WHY FINANCIAL STRATEGY IS KEY TO GROWING A COMPANY
Within business growth there are a series of goals, which must have previously identified objectives; The most important is the financial objective, you must achieve that your company generates profitability and this is achieved with a financial strategy.
Although it is true, customers, suppliers, and employees play a fundamental role and contribute to this growth, as a business leader you must exploit the potential of your company at the level that allows you to have a very good quality of life; This thanks to the fact that you get excellent profits.
Throughout this article, you will learn why it is important to implement financial strategies, what they are for, how to apply them, and the impact they have on a personal and collective level.
WHAT IS A FINANCIAL STRATEGY
First of all, it is important to better understand what financial strategy is; In this section, we want to clearly establish what it is, why it is important and all the benefits that having planning and managing the resources available to finance all the activities of your company in a strategic way will bring you.
DEFINITION OF FINANCIAL STRATEGY
According to the definition of financial strategy, it can be inferred that it is a series of actions aimed at obtaining profitability and peace of mind in a controlled, intelligent, efficient, and economic way.
The important thing is to understand that the strategies to improve the financial situation of a company require planning and that you have a clear vision of all the elements or resources that you have for the development of your activity. What Is Business Finance?
WHY FINANCIAL STRATEGY IS KEY TO GROWTH
The financial strategy is essential to chart the course that your company will take based on the proposed objectives, in such a way that these will help you establish policies and action plans in the scope of your objectives.
The growth of the company is thanks to a greater extent to the correct planning of long-term strategies, of course, they should not only be in this condition but also strategies can be projected in the short and medium term; The key is that the vision is towards profitability and increasing the value of your company.
BENEFITS OF DEFINING A GOOD FINANCIAL STRATEGY
Designing business financial strategies in a structured way will bring the following benefits:
- Greater liquidity
- Have goals focused on profitability
- Have objectives defined by the court (quarter, semester, year)
- A controlled growth oriented to your objectives
- More control of your company gives you peace of mind
Despite the fact that we have already resolved most of the doubts regarding financial strategy, we still have some unknowns that you may be wondering about:
- How to make a financial strategy in the company?
- How do you determine the financial strategies I need?
- What are the right financial strategies for my company?
THE 4 KEYS TO DEFINING A SUCCESSFUL FINANCIAL STRATEGY
Business financial strategies are aimed at companies growing sustainably. For this, they must be based on the financial health of the company, we are not talking about a single indicator, but rather a system of various elements that have to occur correctly.
Now, there are 4 keys that are important within a financial strategy:
KEY 1: OPERATING PERFORMANCE, HOW MUCH IS LEFT FOR EVERY $1 INVESTED?
When we talk about operating performance, we mean something quite simple, but not easy to handle; how much your company earns for every dollar or peso invested.
To achieve good performance, you must be concerned with improving costs, sales prices, purchase of raw materials, and the efficiency of the use of fixed expenses of the company in relation to the volume of sales. Here we recommend you take into account:
- What does the sale of a unit imply?
- salt mix
- Contribution margin (variable expenses)
- Capacity utilization (fixed expenses)
KEY 2: CASH CONVERSION CYCLE, AT WHAT SPEED DOES CASH RETURN?
In this area, accounts receivable, inventory, and accounts payable to suppliers are taken into account; where the idea is to minimize inventory balances and accounts receivable while maximizing sales. This can be achieved if:
- Credit and collection management is understood and optimized
- Efficient inventory management
- Obtains financing from suppliers
KEY 3: TURNOVER OVER ASSETS: EFFICIENCY OF ASSET USE
The efficiency of the use of assets is important because your company could not work with obsolete equipment or inadequate spaces.
Achieving good task performance and financial efficiency implies getting the most out of managing assets such as land, warehouses, offices, equipment, etc. Some characteristics that could help you evaluate this phase are:
- Measure the utilization of installed capacity
- Seek efficiency in the use of assets
- Renew the business model to improve efficiency
We recommend you read: The 4 best strategies for business growth
KEY 4: ROE & LEVERAGE: FINANCING AND RETURN ON EQUITY
At this point, we refer to how you finance the operation of your company to achieve profitability.
The essential thing is to understand that the debt must be taken responsibly and thus, obtaining financing will give you the necessary leverage to achieve your business objectives.
You should know that to achieve the profitability that you want, the best thing would be:
- Match sources and uses of financing (short and long-term)
- Go into debt to grow sales and not to cover inefficiencies
- Squeeze every dollar of capital by measuring risk
On the other hand, we have some additional tips that can help you with a financial strategy oriented toward a service company:
- Take care of the client portfolio to avoid problems with cash flow.
- Standardize processes and price definitions to ensure profits
- Do not spend money on acquiring fixed assets if it is not necessary.
Throughout this article, we have guided you and provided the necessary information so that you know what a financial strategy is, why it is important and what are the main keys to define them.
We recommend you review the first 3 keys previously seen since they are focused on the business model of your company, while the last one has a focus on financial leverage.
In this way, you will have greater clarity regarding the points in which it is worth investing and you will even be able to define your financial strategies in the long term, however, it is necessary to clarify that it must be done in an intelligent and responsible way.