How to Set Goals for Strategic Financial Management at Your Company

November 8, 2019

Financial management is fundamental to the stability and growth of any organization. By setting clear financial goals, organizations can allocate resources effectively, manage risks, and ensure long-term profitability. These goals serve as a roadmap, guiding the financial decision-making process and helping to align financial activities with the overall strategic objectives of the organization.

What Are the Goals of Financial Management

The goals of financial management are centered around optimizing the financial health and performance of an organization. These goals include maximizing shareholder value, ensuring sufficient cash flow to meet obligations, and maintaining a balanced capital structure. By focusing on these objectives, financial managers can help the organization achieve both short-term and long-term financial success.

How Financial Management Goals Work

Financial management goals function as the guiding principles for making financial decisions within an organization. These goals are typically aligned with the overall strategy and vision of the organization, ensuring that financial activities support broader business objectives. The process involves setting clear, measurable financial targets, such as profit margins, return on investment, and cost reduction, and then developing strategies to achieve these targets. Regular monitoring and evaluation are crucial to ensure that the organization stays on track and can make necessary adjustments to its financial strategies.

• Maximizing Shareholder Value: This is often the primary goal of financial management, focusing on increasing the value of the company’s stock and delivering returns to shareholders.
• Ensuring Liquidity: Maintaining sufficient liquidity is critical for meeting short-term obligations and avoiding financial distress.
• Achieving Operational Efficiency: Financial management aims to minimize costs and maximize efficiency in the use of resources.
• Risk Management: Effective financial management involves identifying, assessing, and mitigating financial risks that could impact the organization’s stability.

Key Components of Financial Management Goals

The key components of financial management goals include the following:

• Profitability: Ensuring that the organization is profitable is a fundamental goal, as profitability is necessary for survival and growth. Financial managers work to increase revenues, reduce costs, and enhance profit margins.
• Liquidity: Maintaining adequate liquidity ensures that the organization can meet its short-term obligations, such as paying suppliers and employees. Liquidity management involves balancing the inflow and outflow of cash and maintaining sufficient reserves.
• Solvency: Long-term financial health is measured by solvency, which is the ability of an organization to meet its long-term debts and obligations. Financial managers aim to maintain a strong balance sheet by managing debt levels and ensuring sustainable growth.
• Financial Flexibility: This refers to the organization’s ability to adapt to unexpected financial challenges or opportunities. It involves maintaining access to funding sources, managing debt, and ensuring that the organization can respond to changes in the market or economy.

Benefits of Setting Financial Management Goals

Setting clear financial management goals provides numerous benefits for an organization:

• Improved Decision-Making: Financial goals provide a framework for making informed decisions that align with the organization’s strategic objectives. This leads to better resource allocation and more effective financial planning.
• Increased Accountability: Clearly defined financial goals create accountability within the organization, as progress can be measured and evaluated. This encourages responsible financial behavior at all levels of the organization.
• Enhanced Financial Performance: By focusing on key financial objectives, such as profitability and liquidity, organizations can improve their overall financial performance and achieve sustainable growth.
• Risk Mitigation: Setting financial management goals helps organizations identify potential risks and develop strategies to mitigate them, thereby reducing the likelihood of financial losses.

Examples of Financial Management Goals

Financial management goals can vary depending on the organization’s size, industry, and strategic objectives. Some examples include:

• Revenue Growth: Setting a target for increasing revenue by a certain percentage each year.
• Cost Reduction: Aiming to reduce operational costs by streamlining processes or negotiating better terms with suppliers.
• Debt Reduction: Establishing a goal to reduce the organization’s debt-to-equity ratio over a specified period.
• Return on Investment (ROI): Setting a target for achieving a specific ROI on new projects or investments.

Key Challenges in Achieving Financial Management Goals

While setting financial management goals is essential, achieving them can be challenging due to various factors:

• Economic Uncertainty: Economic conditions, such as recessions or inflation, can impact the organization’s ability to meet its financial goals. Financial managers must be prepared to adjust strategies in response to economic changes.
• Market Volatility: Fluctuations in the market can affect revenues, costs, and profitability, making it difficult to achieve financial targets. Managing market risk is a critical aspect of financial management.
• Resource Constraints: Limited resources, such as capital or personnel, can hinder the organization’s ability to pursue financial goals. Effective resource management is necessary to overcome these challenges.
• Regulatory Changes: Changes in laws and regulations can impact financial management strategies and require organizations to adapt quickly to maintain compliance and achieve their financial goals.

Enterprise organizations already know the importance of effective financial management and oversight of a company’s spending, assets, and other data points. But that doesn’t mean those companies have embraced strategic financial management as a means of supporting long-term business goals.

If you’ve never been involved in setting the goals of strategic financial management, you might not understand the crucial roles that planning and goal-setting play in this process. Though it’s easy to throw out goals for your business at large, creating a plan to reach those goals is a much different matter, and sometimes it requires taking a step backward in the short term, with the goal of reaching greater business heights down the road.

The Importance of Strategic Financial Management

Progress and business growth don’t always happen in a straight line. Realizing gains in operating efficiency, including improvements that reduce your expenses over time, sometimes requires short-term investments that cut into profit margins and appear, at first glance, to be a step in the wrong direction.

Strategic financial management is designed to encourage decision making that prioritizes your long-term objectives. A strategic approach to goal setting doesn’t just set a target for the company to reach; it builds a platform for planning and oversight that accounts for different challenges you might face along the way and lays out actionable steps that will move your business closer to its goals.

There are multiple ways to establish goals for strategic financial management, but regardless of the approach you choose, it’s important to use the goal-setting process to facilitate conversations, involve key stakeholders, and identify strategies that are both ambitious and achievable.

SMART Goals vs FAST Goals

In general, there are two conventional approaches to goal setting. A traditional approach to goal setting, called SMART, emphasizes the following criteria for any business goal:

• Specific
• Measurable
• Achievable
• Realistic
• Time-bound

FAST, by contrast, is a more modern goal-setting framework that features more of the iterative goal-setting strategy made popular in Silicon Valley. It also encourages business leaders to maintain an agile approach that accepts that circumstances or goals may change over time:

• Frequent
• Ambitious
• Specific
• Transparent

Although the FAST framework is becoming more commonplace for its agile approach, and its success in helping unify large organizations around a common goal, your leadership will need to decide which approach is a better fit for your company and its strategic financial management needs.

What Do Strategic Financial Management Goals Look Like?

Strategic financial management goals can be created for a wide range of business objectives, from product growth to customer service to internal operations and office culture. From a financial perspective, though, this goal-setting process tends to focus on financial benchmarks that can be reached within a specific time frame.

Specific goal setting is easier for strategic financial management because the numbers make it easy to conceptualize goals and track progress. Examples of strategic financial goals could include:

• Increase net profit by 10% in FY 2020.
• Reduce operating costs by $300,000 by the start of Q3 2020.
• Grow revenue by at least 2% over the next three fiscal quarters.
• Increase reserve working capital by 50% within the next 12 months.

Once you have your goal identified, you can work backward to create a template for how the organization can achieve the desired result.

Steps to Consider When Setting Strategic Goals

A strategic financial goal is the starting point for other conversations and decisions that need to take place. As you set your goals, you’ll need to address the following factors:

• KPIs tied to the goal: You will need to know which KPIs you can use to track progress toward your goal. Again, financial management is easier than other types of strategic decision making because you’re always working toward a concrete number. But other KPIs can help you track your success in the short term and make sure you’re progressing toward that goal.
• Teams involved: At the enterprise level, strategic financial management often involves other departments, such as marketing, sales, and IT. As you plan to roll out your strategy, you’ll need those departments to be supportive of the initiative.
• Plans to reach your goal: Your plans should include the actionable steps you will take to drive results that bring you closer to your goal. They could include new sales initiatives, marketing campaigns, business technologies, or other steps seen as critical to reaching your goal.
• Timelines/milestones: How long will it take you to reach this goal? What steps along the way can you take to gauge your success and adjust your strategy when needed?
• Challenges and threats to success: Every goal faces the threat of failure due to internal and external factors. It’s helpful to identify those risks beforehand and make sure you understand—and account for—the potential barriers.

Conclusion

When it comes to strategic financial management, it’s well worth the time investment to lay out a plan that fully addresses the financial risks, opportunities, and steps required to reach new business goals. At the enterprise level, this approach to strategy makes it possible to organize large departments and teams around a common goal—while providing a framework to hold everyone accountable for the results.