For many years, the majority of businesses throughout the world believed that these two processes were completely separate from one another. Recently, though, this has changed. Strategic financial planning is a hybrid method to financial planning that integrates multiple techniques to produce a more comprehensive approach to financial planning. Let us understand what is strategic financial planning along with examples, importance of strategic financial planning and levels of strategic financial planning in this module.
In terms of strategic financial planning level, it’s all about making a profit for the firm while also making sure that the corporation receives a decent return on its investment (ROI) (ROI). Financial management is accomplished through the development of company financial plans, the installation of financial controls, and the formulation and execution of financial policies and procedures.
Meaning of Strategic Financial Planning
Strategic financial planning means the goal of success entails not only overseeing a company’s finances, but also ensuring that they are managed with the intention of achieving those goals and objectives while also increasing shareholder value over a period of several years, which is known as long-term financial planning.
You may benefit from Strategic Financial Planning at any point of your life since we will offer you with a personalized financial counselling solution that is suited to your specific requirements and circumstances. To help you flourish, accomplish your financial goals, and achieve financial independence as fast as possible, our professional Financial Advisers work with you at every level of your unique financial planning journey, guiding you through every stage of your financial planning journey.
Examples of Strategic Financial Planning
The development of precise goals is simpler in strategic financial planning since numbers make it easier to conceptualize goals and track progress. The following are examples of strategic financial objectives that you could consider:
- Over the next two fiscal quarters, revenue must rise by at least 5% every quarter on average.
- Within the next one year, the reserve will be increased to payoff credits and loans, according to the plan.
- Profit margins should be raised by 10% in the next fiscal year.
It is possible to work backward from your aim in order to create a template for how the firm may reach the desired result once you have established what you want to do.
Importance of Strategic Financial Planning
The benefits of strategic financial planning are to place your company in an advantageous competitive position outweigh the benefits of just being in a strategic position and then competing. While making strategic financial decisions for the organization, it is critical to have a long-term vision of where the company wants to go in a few years’ time and to keep that vision in mind.
Whether or not a business operation will be successful is determined by the efficiency with which its financial planning is executed. There is several importance of strategic financial planning variables. Let us overview it.
Foundation Upon Which Financial Control is Built
Specifically, it serves as a foundation for evaluating financial operations by comparing actual income to anticipated revenue, and actual costs to predicted costs, when it comes to financial planning.
Maximizing the Effectiveness of Funds
It is possible to minimize wastage and over-capitalization by using the financial planning process to estimate the precise amount of cash that will be required.
Smooth Running of the Business
A company’s production and distribution function will succeed or fail if the appropriate financial decisions are made, which ensures a smooth flow of funds as well as the smooth operation of production and distribution. The success or failure of a company’s production and distribution function is dependent on the decisions made.
Capital Structure has been Corrected
The organization of funds from a range of sources and the use of funds for a number of objectives, including long-term, medium-term, and short-term goals, are possible. Because long-term funds are generally provided by shareholders and debenture holders, medium-term funds by financial institutions, and short-term funds by commercial banks, levels of strategic financial planning is necessary in order to access relevant sources at the appropriate time.
Ensures That Activities Are Well-Coordinated
Additionally, it assists in the coordination of numerous corporate responsibilities such as production, sales, and marketing, among others.
Aids in the Allocation of Financial Resources
The financial plan recommends how the cash should be divided for various purposes throughout time, based on a comparison of many investment choices.
Preventing Shocks and Surprises in the Business Environment
Financial planning, rather than being caught off guard by financial requirements, assists organizations functioning in unpredictable circumstances in avoiding the shock or surprises that would otherwise occur.
Understanding Investment Vs Financing Alternatives
Developing a financial strategy may aid in establishing the debt-to-equity ratio as well as identifying where monies collected should be invested. It builds a link between the two judgments made before.
Ensures Efficiency of Financial Resources
Every organization’s financial well-being is essential. A crucial component of the whole company planning process, financial planning has emerged as a result of this development. The importance of strategic financial planning is in soundness of a companies to the success of its overall business strategy.
Creating a Link Between the Present and the Future
Using sales and growth projections for a company’s sales and growth targets, financial planning connects the dots between current financial requirements and future financial requirements.
Levels of Strategic Financial Planning
Strategic financial planning formulation refers to the identification of the market in which a company wishes to establish itself as a player. This decision will have an impact on the possibilities that the company will have in the future as well as the competition that it will most likely face.
In a single business scenario, all of the functional, business and corporate level duties are grouped together and carried out by a single group, but in a multi-business situation, there are three fully operational levels to strategic financial planning take into consideration.
Functional Levels of Strategic Financial Planning
Functional level strategies are those that are specific to the various functional areas that a strategic business unit possesses, such as marketing, production and operations, finance, and human resources, among others.
These strategies are developed by the functional heads in collaboration with their teams, and they are aligned with the overall business strategy. Functional level strategies consist in the establishment of short-term functional objectives, the achievement of which will result in the realization of the business level strategy.
Example of strategic financial planning, a tea store may plan to sell a wide variety of tea variants through company-owned retail outlets, which is consistent with the differentiation strategy. As a result, the distribution department may set a goal of opening 25 retail outlets in a city, while the production department may set a goal of producing 15 different varieties of tea. As a result of the realization of functional strategies in the form of quantifiable and measurable objectives, the achievement of business level strategies will also be achieved.
Business Levels of Strategic Financial Planning
The strategies developed at the business level are tailored to the needs of certain strategic business units and are focused on a specific product-market segment. It entails determining a strategic business unit’s competitive position in the marketplace. It is the generic strategies of overall cost leadership, differentiation, and focus that serve as the foundation for company level strategy creation.
Strategic financial planning example: Your company may decide to seek overall cost leadership as a strategy in the steel industry, distinctiveness in the tea industry, and emphasis in the automotive industry as a strategy in the steel industry. Businesses’ top-level strategies are determined by the heads of strategic business units and their teams, taking into consideration the specific nature of the industry in which they operate and other relevant factors.
Corporate Levels of Strategic Financial Planning
The business sectors in which your company will operate are defined at the corporate level strategy. It is concerned with the coordination of resource deployments across a varied collection of business sectors, whether they are connected or unrelated.
At this level, strategy creation entails integrating and managing a broad range of companies, as well as generating synergies at the organizational level. The top management team is in charge of developing the company’s long-term strategic direction. The business strategy outlines the course that your firm will take to achieve its goal of success.
Examples of strategic financial planning, your company may have four separate lines of commercial activities, say, autos, steel, tea, and telecommunications, all of which are interconnected. If your organization wants to compete in or withdraw from each of these lines of business, the corporate level strategy will describe where investments should be made and how much money should be spent on each of these lines of business in accordance with your company’s goal.
When putting out a financial strategy, financial managers must take into consideration the following essential aspects. It is possible that extra components will be required depending on the size and sector of the project. I hope you found this information about strategic financial planning to be of useful. You now have sufficient knowledge on importance of strategic financial planning and levels of strategic financial planning.
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