What is the objective of financial strategy?
This book resolutely focuses on ROI (return on investment, also termed ROCE - return on capital employed) as being the prime goal of a business, all other objectives and goals being secondary or supportive. This turns thinking on its head; the company is now driven by finance - making a return through pointing out physical actions/strategies that will deliver the components of the ultimate financial strategy, that strategy being to make the best return for shareholders or investors.
Chapter 2 demonstrates this 'truth' with simple numerical examples. Readers will no doubt dissent, but if this chapter results in thought and discussion as to what your company's objectives and supporting strategies really are, that is good. In today's world, one unfortunate side effect of well-intentioned political correctness is that businesses may be forced to be deceitful, not to be honest as to their true motives and intentions. These debatable comments are further explored in later chapters.
There are many feasible financial strategies but for clarity and to aid understanding, financial strategies may be classified as two distinct types:
1 Operational financial strategy, meaning plans (physical strategies) as identified, reported and implemented using financial models, measures and responses. The strategies that plan, report and deliver results: profits, cost reductions, efficiencies and so on.
Without an operational financial strategy there is no continuing business. Operating strategies may have to be very nimble, responsive to the sudden changes faced by many industries today, for example in the service sector.
Operating strategies may be very consistent and boring - but they still need to exist and to be constantly monitored and improved if possible.
2 Structural financial strategy, meaning plans to finance the business in an efficient and effective manner. Examples are gearing up a balance sheet, leasing as opposed to purchasing equipment, and factoring debts. Unless you are large and powerful or have generous and willing friends and supporters (as you must have to be able to work a private equity strategy), financial strategy is very much constrained by external parties, in particular funders - the banks.
The two distinct types of financial strategy give rise to many different approaches with aims that should be complementary or aligned (to use another overused word). The overall operational or structural strategy will have sub-strategies or tactics to aid its delivery.
The chapters that follow refer to how the topic relates to operational or financial strategy, or both. This will help you to understand the importance of the accounting statement or practice being studied. Their place in applying tactics and delivering strategy should be clear. The problems and limitations of reports and practices will also become evident - you must know what prevents a tactic working and a strategy being delivered.