The Difference Between Financial Strategy and Policy: Know the Dangers of Mixing Them
When it comes to managing a business, an executive team has to make strategic decisions on how the company will grow and optimize its financial performance. A business needs a financial strategy to plan and execute the company’s capital allocation and investments.
A business also needs a financial policy to know how the company will distribute capital and investments to achieve the business’s financial objectives. It is essential to understand the difference between financial strategy and policy so that executives do not get trapped in the deadly trap of mixing these two.
Financial strategies are short-term, high-level plans that guide companies towards specific financial objectives. Financial policies are comprehensive, detailed plans that cover aspects of capital allocation such as types of capital, sources of capital, and the timing of capital investments.
Financial Strategies
Financial strategies are the strategic blueprints of businesses that visualize their growth and financial performance with a long and medium term perspective. They are usually used to shape a company’s growth and future strategic direction.
They are often used to set the company’s financial goals, including revenue, expenses, and profitability.
Other things that companies use financial strategies for is to set budgets, resource and capital allocation plans, and financial projections.
The main goal of a financial strategy is to provide the blueprint for success, including the use of financial and operational metrics to gauge the success of the strategy.
For example, a financial strategy may be to increase revenue by 10% each year by finding innovation and expanding market share. This strategy calls for finding new ways to gain customers so that sales increase by 10% each year.
Financial Policies
A financial policy is a detailed plan that organizes the company’s capital allocation.
For example, a financial policy for a manufacturing plant may be that profits from that plant will go towards funding new projects or hiring more employees.
A business may have many financial policies that it applies to different aspects of its operation. The policies of a manufacturing business may differ from those of its sales or administrative departments.
A financial policy is a comprehensive set of guidelines that determines the distribution of a company’s resources. It outlines the rules, guidelines, or procedures that determine how capital is allocated.
A financial policy can be written down as a regulation, a by-law, an operating manual, or a code of conduct.
A financial policy can also be unwritten. The company’s culture and values can be used as a financial policy, even if the policy isn’t written down.
What's the Dilemma?
There is a dilemma when it comes to financial strategies and financial policies. They are like oil and water; they don’t mix.
One example of this dilemma is that many companies focus their company’s financial strategies on short-term results and growth. They neglect the needs of the future, including the need for future growth to maintain and grow their business.
They also neglect their sustainability, including the need to maintain a healthy balance between profits and expenses.
In this case, the company’s financial policies are often outdated. Moreover, they may lack priority to the financial needs of the company’s employees, customers, and the environment.
The Deadly Trap of Mixing Financial Strategies and Policies
Mixing financial strategies and policies leads to the deadly trap of financial mismanagement.
For example, a company may have a financial policy that calls for profits to be reinvested in the company or given back to shareholders.
But, the company’s financial strategy may be to increase sales by launching new products and services, which will lead to an increase in revenue.
So, not only is the company violating its financial policy, it is violating its financial strategy as well.
A business needs to have a financial policy that follows its financial strategy. A business also needs a financial strategy that meets its financial policy.
Final Words: Knowing the Difference Between Financial Strategy and Policy
Financial management is a challenging task, and executives need a clear understanding of the difference between financial strategies and policies.
A company’s financial management system is the set of policies and practices that govern the company’s use of capital. This system helps ensure that the company’s financial strategies are followed.
The best way to avoid the deadly trap of mixing financial strategies and policies is to have a financial management system that covers all aspects of the company’s financial management.
