Developing a financial strategy is vital as a CEO. Doing so allows projections to be made for the coming months, including forecasting income and expenses, and can act as a crucial early warning system. Cash flow dips can be planned for, with the best times to start new projects identified and finance needs anticipated in advance. A financial strategy allows a CEO to assess progress and take steps to circumnavigate bumps in the road ahead.
The Four Cornerstones of Financial Decision Making
As a CEO, bearing in mind these four principles can be very helpful when making important financial decisions.
The first is the core-of-value principle, which identifies that value creation is a function of returns made on growth and capital.
Second, the conservation-of-value principle determines that only increasing cash flows create value.
Third, the expectations principle details how movements in a company’s share price reflects shifts in stock market expectations relating to performance and not just the company’s actual performance.
Finally, the best-owner principle stipulates that no business has inherent value: instead, it has varying values to different owners (or potential owners).
Creating Financial Projections
Monthly financial projections can be created by recording anticipated income. This should be based on sales forecasts and the expected expenses relating to supplies, labour, overheads etc. Anticipated expenses relating to forthcoming projects should also be included, and it’s a good idea to prepare a balance sheet projection and a profit and loss statement too.
Successful CEOs like Rob Tolley know that incorporating several scenarios in these projections can be a helpful way to assess the impact of each.
Ensuring Operational Efficiency
The efficiency with which operations within a business are managed has a direct impact on the bottom line, so ensuring this needs to be a part of creating a financial strategy. Streamlining is the key.
There are three main factors that influence operational efficiency: human, organisational and technological. The first can be boosted by promoting a positive work culture and developing effective communication processes, while the second involves ensuring effective organisational structures are in place. When it comes to technology, this means the adoption and utilisation of tech – such as automation, integrated systems and data analytics – that is designed to enhance operational efficiency.
The Importance of Planning for Growth
A financial strategy should feed into and be informed by a clear growth strategy. This means having a plan for profits made and identifying ways of making sure that profit margins remain tight or increase. The overall financial strategy should provide direction to the business, and planning for growth is an important part of this.