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The Role of Finance in Business Strategy

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A business strategy describes what a business plans to do, while finance funds the activities needed to get there. Companies can have the biggest visions and planned milestones, but they won’t manifest them without strong financial planning.

Just how intertwined are finance and business strategy? The two are inextricably linked. 

Let’s explore everything you need to know about the role of finance in business strategy, how to use finance to inform and achieve strategic goals, and then we’ll share some helpful resources to better equip you to use finance to improve your strategy.

role of finance in business

5 Ways the Role of Finance in Business Influences Strategy

Here are five ways that finance helps improve business strategy:

Balances Vision with Realistic Goals

Company goals and visions may reach for the stars, which is great if there’s enough money to get there. Finance has a humbling effect on strategy and goals, as it checks and balances whimsical strategic goals with realism.

A strategic plan is only as viable as a company’s financial power. Finance tells you whether a goal is attainable and if it isn’t, what has to happen to reach it.

Another way finance humbles strategic planning is in removing bias from interpreting something related to the business. 

A great example is a business’s perception that all new business is good. But a financial perspective ignores the bias and optimism and replaces them with cold, hard facts — even if that means acknowledging that one type of potential client might not be beneficial for a business.

 

Determines Profitability

Profitability is a relative number referring to a business’s ability to earn a return on investment. Similar to profits in that profitability is a business goal, profitability is a business’s ability to sustain itself with its current resources. 

You can use profitability (or a lack thereof) to inform strategic planning. If your business doesn’t have profitability, its current strategy won’t achieve it. Instead, you have to significantly change your strategy. 

To find profitability, a business may alter its strategy to do the following:

  • Create goals to find more clients and scale the business
  • Invest in new services and offerings to attract higher-paying clients
  • Altering a business model to price products and services higher
  • Find cheaper supplies

Budget Tracking

Budgeting helps managers allocate resources to different goals within the strategy. And, tracking budgets and variances help keep strategic goals in line with financial constraints, sometimes sparking the need to revise activities within a strategy. 

For example, if you notice variances between budgets and reality in implementing a strategic goal, you may need to adjust some of the activities in the strategy to find more cost savings. This might look like:

  • Hiring higher-paid talent instead of multiple employees
  • Expanding one or two locations instead of three
  • Offering no bonuses to management one year
  • Limiting or broadening the scope of a marketing campaign

 

Risk Management

    Every business has risks, and sound corporate strategies should account for them. Whether it’s a client not paying, a decrease in market prices, or risky terms on a business loan, finance teams use data to assess risk and protect the company’s interests.

     

    Asset Management

    Asset management entails increasing a business’s wealth by buying and maintaining investments. These investments may look like real estate property, mutual funds, private equity funds, hedge funds, or exchange-traded funds. Businesses can use these assets to fund their day-to-day activities or grow their presence over time. 

    If finance teams present any budget or profitability issues with a company’s current strategy, you could revise the strategy by making more use of a company’s assets. For example, you could:

    • Adjust the amount invested each month
    • Sell an investment to free up capital for a more important or effective endeavour
    • Managing assets internally instead of hiring an asset management company 

     

    Best Practices in Using Finance Principles to Inform Business Strategy

    Now that we know the role of finance in business, let’s explore some quick tips and tricks to make sure you’re using finance effectively when planning company strategy:

    • Make all strategic goals actionable
    • Encourage accountability amongst staff and management
    • Conduct variance analysis to learn why strategic expenses sometimes stray from the budget
    • Learn how to measure success for your business 
    • Create specific targets for financial and strategic goals
    • Be adaptable and adjust strategy when financial analysis deems it necessary
    • Review your corporate strategy with finance professionals often, once a year
    • Make informed decisions about sourcing funding, be it through loans, assets, or capital

     

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