This means meeting with your management and leadership to consider what “success” would look like in the next few years or even in the next decade. If you’re dealing with a publicly-traded company, this should include not just goals for your business—but for shareholders as well.
In defining goals and objectives, it’s also important to refer to your vision and mission statement regularly so you can ensure that your goals align with your company values.
Data Gathering and Analysis
Once you have a better grasp on your company’s goals and objectives, the next step is to start collecting and analyzing data. The challenging part here is determining which data is relevant to your strategic plan and how to gain valuable insights from it.
It can be useful here to consult with any financial analysts that you currently have on your team. In some cases, it might even make sense to bring in some outside help to make sense of such data as:
- Revenue
- Earnings
- Expenditures
- Cash flow
- Accounts payable and receivable
Depending on the complexity of your data, a great financial planning software can also help you analyze information and determine whether your goals are aligned with your company’s performance as it stands.
Budgeting and Cost-Cutting Measures
Now that you’ve analyzed your data and have some useful insights, it’s time to create a budget based on your current financial resources. The end goal here is to create a realistic budget using forecasting and scenario analysis that will set your company up for success in reaching its future goals.
Steps to Create a Strategic Financial Plan
If you’re looking to build a strategic financial plan from the ground up, there are some additional steps you may need to take.
Evaluating the Company’s Financial Situation
Start with a careful analysis and evaluation of your company’s financial situation as it currently stands. This includes a close look at things like cash management, financial statements, profit and loss management, and more. From there, you’ll be able to compare your company’s performance with its long-term financial goals and determine areas that may require some change.
Setting Financial Goals
Next, it’s time to set some realistic financial goals both for the short- and long-term. In setting goals, be sure to consult not just with other members of management and leadership, but experienced finance professionals and accountants. This will help to ensure that the goals you’re setting are realistic and attainable.
Forecasting Future Financial Scenarios
For many businesses, forecasting and scenario analysis can be extremely useful tools for determining the potential success of a strategic plan. Specifically, forecasting involves creating short- and long-term projections for a company’s performance based on the data you have available to you today. Meanwhile, scenario planning can be used during the early stages of your strategic planning to allocate resources as needed.
Implementation and Management of the Financial Plan
Having a strategic plan is one thing, but actually being able to implement and track the success of the strategic plan is an entirely separate challenge. As you prepare to put your plan into motion, there are some things your team needs to keep in mind.
Developing and Sharing the Plan
First of all, strategic plans should be openly shared with all leaders and management staff to ensure that they can make changes to their own teams and processes in-line with the plan. Ideally, you’ll provide this information to your leadership as far in advance as possible so they can be prepared to plan and adjust as needed.
Tracking Success and Performance Monitoring
Once the plan is officially implemented, it’s crucial to follow through with its specifics. Additionally, tracking and measuring its success as much as possible is equally important. There are many ways to go about this, but usually the most effective is to look closely at metrics and KPIs related to the plan itself.
As you evaluate the performance of a strategic plan, it’s critical to take a close look at what’s working versus what may need some additional attention or adjustment. From there, you’ll be able to pivot as needed and continue working toward your goals.
Essential Metrics in Strategic Financial Planning
So, which exact metrics should your team be evaluating and tracking when it comes to determining the success of a strategic plan? There are dozens of them that may be worth looking at, but some of the most essential include churn rates, debt-to-equity ratio, and LTV/CAC ratio.
Churn Rates and Debt-to-Equity Ratio
Specifically, churn rates look at both revenue and customer churn. These occur when an existing customer decides to stop doing business with your company for any reason. When churn rates are high, you know that some changes need to be made. More specifically, it’s important to look at churn rates as they relate to percentage of customers and percentage of revenue lost each month.
Another important metric is debt-to-equity ratio, which refers to your company’s liabilities compared to its total shareholder equity. Ideally, your ratio here should be on the lower side, which would suggest that your business is not being financed through debt and thus has a lower financial risk overall.
LTV/CAC Ratio and the Rule of 40
Lifetime customer value (LTV) and customer acquisition cost (CAC) are also crucial in measuring the success of a strategic plan. The higher your lifetime value is and the lower your CAC is, the better off your company will be. Depending on the stage of your business, you should be aiming for an LTV/CAC ratio of around 3:1.
Also consider the so-called “rule of 40” in financial planning, which states that a company’s growth rate and profit margin should be greater than 40 percent at all times. Does this apply to your business? If not, then something might need to change.
Aligning Financial Planning With Organizational Goals
At the end of the day, your company’s short- and long-term financial planning should always align with your organizational goals. This includes your vision and financial targets as well as your values and overarching mission. Otherwise, what’s the point?
The Role of ESG Criteria in Strategic Planning
Taking environmental, social, and governance (ESG) factors into consideration when creating a strategic plan is important when it comes to achieving your goals using sustainable and ethical business practices. If you don’t already follow ESG criteria in your business decision-making, now is the time to start. Your investors and customers alike will be sure to take notice.
Tips for Effective Strategic Financial Planning
At the end of the day, effective strategic financial planning is all about understanding business valuation and the ins and outs of goal setting. It’s also important to remember that your strategic plan is never fully complete, as you should be constantly evaluating and making changes as needed.
How Can Strategic Financial Planning Lead to Better Decision-Making and Crisis Management?
Proper financial planning on your end can naturally result in better informed decision-making and crisis management because it requires you and your team to look closely at critical data and performance metrics. This can ultimately make you better aware of your business performance.
Learn More About Financial Planning at Florida Technical College
When you have a business to run, it’s easy to get so tied up in the everyday tasks and decision-making that you overlook the importance of having a strategic plan in place. Hopefully, this guide will not only drive home the importance of developing a strategic plan but provide your team with some guidance on how to implement one as well.
Interested in taking your finance and business acumen to the next level? Explore Florida Technical College’s bachelor’s degree in business administration, which covers courses in everything from financial management to business planning and more. Plus, this 36-month program is available both online and at several of our Florida campus locations. Request more information today to get the ball rolling on your next career move.
These examples are intended to serve only as a general guide of possible employment opportunities. There are many factors that determine the job an individual may obtain and Florida Technical College cannot guarantee its graduates any particular job. Some positions may require license or other certifications. We encourage you to research the requirements for the particular position you desire.
Sources
https://www.ftccollege.edu/program/bachelors-degree/business-administration/
https://www.ftccollege.edu/request-information/
https://www.cubesoftware.com/blog/strategic-planning-finance
https://www.geckoboard.com/best-practice/kpi-examples/ltv-cac-ratio/
