Because it integrates the tasks of strategy development with those of financial planning, the strategic financial planning process is distinct from other planning processes. For many years, most companies throughout the world believed these two processes to be distinct from one another. This has changed recently. Strategic financial planning combines several procedures, resulting in a hybrid approach to financial planning.
Financial planning on a strategic scale is concerned with generating profit for the company while also assuring a reasonable return on investment (ROI) (ROI). Financial management is done through the development of corporate financial strategies, the implementation of financial controls, and the making of financial decisions.
Strategic Financial Planning Definition
Strategic financial planning with the aim to succeed involves not just overseeing a company’s finances, but also ensuring that they are managed with the intention of achieving those goals and objectives while also maximizing shareholder value over the course of several years.
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In a broad sense, strategy formulation refers to the market in which a firm intends to establish itself as a participant. This indicates that the firm has decided to offer just certain items and services while refusing to sell any other products or services at all. It is this choice that determines the chances that the firm will have and the competition that it will most likely encounter in the future.
In comparison to just being in a strategic position and then competing, utilizing strategic financial planning to set your firm in an advantageous strategic position offers more advantages. It is important to take a long-term vision of where the firm wants to go in a few years’ time while making strategic financial decisions for the organization.
Examples of Strategic Financial Planning
Creating strategic financial management goals for a variety of business objectives, from product growth to customer service to internal operations and office culture, is simple and straightforward. Nonetheless, from a financial standpoint, this goal-setting process is more likely to be focused on financial benchmarks that can be achieved within a particular time frame. You can also look at examples of financial planning to get some additional knowledge on it.
When it comes to strategic financial management, specific goal formulation is simpler since numbers make it easier to conceive goals and measure progress. Examples of strategic financial objectives include the following:
- Reduce operational expenses by $300,000 by the beginning of the following fiscal quarter.
- Profit margins should be increased by 10% in the current financial year.
- Within the following 12 months, reserve working capital should be increased by fifty percent.
- Over the following three fiscal quarters, revenue must increase by at least 2 percent every quarter.
You may work backward from your objective to build a template for how the company can accomplish the desired result once you’ve determined what you want to achieve.
Components of Strategic Financial Planning
You can understand features of financial planning as your self study. Strategic planning is the process through which an organization outlines and defines its strategy, as well as the direction in which it is headed. This resulted in decisions being made and resources being allocated in accordance with the plan.
For example, SWOT and PEST analyses, as well as STEER analyses, are all methods of doing strategic planning. When taking a longer term view, it is common to have a plan for one year, but it is more common to have a strategy for three to five years.
Costs of Starting a Business
For start-up businesses as well as those that are part of an established company. Costs for new fabrication equipment, new packaging, and a marketing strategy are all possibilities.
Costs that will Continue to Accrue
Costs for labor, supplies, equipment upkeep, shipping, and facility use are all included. It is necessary to break down the costs into monthly figures and deduct them from the income estimate (see below).
Analysis of the Competition
An examination of how your revenues will be affected by the competition.
Determine how much money will be available throughout the course of the project’s duration to pay for continuing costs and whether or not the project will be profitable.
Objectives of Strategic Financial Planning
For our company, which is a growing company, it is critical to set goals, and in order to do so, it is necessary to impose a series of objectives that will support the achievement of these goals, among which are financial objectives that serve as the foundation for a solid plan to move our organization forward on the path to success; these financial objectives are as follows:
We are referring to the qualities of development that will allow the firm to continue to operate while also creating more employment and achieving a steady improvement and gradual expansion over time.
Earnings Increase as a Result of Growth
It is critical for us to provide strong yearly sales with a margin of 20% rise from the first five years in order to pay initial costs and create the projected profits from the second year onward.
Obtaining a Profit on an Investment
Return on investment refers to the amount of money that is recovered from capital expenditure. Our company expects to receive a 100 percent return on investment within two years of making a profit, generating a profit margin of 20 percent in the first five years and a profit margin of 40 percent in the sixth year.
Profit Margins Are Important
Obtain profit margins sufficient to fulfill the demands of the organization, as well as the ability to invest in the firm for development and distribution among employees under the terms of a profit-sharing contract.
Objectives based on non-financial elements that a firm want to attain with a particular indication that will allow it to be assessed over a specific period of time are referred to as strategic objectives.
- Agile methods that are centered on innovation
- Make use of the most relevant human resources available
- Establishing the brand’s position
- Encourage a positive work atmosphere in order to enhance the efficiency of the organization’s procedures.
- Increasing the variety of available supplies
- Establish the company as a dependable and well-organized corporation.
- Strengthen consumer relationships in order to keep them.
- Increase the amount of people working for you.
- Provide customers with incentives for choosing our brand.
Importance of Strategic Financial Planning
Any company enterprise’s success is dependent on the effectiveness of its financial planning. The following factors contribute to the perception of its necessity
Financial Control is Built on this Foundation
When it comes to financial planning, it serves as a foundation for monitoring financial operations by comparing real income to anticipated revenue and actual cost to estimated cost.
Optimum Utilization of Funds
The financial planning process determines the precise amount of cash that will be required, therefore avoiding wastage and over-capitalization situations.
Assist in Business Operational Activities
Because making the strategic financial decisions guarantees a seamless flow of funds as well as a smooth operation of production and distribution, the success or failure of a company’s production and distribution function is dependent on those decisions.
Correction in Capital Structure
Funds can be organized from a variety types of financial planning and utilized for a variety of purposes, including long-term, medium-term, and short-term. Due to the fact that long-term funds are typically supplied by shareholders and debenture holders, medium-term funds by financial institutions, and short-term funds by commercial banks, strategic financial planning is required in order to tap relevant sources at the right moment.
Aids in the Coordination of Activities
In addition, it aids in the coordination of various company tasks such as manufacturing, sales and marketing, and so on.
Aids in the Allocation of Funds
Using a comparison of several investment options, the financial plan proposes how the cash should be distributed for various objectives over time.
Prevention of Business Shocks and Surprises
Rather than being caught off guard by financial needs, strategic financial planning helps to avoid the shock or surprises that might otherwise be experienced by businesses operating in uncertain environments.
The Relationship Between Investment and Financing Options
Financial planning assists in determining the debt-to-equity ratio and in determining where to invest the funds raised. It establishes a connection between the two decisions.
Aids in the Efficient Use of Financial Resources
Finance is the lifeblood of every organization. As a result, financial planning is an essential element of the whole business planning process. The soundness of financial planning is critical to the success of any company strategy.
It Establishes a Link Between the Present and the Future.
Financial planning connects the dots between existing financial requirements and future financial requirements by forecasting the company’s sales and growth objectives.
When developing a financial plan, financial managers must take into consideration the following fundamental components. Depending on the size and industry of the project, more pieces may be required. Hope this information on strategic financial planning was useful to you. Now you have enough knowledge about financial planning on a strategic measure.