The Link Between Financial Analysis and Strategic Planning

The relationship between financial analysis and strategic planning

A complete view of financial analysis

Financial analysis is the process of evaluating the financial performance of a company. Then, companies use that information to make informed business decisions. It involves analysing the financial statements of the company to determine its financial health. Financial statements include income statements, cash flow statements, balance sheets etc. It can aid in the financial modelling process.

There are different tools and techniques available to determine the financial performance of the organisation. For example, trend analysis involves analysing financial data over time to recognise trends and patterns.

A complete view of strategic planning

Strategic planning is the process of determining the vision for the company’s future. It is where the business leaders identify the goals and objectives of the company. The process also involves establishing the sequence in which these goals have to be realised. This is to ensure that the company will eventually achieve its stated vision.

Strategic planning generally involves mid to long-term goals. The lifespan of these goals is typically 3-5 years. However, it can go longer. This is different from business planning which involves short-term goals. Companies conduct strategic planning periodically to address changes in business, industry and regulatory conditions.

The link between financial analysis and strategic planning

Financial analysis plays a crucial role in strategic planning. It provides the essential information required for the development of a strategic plan. The following are some of the ways financial analysis can contribute to the organisation’s strategic planning and boost business growth:

Assessing financial health

This is one of the key ways financial analysis is linked to strategic planning. Financial analysis tools can be used to identify the areas where the business is struggling financially. It can reveal business issues such as high debt, low profitability, poor cash flow etc. This information can be used to plan business strategies to address these issues. This way, companies can ensure that they have a strong financial foundation before establishing a new growth strategy.

Identifying growth opportunities

Apart from identifying the areas where businesses lack, financial analysis can also determine the potential growth opportunities of the company. For instance, companies can get an idea of business areas that are growing or declining via trend analysis. With the help of ratio analysis, they can learn about the areas where the company is performing better than its competition. Companies can take advantage of this information to develop strategies in order to explore growth opportunities. It can make use of the information to identify new product lines and markets to pursue.

Evaluating risk

Financial analysis can be used to evaluate the risk involved in different growth strategies. For example, if a company is venturing into a new market, companies can identify potential risks associated with that market using financial analysis. The risk factors can be in the form of regulatory issues, competition, economic conditions etc. With this information in hand, companies can develop strategies to avoid or reduce the impact of those risks. By doing this, companies can ensure that they will succeed by entering into the new market.

Allocating resources

Financial analysis can assist companies in the effective allocation of resources in order to achieve business objectives. For instance, a company is trying to expand its product line. They can identify profitable product lines through financial analysis. Plus, it will also give information about the product lines that may need additional investment to become profitable. Companies can make use of such information to accurately allocate resources and achieve growth strategies of the company.

Monitoring progress

Financial analysis can help with tracking and monitoring progress towards strategic objectives. Companies can track their progress towards achieving their business goals by analysing the financial data regularly. Then, based on the information drawn from this analysis, they can make the required adjustments. For instance, consider that a company is not meeting its profitability targets. Here, financial analysis can be used to identify areas where the costs can be cut. It will also give information about the business units where additional revenue can be generated. This way, companies can improve their profitability.

Key takeaway

Financial analysis involves analysing the financial performance of a company. Strategic planning is the process of determining company goals. Financial analysis plays a crucial role in strategic planning as important company decisions are made based on the information gained from financial analysis. The job role of a financial analyst is essential for every organisation. They have to be at the top of their game to analyse and improve organisational growth. That’s why Imarticus Learning provides a certified financial analyst course to polish the skills of these professionals.

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