Quick answer: A financial strategy is a forecast that puts numbers on your plan: three to five years of projected financial statements showing what has to be true for the strategy to work, and what it will cost. It will be wrong, and that’s fine. It forces the hard questions, surfaces risk early, defines winning, and tells you what funding you need before you commit.
Don’t you hate it when someone asks where the business will be in three years, and you realize you’re guessing?
Most businesses have a strategy. Fewer have a financial strategy.
In Part 1, we looked at how a budget can lock you into last year’s strategy. The first way out is to quantify where you’re actually going.
What is a financial strategy?
A financial strategy is a forecast that puts numbers on your plan. It’s three to five years of projected financial statements that show what has to be true for the strategy to work, and what it will cost to get there.
Why do so many owners skip it?
Because it feels like guessing; committing to a revenue number three years out feels reckless. What if you’re wrong?
You will be wrong. Every forecast is.
That’s not a reason to skip it. A forecast earns its keep in four ways even when the numbers miss:
It forces the hard questions. What has to go right? What could break it?
It surfaces risk and opportunity early, while you still have time to act.
It defines winning. Without a number, “growth” means whatever anyone wants it to mean.
It gives you something to measure against. The key performance indicators (KPIs) you track should come straight out of the plan.
Your budget then becomes year one of that strategy. It’s the most detailed and most accurate year of the plan. When the budget and the strategy are connected, a change in one shows up in the other.
When they aren’t, you get the trap.
Is a profitable business always fundable?
No. A real financial strategy goes past the income statement.
I’ve watched owners with strong profits get turned down by their bank. Too much short-term debt. No cash cushion. Money tied up in slow-moving inventory, slowing revenue, and weak market demand. The business was profitable, but still not fundable.
Here’s what your income statement tells you, and what a lender looks at too:
| Your income statement shows | A lender also looks at |
|---|---|
| Whether you’re making a profit | How much debt you carry, and how short-term it is |
| Your margins | Your cash cushion for slow months |
| Revenue growth | Cash tied up in inventory and receivables |
| This year’s results | Whether market demand supports the plan |
Your three- to five-year plan needs your balance sheet and your cash in it, not just your profit. It should tell you how much funding the strategy needs, what kind, and when, before you commit.
Line up the financing, then make the promises. Not the other way around.
Is playing it safe a strategy?
Yes. Usually a losing one.
Here’s a test. Name one investment you’re making right now that won’t pay back within a year.
If you can’t, your budget may be running your strategy.
Budgets are often designed around this year’s KPIs and profit. Yet most businesses need to grow. The saying that if you are not growing, you are dying has some truth to it. Growth has a price. And it can hurt the bottom line in the meantime because you need to take longer bets: new markets, new products, and the systems and people that let you scale. If every dollar has to earn its return inside twelve months, those bets never get funded, and the business slowly loses relevance.
We see the hardships of quarterly reporting and managing expectations in the public market, and those are amplified in small and medium businesses if you let them. Yet one privilege of staying private is avoiding this risk and challenge.
To make longer bets with confidence, you need clarity. A financial strategy lets you see the cost, the timeline, and the return you need, and decide with clarity.
Where do you start?
If cash is still a worry, start there. If you don’t have a budget you actually use, build that next. We covered why the order matters earlier in the budget series.
Once those are in place, put numbers on the next three to five years. Then test them against more than one future.
If you want coaching to build your financial strategy, reach out.
Next in this series: You Won’t Get It Right, So Build Three. Financial scenario planning.
Jamie L Smith
