A company’s financial strategy uses its financial tools to maximize shareholder value. It examines the numbers that characterize the performance of the company and identifies ways to increase the return on investment. A financial strategy analysis details the overall objectives of the strategy, identifies its targets, examines the likelihood that the planned implementation will meet its objectives, and assesses the results. Small businesses need to focus their financial strategy on profitability because they do not have the financial resources to support large losses.
A key component of financial strategy is profit margin, expressed as a percentage of profit divided by sales. Achieving a high percentage net profit increases shareholder value and drives up stock prices. A financial strategy analysis examines how the strategy attempts to increase the percentage of profit. It examines whether the strategy is realistic and likely to achieve its objectives. Typical strategies position the company as a high value-added supplier, emphasize the value-added characteristics of products, or publish comparisons with competitors. Financial strategy analysis assesses the likelihood of success and actual results.
The other side of the focus on margin is an effort to cut costs. While the strategic focus on margin deals with percentages, a cost reduction strategy typically looks at total costs in relevant categories. The financial strategy examines the sources of the major cost elements for each product and looks for ways to reduce costs. In addition to assessing the strategy’s potential for success, an analysis checks whether its targets are consistent with the strategic elements focused on margin. Cost reduction based on eliminating the characteristics of low value products reinforces the focus on high value products, as opposed to cost reduction based on inferior product quality.
Small businesses have less access to finance than large businesses, but finance can still be a significant cost factor. Financial strategies aim to reduce financing costs by reducing interest paid and speeding up payments due. Typical strategies include a strategic plan for short-term funding at a lower cost than long-term obligations and offering discounts for quick payment. A financial strategy analysis examines the development of interest rates and exchange rates, if applicable. He examines historical data to see if the financial strategy is likely to result in lower financing costs for the company.
A final aspect of a financial strategy is asset management. Small businesses often avoid tying up financial resources in company assets, but even avoiding ownership requires financial management. Financial strategy puts the company’s financial resources to work where the benefit is greatest. It examines whether it makes sense to buy a building or rent it, and whether the business should own or lease equipment. A strategy analysis examines whether it has assessed all possibilities, such as leasing or buying back, and considered all possible sources of funding. It then examines the actual benefits of the strategy versus the expected results.
Biography of the writer
Bert Markgraf is a freelance writer with a solid background in science and engineering. He started writing technical articles while working as an engineer in the 1980s. More recently, after starting his own computer business, he helped organize an online community for which he wrote and edited articles as as editor, business and economics. He holds a Bachelor of Science degree from McGill University.