Financial Strategy and Financial Planning

Financial strategy and financial planning together refer to the long-term direction and short-term actions a company takes to manage finances, align investments, budgets, and funding decisions with strategic goals, and maximize shareholder value.

A company’s strategic plan is a method of achieving the goal of maximizing shareholder wealth. This strategic plan requires both long-term and short-term financial planning that brings together forecasts of the company’s sales with financing and investment decision making. Budgets, such as the cash budget and the production budget, are used to manage the information used in this planning, whereas performance measures, such as the balanced scorecard and economic value added, are used to evaluate progress toward the strategic goals.

A strategy is a direction the company intends to take to reach an objective. Once the company has its strategy, it needs a plan, in particular the strategic plan, which is the set of actions the company intends to use to follow its strategy. The investment opportunities that enable the company to follow its strategy comprise the company’s investment strategy.

The chief financial officer (CFO), under the supervision of the board of directors, looks at the company’s investment decisions and considers how to finance them. Budgeting is mapping out the sources and uses of funds for future periods. Budgeting requires both economic analysis (including forecasting) and accounting information.

Economic analysis includes both marketing and production analysis to develop forecasts of future sales and costs. Accounting techniques are used as a measurement device: But instead of using accounting to summarize what has happened, companies use accounting to represent what the management expects to happen in the future. Therefore, budgeting involves looking forward into the future.

Once these plans are put into effect, the management must compare what happens with what was planned. Companies use this postauditing to:

• Evaluate the performance of management.
• Analyze any deviations of actual results from planned results.
• Evaluate the planning process to determine just how good it is.

Strategy and Value

The strategic plan is the path that the company intends to follow to achieve its objective, which is to put its assets to their best use, adding value. In this strategic plan is a method to make investments that will add value to the company. The way to add value is to invest in profitable projects.