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.
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.
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