You probably hear constantly that you must establish a vision and a business strategy. Will you create a differentiated product or make it cheaper? Will you try to deliver both? Either way, if you don’t make considerations in your business for how to organize and analyze your finances, then it doesn’t matter what business strategy you develop because you won’t be in business very long.
A finance strategy helps you to focus on tracking and examining your revenues and expenses along with developing budgets that support your business goals. Without a finance strategy, you will not be able to understand costs nor be able to pay your bills on time.
A key aspect of implementing a finance strategy is to match resources to goals. What does it mean that you want to launch a new product line, but you have not developed a budget to research and test it? Your business strategy must tie to a finance strategy that supports it. Every goal must have resources assigned to it, which includes the commitment of human resources, technology, facilities, time and capital.
Elements in the development of an effective finance strategy:
- Implement a formal accounting and finance system. Track and analyze your sales and expense data to formalize your financial situation. Every month you should be publishing financial statements to visually understand where your money is going: profit and loss statement, balance sheet and a cash flow statement. Sales and inventory reports and a report on receivables and payables round out what you should be reviewing to make better decisions each month. These statements will help when talking to investors and lenders.
- Determine the right solution in running your accounting system. When you first started, you did the books (hopefully). When you grow large enough, outsourcing can be used, but this solution may not necessarily be quick in your need for current-time information. Web-based accounting services can provide a wide array of tools for you to manage the finances of the business. As business owner, you must dedicate significant time to working on your business, which means you may have to hire specialized professionals, at the right time, who can help you. Depending upon the size of your business, you need to analyze your requirements carefully.
- Enforce internal controls. To protect your assets, an internal control process can minimize loss to theft and abuse. Ensure you are checking on everything from inventory to cash balances. Internal controls serve to ensure your assets are used in the proper way and in the manner you prescribe to grow your business. Click here to read: How to Establish Internal Controls to Safeguard Your Assets
- Analyze key metrics. What critical metrics define your industry that can help shape your ability to make decisions? Is it a specific sales metric in your niche or a metric related to controlling costs? Typical metrics to continually analyze are traffic, sales, gross margin, inventories, and customer satisfaction.
- Be linked to your business strategy:
- Budgeting resources. A budget commits financial resources to the accomplishment of a goal. When you develop a product offering, perform a budget analysis that ties to the strategy. Without a firm financial analysis, you are at risk for wasting resources.
- Capital investments. As your business grows, consider how to grow the infrastructure and to develop improved or new product and service offerings. You may need a better piece of equipment or build a new brick and mortar store. Again, tie your business goals to what investments you make in order to deliver what you have planned.
- Realistic projections. In everything you do, ensure you are realistic with the financial analysis. Financial projections that are beyond acceptable variances can commit you to resources you don’t have. You may actually believe, based on research, that you can achieve $10 million in sales in the first quarter, but if you borrow money and manufacture to that projection, you may go bankrupt. Additionally, investors and lenders want realistic projections, not lofty ones that sound too good to be true.
By implementing financial planning within your business strategy, you will be able to commit resources properly to accomplish your goals. You create a value-added situation for your business by having an organized, formal accounting and finance system that can collect receivables and pay the bills on time, track inventory and control costs.
“Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.” -Michael Porter
What can you do today with your finances to better support the overall strategy of the business?
Please comment or email me at comment@stephenmclain.com.
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Copyright 2017 – Stephen McLain