An organization’s financial strategy is critical to the health and success of the business. A well-crafted financial strategy enables an organization to optimize operations and can present additional opportunities for growth. In contrast, a poor financial plan can hinder an organization’s operations and drive even a profitable company out of business.
Despite the importance of financial planning, the process of building a robust financial plan does not have to be complicated. By following a few simple strategies, an organization can avoid many of the common pitfalls that result in a flawed financial plan and hamper the growth of the business.
Three Important Financial Strategies for 2021
1. Remember That Cash Is Still King
It is vital to remember that a company’s money (revenue) is not the same as the money that a company has been paid (cash inflow). While an organization may be profitable on paper, it could be broke in reality based upon the ratio of revenue to expenses.
Bills can only be paid with the money that a company actually has on-hand, making cash management an essential component of an organization’s financial strategy.
This includes setting the terms of contracts to ensure that they are paid promptly and taking advantage of opportunities to minimize expenses, such as the use of automation to reduce payroll expenses.
2.Keep It Simple
Overcomplicating its financial strategy is a common mistake that businesses make. To optimize its operations, an organization may break expenses into many buckets and independently monitor and analyze each.
While this is intended to increase visibility and optimize expenditures, it can end up costing an organization more money in the long term. Additional complexity and analysis require additional headcount to complete. Since payroll is typically one of a company’s largest expenses, up to 70% of the total, the potential gains made due to increased visibility and optimization are likely to be overwhelmed by the corresponding analysis cost.
A better approach to expense management is to apply the Pareto Principle: 80% of consequences come from 20% of causes. Identify those few things that make up 80% of your expenses (likely payroll, marketing, and rent) and focus optimization efforts on those for maximum impact.
Financial analysis can also be simplified and optimized by the use of automation. By transitioning manual accounting processes to automated ones, an organization can achieve the same level of analysis while minimizing the associated costs.
3. Bring Management Together & Make It Meaningful
One of the most common mistakes made by founders and entrepreneurs is maintaining too tight of control over a business’s operations. By trying to do everything themselves, these leaders end up spending more time working “in” their company (day-to-day tasks, putting out fires, etc.) rather than working on their company (strategic planning, long-term goals, etc.). As a result, the company can stagnate and fail because it lacks a clear path forward.
This also applies to an organization’s financial planning. A crucial part of building a successful business is hiring competent people and handing over control of the tasks they are more fit to manage.
When developing a financial strategy, an organization’s management likely has a better view of the current state of the parts of the company under its direct control than the CEO. Asking them about their departments’ current state, their needs, and potential opportunities to decrease expenses without sacrificing revenue can provide invaluable data for crafting an organization’s financial strategy.
Preparing Your Financial Strategy for 2021
The most effective financial strategies are based upon experience. Optimizing cash flow requires knowledge of how to manage contracts best. Simplifying financial analysis requires an understanding of what is and isn’t important. Reducing expenses via automation requires the ability to select platforms that provide a tangible benefit and return on investment. Crafting a strong financial strategy requires knowing the right questions to ask subordinates and take the right actions based on their answers.
A good starting point for acquiring some of this knowledge is reading Lavoie’s Guide to Strategic Financial Planning.
This ebook provides best practices and tips for developing an effective financial strategy.
However, in many cases, there is no substitute for experience. Lavoie CPA has over 25 years of financial planning experience and can manage your accounting for you, allowing you to focus on running and building your business.