For companies to become successful, it is important to learn the money game. A financial strategy is there to survive the competitive landscape
A finance strategy is an important component of the overall strategic plan of a business, outlining how the business plans to arrange and manage funds required for its operations to meet its objectives.
A solid finance strategy is vital to the success of any business, especially if the business is in its growth stage.
Why Businesses Require a Finance Strategy
A period of growth can be an exciting time for any business. Sales are on the rise; your financial statements are starting to show promising figures of profit, and your brand is becoming stronger in the market.
Yet, managing growth is no easy task – you need to have enough resources to keep up with the increased level of activity so that it continues. This requires keeping a strict check on your finances.
With growth comes to a change in cash flows as a business is likely to incur several unplanned costs such as frequent wear and tear of equipment. There is also the need to acquire additional resources such as human capital or perhaps new machinery as well as increased production and inventory costs.
It is essential to make forecasts of upcoming revenues and costs in order to avoid running into financial problems. This is why a sound financial strategy is essential in ensuring sound management of the company’s financial affairs during the period of growth.
Incorporating Financial Strategy into a Business
In this article, we discuss 4 ways how a finance strategy ensures business growth.
Produce Reliable Forecasts and Budgets
Finance strategies are forward-looking — they help a business plan for the future. Using current data on performance such as Profit and Loss statements, balance sheet and cash flow statements; forecasts are made for the future performance. This requires accounting for any changes expected in revenues and costs in the future.
This information is very useful as the management can perceive where the company stands in the industry. Forecasts depict the financial position of a business and help in decision-making.
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For example, any expected cash shortfalls can be anticipated beforehand, and arrangements are made in advance to avoid operations coming to a halt. The business can arrange an overdraft facility with the bank in advance.
Forecasts lead to budget…
A finance strategy also helps with budgeting. While a forecast shows what is expected to happen in the future, a budget is the organization’s plan for the future – what it wants to achieve in terms of financial performance.
Budgets are useful because they provide a benchmark against which actual performance can be measured. Actual results can be compared with the budget and corrective action taken in a timely manner to ensure the business is headed in the right direction to achieve its growth objectives.
Pro-tip: Budgets and forecasts are only estimates based on current conditions, and if circumstances change drastically, a revision may be necessary.
Helps Arrange Funds Required For Growth
Let’s face it – most types of growth require funding. When it comes to growth, there are different strategies adopted by businesses:
- Market penetration — involves increasing market share in the existing market with existing products. As more products need to be sold, an increase in production is likely to be required, increasing production-related costs.
- Market development — finding new markets for existing products. The new market can be a new geographical area or a new group of customers.
- Product development — involves introducing new products in existing markets. An investment in Research & Development may be required to come up with a new product based on market needs.
- Diversification — making new products for a new market.
A finance strategy helps raise funds based on the business’s needs. The key is to match finance to the nature of expenditure. For short-term needs such as working capital, short-term finance, such as arranging a line of credit, may be appropriate.
For longer-term projects such as the acquisition of new machinery, long-term finance should be sought so that the business can pay off the loan as the project starts generating returns.
There are various alternative financing solutions. We looked into Fastcapital360.com and found that they provide various options for business loans with quick processing terms.
Pro-tip: When applying for a loan, it really makes a difference if you have a solid financial plan outlining the purpose of getting the loan, and how you plan to repay it.
Effective Cashflow Management during Growth
What is the main cause of failure when it comes to managing funds during growth? It’s definitely improper cash management.
Growth brings with it an increase in revenues, but you will also see a rise in expenses with the increase in activity level. The problem is, costs often rise before revenue does as shown in the graph above.
You must first incur an increase in production costs, such as the cost of raw material or hiring additional labor before you can generate additional revenue.
So, how does a finance strategy help ensure a cash crunch is avoided during growth? Here are a few ways:
- Effective receivables management – If you must offer credit, make sure the credit period isn’t too long, and it is highlighted when offering credit so that customers know by when they have to pay. Regular follow-ups and reminders should also be sent, with discounts offered to encourage early payment.
- Effective payables management – The business should try and secure maximum credit periods from its own suppliers, to delay cash outflows.
- Inventory management – Holding excess inventory means extra costs (cost of storage plus risk of damage and obsolescence), so inventory levels need to be minimized.
Pro-tip: Despite the above strategies, if the business is still facing shortfalls, additional working capital finance may be needed.
Keeps a Check and Balance to Facilitate Growth
Most strategies require a constant review of actual results to ensure that the financial goals are achieved. When a business is at the initial stage, it becomes easy to get caught up and focus so much on sales and revenues that you forget about things such as internal controls and keeping a check on variances.
For instance, when demand increases, all that a business cares about is procuring raw materials on time and converting it into finished goods to meet the demand. In such situations, control must be maintained in order to succeed. What if materials have been bought at a higher cost than usual or due to work pressure, errors and wastage have increased?
A good financial strategy will keep a check on such issues as actual results are compared with budgets on a periodic basis, and any variances investigated to ensure the business generates maximum financial benefit from growth.
Pro-tip: Some variances arise due to uncontrollable factors and are unavoidable.
The Bottom Line
Without a solid financial strategy in place, a business cannot grow or even survive. So, it is important for a business to hire professionals to manage its funds so that it can continue to prosper.