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What's the difference between strategic and financial planning?

To be successful at chess requires strategy. The same is true of business. Strategic planning helps an organization define where it is going so it can succeed.
To be successful at chess requires strategy. The same is true of business. Strategic planning helps an organization define where it is going so it can succeed.

In order to succeed in its industry or field, a corporation, institution or organization has to know where it is going. A strategic plan can help define and set the course.

A strategic plan is the result of strategic planning. It is during this process that the organization decides, in finite, simple terms, its place in the world right now, and where it ultimately would like to go [source: McNamara]. In other words, a business provides a certain service, let's say high-speed Internet access. The plan defines what the institution does, for whom, and how they intend to excel and beat the competition. But how will it adapt to the changing world and marketplace to deliver the same service (or not) in the future? Most importantly, why does the organization want to go where it's going, and how is it going to get there? This is strategic planning. It's a survival method, the cornerstone of an organization, and the voice that informs the company culture, or overall "feel," philosophy and code of an organization.

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Strategic planning is essentially the "why" that drives an operation. Once it knows the "why," it can figure out the "how" by outlining the requirements to get there, including where to place financial resources, how to forecast human resource needs, and where to place investments, otherwise known as financial planning. Financial planning is all about allocating finite resources -- such as money, employees and equipment -- over time, to reach the broad goals set out in strategic planning. To do so involves measuring current performance against past data and trends for the future.

Read on to find out more about how a strategic plan comes together.

The strategic plan is comprised of two very different parts. First is the mission statement. This is a brief statement of the organization's intended purpose -- why it exists, and what it does to achieve that purpose [source: QuickMBA]. For example, a mission statement for a local charity aimed at ending homelessness could be, "To greatly reduce the number of women and children living on the streets in our community each year." The mission statement is, by nature, broad. Although it does have to follow some reasonable criteria, which are often called SMART objectives [source: Heathfield]. SMART is an acronym for specific, measurable, achievable, relevant and time-bound. In other words, the mission statement may have a very lofty scope, but if the SMART system is employed, results are possible or even probable.

The mission statement example above is specific in that it targets the problem of homeless women and children. It is measurable because the number of homeless women and children can be quantified. It is achievable because it is a broad goal -- the aim is to "greatly reduce" the problem. It is relevant because homelessness is a major social issue. And it is time-bound because the goal is to make progress "each year."

The second part of strategic planning is crafting a vision statement [source: McNamara]. A vision statement speaks to an organization's long-term future, describing what it hopes to accomplish in five, 10 or even 20 years or more. So a vision statement for the local charity example mentioned above could be something like, "We're striving for a community free of homelessness, where everyone has affordable, safe housing." The vision statement is the collective dream of the organization, and as such must be agreed upon by its leaders, stakeholders and shareholders.

Combined, the two create an organization's "what" and "why," which is ultimately a theoretical and idealistic way to plot the future. Financial planning is where reality jumps in.

If strategic planning is the "what" and "why" of a company, financial planning is the "how" and "when."
If strategic planning is the "what" and "why" of a company, financial planning is the "how" and "when."

Strategic planning informs financial planning; strategic is the "what" and "why," while financial planning concerns the "how" and "when." Financial planning is built around financial projections. A company's data and financial analysts look at a number of things to determine the financial outlook of the present and future of both the economy and outside factors including:

  • Trends - An electronics manufacturer, for example, might look at sales trends for plasma TVs and LCD TVs. If plasma TV sales are dipping, and LCD TV sales are rising, then the manufacturer would allocate more money to making and marketing LCD TVs.
  • The competition - It's important to look at how the "other guy" is navigating the landscape. A soft drink company would look at how its primary rival is performing in emerging overseas markets, and allocate accordingly, or if the rival's new salmon-flavored drink is selling well, then it might decide to spend some money developing a new, weird flavor of its own.
  • Profit margins - A bakery would examine how the cost of raw goods like sugar and wheat are influencing its bottom line. Will wheat cost more in six months due to a drought in a wheat-producing state, thus driving up the price, and lowering the bakery's profit margins?
  • Expenses - A business is always acutely aware of its overhead and expenses, but in financial planning, it examines overhead and expenses intricately and makes projections on how they may fluctuate due to outside forces, or how they may rise and fall due to internal decisions.
  • Economic indicators - A business does not exist in a vacuum -- it's part of an economy, which involves unemployment levels, disposable income levels and the changing (or non-changing) government regulation climate.

Financial planning is more precise than strategic planning. Rather than dealing with setting idealized goals, financial planning is about manipulating real-world factors -- specifically, money and human resources -- to make the strategic plan tenable in a measurable period. The strategic plan may call for a lofty goal to happen in 10 years, but financial planning may dictate that it is more likely to happen in nine years, 11 years, or even 50 years (which would indicate a woefully inept strategic plan). As such, financial planning is long-term oriented. You could say that strategic planning is about determining a destination and financial planning is about making sure the destination is reached.

For financial planning to work effectively and assuredly, it has to be integrated with strategic planning early and thoroughly.

Perhaps the way strategic planning can be most invigorating to a company is that it gets everybody on the same page, following a precise, singular purpose that is clearly presented in writing. This in turn creates a company-wide focus in the long-term toward specific goals. It helps the organization grow, of course, but even in some not-so-obvious ways. The strategic plan can be used as a litmus for hiring new employees -- passion about the mission statement can determine which new hires are a great fit for the company and its long-term goals.

It's also very valuable to morale and company culture to have a well thought-out, clearly defined purpose, because everyone can carve out a unique niche in that environment. And the more intricate a strategic plan, the more that it may be itemized and quantified in terms of allocation of employees, cash, facilities and investments, which segues nicely into financial planning territory.

The cons of a strategic plan can present themselves when financial resources are low. When this happens, morale and purpose might become hard to come by. If times are good for the company, it's easy to work toward what is essentially just a "nice idea." However, if things get muddled, the strategic plan may grow out of focus.

In financial planning, every dollar counts (especially when the future is unclear), so foresight equals preparation and protection. Anticipating the future allows a company to prepare for things financially. Good financial planning helps a company maximize cash flow with pinpointed resource allocation and investment strategies. On the other hand, that means money can become tied up in long-term investments and investment strategies And if a company's strategic plan or financial plan ends up being woefully wrong, it may not have the money it needs to immediately rectify a problem.

It's much harder to convince shareholders and stakeholders of a company how to properly execute the company's finances; it's easier to get everyone behind a strategy, because it's goal-oriented, not cash-oriented. But the two can be integrated.

Financial planning is not a subset of strategic planning -- it's an integrated step. Although strategic planning typically should come first for best execution, the strategic plan doesn't have to be in place before a company can start thinking about resource allocation. But most companies find that you can't plan the money trail if you don't know where it needs to go.

Regardless of all the careful planning and conservative speculation, there's one factor that strategic and financial planning simply must not forget to include -- new ideas. To move into a wide-open future, an organization has to be willing to innovate. The future will be different no matter what, and innovation (and risk-taking) can serve the business well. Including innovation in the strategic plan -- with a willingness to pay for it in the financial plan -- becomes an inspiring and engaging part of the company culture and a way to distinguish a company from the competition.

Innovation can be risky, but risk can take the company to the level its strategic plan says it wants to go. As the old adage goes, you have to break eggs to make an omelet. Risks can go one of two ways, so plans must account for risks. The strategic plan must justify why the risk is vital. For example, if a hotel chain wants to have floating space hotels in 50 years, it has to justify that very expensive risk with some data about the increasing feasibility of space tourism in order for the financial plan to support it.

Ultimately, each plan serves a different part of the business, and reflects the two sides of the human brain: the creative and the practical. But if they work together, the strategic plan and the financial plan can shape the organization's future while also adapting to the future.

For more on strategic and financial planning and related topics, visit the links on the following page.

Related HowStuffWorks Articles

Sources

  • Allison, Michael and Kaye, Jude. "Strategic Planning for Nonprofit Organizations." Wiley and Sons. 2005
  • Bullseye Target Marketing. "Strategic Targeted Planning." Accessed 22 January 2010. http://www.bullseyetargetedmarketing.com/betmkting/default.asp?p=Strategic%20Planning&title=Strategic+Targeted+Planning]
  • BusinessInformationSite.com. "Strategic Planning: What, How, and When?" Accessed 22 January 2010. http://www.businessinformationsite.com/strategic-planning-what-how-and-when/
  • Heathfield, Susan M. "Build a Strategic Framework: Mission Statement, Vision, Values, and More." About.com. Accessed 22 January 2010. http://humanresources.about.com/cs/strategicplanning1/a/strategicplan.htm
  • MarketingTeacher.com. "SWOT Analysis." Accessed 22 January 2010. http://www.marketingteacher.com/Lessons/lesson_swot.htm
  • MBAToolbox.org. "Chapter 1.2. A Model for Strategic Planning, Analyzing Cases and Decision Making." Accessed 22 January 2010. http://mbatoolbox.org/stories/storyReader$19
  • McNamara, Carter. "Strategic Planning." ManagementHelp.org. Accessed 22 January 2010. http://managementhelp.org/plan_dec/str_plan/str_plan.htm
  • PlanWare.org. "Business Plan Tips." Accessed 22 January 2010. http://www.planware.org/businessplantips.htm
  • QuickMBA.com. "The Strategic Planning Process." Accessed 22 January 2010. http://www.QuickMBA.com/strategy/strategic-planning/
  • Tracy, Brian. "The 100 Absolutely Unbreakable Laws of Business Success." Berrett, Koehler. 2000.

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