Strategic financial planning
Our financial expert, Matthew Keehan, contributed to this article.
Strategic financial planning involves determining how an organization manages itself financially to achieve its strategy and reward its owners. It is a crucial component of the broader strategic planning process, where an organization defines why it exists (purpose) and the strategy it pursues to achieve the purpose. Both are highly dependent on each other, and financial targets must be aligned to achieve broader business strategies.
Being strategic in nature, it goes beyond budget management and involves establishing long-term financial objectives and the path to achieving them. It is crucial for supporting sustainable growth and stability.
Key components
Strategic financial planning generally involves:
Resource assessment: evaluating current financial resources such as income, savings, and investments.
Financial strategy development: crafting strategies for revenue, costs, cash, capital expenditure, tax, and treasury.
Target setting: establishing financial objectives and goals aligned with the strategies and timelines indicated in the strategic business plan.
Implementation and monitoring: executing the financial strategy and adapting.
Risk management: identifying and mitigating financial risks.
The conflict between planned financial objectives and at-the-time resource availability means that strategic financial planning must be undertaken regularly to reflect realistic financial scenarios.
How does strategic financial planning fit with the broader strategic planning process? Typically, it is undertaken after an organization’s strategy (purpose, vision, mission, values) and strategic level implementation plan are defined. If planning resources are available, it can be commenced during the development of the strategic level implementation plan. Once strategic (business) requirements are defined, they help inform the development of financial requirements and ensure that financial planning is well integrated into the overall business strategy.
Benefits of strategic financial planning
Clear financial direction: it provides a clear direction and a sense of purpose, making financial decisions easier. This enables efforts to be focussed on strategy implementation and avoid distractions due to financial uncertainties.
Improved financial security: strategic financial planning helps cushion against unexpected financial shocks by ensuring that risks are adequately managed and cash reserves are in place. This leads to improved financial security and improved business confidence.
Increased confidence for investors: comprehensive financial plans that are connected to an organization's strategic (business) plan increase transparency and, therefore, confidence amongst investors and make it more likely to secure investment.
Enhanced decision-making: a comprehensive understanding of the financial situation makes it possible to make more informed decisions that yield better outcomes. Whether choosing between investment options or understanding the market outlook, a strategic financial plan provides the guidelines for such decisions.
Better ability to achieve financial goals(targets): perhaps the most compelling benefit of strategic financial planning is its role in helping an organization achieve its financial targets. A strategic financial plan acts as a roadmap guiding an organization toward these outcomes.
Best practices in strategic financial planning
Effective strategic financial planning involves:
Being ambitious but realistic: financial targets should be ambitious but also set within acceptable over- or under-performance margins. This will better allow an organization to adapt to changing circumstances if necessary. The world is unpredictable, and a financial plan should be as adaptable as possible.
Comprehensive risk management: every financial decision involves some level of risk. Effective strategic plans identify potential risks in advance and incorporate strategies to manage them. The same is true for a strategic financial plan, which often involves diversifying investments, understanding your competitors, and maintaining an emergency fund.
Being flexible: a strategic financial plan is not a one-time document but a living concept that needs periodic evaluation and adjustment. Regular reviews help adapt to internal and external changes, such as economic downturns or legislative changes.
Professional input: while developing a financial plan independently is possible, financial planning experts generally provide deeper insights, especially for complex portfolios or ambitious financial targets. They can also offer tailored advice and help establish accountability.
Conclusion
Strategic financial planning is crucial for achieving long-term success. By integrating it with strategic planning, organizations can ensure a holistic financial and strategic business management approach.
So, does your organization have a comprehensive strategic financial plan?