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Importance of Strategic Financial Planning
A sound strategic financial planning and management can assist businesses to keep on track and check if they are going in the right way. It includes increasing profit and shareholder revenue, allowing companies to reach financial objectives. People in leading positions like managers and CEOs tend to have a hefty task list which leaves no time for financial planning.
Because it takes time to identify objectives, strengthening your resources and having a firm grip on your assets and liabilities. Nevertheless a strategic financial system is vital for a firm's long term prosperity. In this article we'll discuss the aspects and financial elements you need to keep in mind while formulating a strategic financial plan.
Understanding Strategic Planning
Strategic planning is all about the process in which a company finds out how to achieve their financial objectives. One of the significant determiners of sound strategic planning is a good Return on Investment (ROI) for the organization and its stakeholders.
Strategic Planning makes use of creative data analyzation, creative approaches, and a synchronized team that generates profits, development, and long term prosperity for a business.
Steps to Carry Out Strategic Financial Management
A financial planning and analysis team is responsible for leading strategic planning techniques. These teams often increase the economic department's capability to enhance efficiency by utilizing the best growth strategies and execution tactics.
These are practices like financial consolidation and close, cash flow inspection, and financial accounting. It also includes strategic initiatives like financial insights, financial forecasting, financial risk management, and financial modeling.
Here are some of the steps involved in strategic financial planning:
Understanding Objectives and Goals
This means developing financial objectives that are specified to solve a company's existing problems, objectives that are assessable and can be achieved in a specific time frame. These goals are for both the firm and its stakeholders.
A good place to start can be understanding the company's existing vision and trying to prepare a strategy that compliments the vision statement. The next step is to formulate goals and objectives that help develop a clear vision towards the financial objectives. In this regard, the financial modeling software can be of great help.
Collect Data
In this step, you need to gather the firm's financial data from each department separately. The data is on things like:
- Income
- Assets
- Net Operating Cycle
- Expenses
- Accounts receivable and payable
- Cash flow
- Profit
For understanding these things better it is best suited to take help from your financial analyst or financial consultant. These guys can tell you whether your finances are disrupted and whether they need improving. Furthermore, try to take a look at your accounting process as well.
Inspect the company data.
In this step try to see whether your objectives are aligned with your current performance. Financial Planning and Analysis utilizes prognostic planning, driver-based forecasting and strategy planning to find out the company's current position and future potential standing. Irrespective of the technique, a financial analyst should collaborate with all the departments when analyzing company's data.
Formulate and distribute the plan.
Now that you have the analyzed data, it's time to execute the strategies to meet the financial objectives. Here, certain aspects are essential:
Budget
The main goal of the budget is to find out which financial resources should be distributed to different parts of the company. From office goods to salaries, this includes everything. The focal point of a budget is dependent upon the cash management, that includes incoming profits, costs, to craft new financial goals for the upcoming future.
Financial Forecasting
A financial forecast's adaptability determines its use in both short and long term calculations. Managers can alter changes simultaneously to satisfy the important goals. This allows them to adjust their operations like marketing strategies, production and employee hiring.
Scenario Understanding
Scenario planning is all about pretesting various outcomes within a single budget and plan. A better example is illustrating different outcomes utilizing an yearly operating budget. This helps a business to make better business decisions by understanding resource allocation and further adjustments. Even Though it's just an analysis, it can be used in the preparation stages.
Therefore, if you can find out the areas and business departments that require the allocation of resources, take a look at your company's motto a second time.
Now that a plan is being set up, feedback from the team leaders is required so they can educate the team members about these goals.
Execute and Direct the plan.
Now that you have a functional and data prominent plan to execute, it's important for team leaders to explain the plan to employees and create financial guidelines to make sure the company is on the right track.
The important thing here is to make robust financial guidelines to find out the persisting issues and take correct measures in the future.
Measure Success
Keeping track of your strategic plan involves consistently reviewing, managing and altering your actions for better sustaining long-term objectives.
The financial team should understand the important financial aspects like financial ratios to check whether or not the plan is functional, and if not then what things might be subject to change.
Here are some of those important financial aspects to look for:
Important Financial Metrics for Strategic and Financial Planning
The financial metrics and KPIs assist the company leaders to increase the company's performance. Key Performance Indicators in specific allow a company to track their strategic initiatives.
These KPIs are financial metrics that illustrate the need to meet specific business goals and where the company is lagging. Here are some KPIs that can help your company in this regard:
Net Dollar retention
Net Dollar retention is a Saas metric that specifically measures how much your monthly and annual recurring revenue is varying. Also known as (NRR) Net revenue retention, it looks at company expansions, disturbing rates, downgrades to put an indication on business growth.
SaaS magic number
SaaS magic numbers are related to a company's sales efficiency. It calculates the production of goods or services of a year's worth with respect to every dollar consumed by the sales and marketing department.
Following are some essential things that SaaS magic number can help managers with:
Market Adjustment
Markets are ever evolving, so the jobs of marketers are always prone to new adjustments. The SaaS magic number indicates the need of rectifying your marketing needs.
Sales Regulation
Here, the metrics in your SaaS magic number can indicate when it's time to alter your sales strategies and communication so that the sales team can better work on those metrics.
Cost Depletion
In this case, the higher SaaS magic number tells that it's time to give attention to improving your business finances so that it can better generate more profit.
Cash Runway
Cash runway is the amount of time a company has on which it can operate without completely running out of money. This means how much longer your current money will last without the upcoming revenue.
Simply put, it's a calculation of your cash flows. This can be calculated by dividing your current financial value with the burn rate. Burn rate is calculated by the monthly expenditures.
Cash runway can indicate how financially sound your company is and whether or not they are overspending. So, if your cash runway is high then your strategic financial plan might not be effective or off track.
Debt-to-Equity ratio
The Debt-to-Equity ratio contrasts all the liabilities of a firm to the stockholder equity. This comparison provides insights into how financially sound a company's operations are based on the debt vs equity comparison.
This comparison is made using two key elements: Total liabilities, which incorporate all the debts, and financial commitments. Shareholder equity is all about the company's net value ( assets minus liabilities )
This means that a higher Debt-to-Equity Ratio suggests that a firm is more heavily financed through debt, this indicates potential financial crisis and also potential for better returns.
Churn Rates
Churn occurs when a client stops doing business with a company. Revenue churn and customer churn are both included in Churn Rates.
Revenue churns indicates the percentage of revenue lost due to downgrades, cancellations and customers. It tells what percentage of revenue was lost in the last month. Customer churns is the amount of customers lost. It can also tell you how much customers have been lost in a specific period; let's say a month.
On the contrary, the growth rate tells how many new customers or employees a company has obtained. For a stable company growth, the churn rate of the customers must not exceed more than the growth rate.
LTV/CAC Ratio
LTV stands for the lifetime value of a customer, and CAC stands for Customer Acquisition Cost. Their ratio determines the value of a customer in contrast to the cost of acquiring that customer.
To understand the LTV/CAC ratio, consider that you spent $5 to acquire a customer, and the LTV is $50. In this case, you have an excellent LTV/CAC ratio. The opposite of this situation means that you need to make adjustments to the ROI of your sales and marketing expenditures.
The ideal LTV/CAC ratio for an emerging company is 3:1. On the other hand, if the LTV/CAC ratio of your company is >3:1, then it means that you need to bring improvements to your sales and marketing team and go after better value generating clients.
If the LTV/CAC ratio is <3:1, then your sales and marketing expenditures need to bring the desired results, or you can try to increase the LTV of existing customers.
Rule of 40
According to the rule of 40, the profit margin and growth rate of a company should always be more than 40%. In an ideal situation this might seem pretty straightforward, but in a real world situation, there will always be give and take between growth and profit. This is because it's uncommon to have higher profit and growth simultaneously.
When trying to stabilize this equation, it's common with high growth income to have lesser profit margins or vice-versa.
Rule of 40 was specifically developed to check the progress rate of smaller firms. As a firm expands, they emphasize more on profit as compared to growth so this keeps the rule of 40 quite balanced.
The best way to manage your strategic financial planning
Strategic management is a gradual process that takes time to formulate and show results. The financial planning and assessment team should have a firm grasp on companies short and long term goals. This allows them to formulate, budget and predict accurately to contribute towards the strategic plan.
Ofcourse, they can improve the tools they are using as need arises when the business expands and the organization becomes more complex.
At BestCFO, we've tons of experience when it comes to providing strategic financial planning services here in the US. Our expert team has hands-on experience in providing robust strategies for a sound and prosperous financial strategy.
We are excited to see how the best CFO takes your business to new heights.Visit our website today or email us at info@bestcfo.com
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