Financial strategies can help businesses to overcome their financial difficulties and ultimately prosper. However, some financial strategies are more effective than others for certain types of businesses.
Businesses that find themselves in a cash-strapped position should focus on these four different types of financial strategies.
- Cash Flow Planning
Cash flow planning considers the likely sources of cash for a business over time and identifies how much will be required. This helps businesses to determine which investment opportunities should be taken on and if the new debt should be raised or not.
The objective is to ensure that businesses have adequate cash reserves throughout their financial year but do not have too much cash.
- Investment Planning
Investment planning is used by businesses when they have idling cash and are considering investing this idle money. The difference between cash flow planning and investment planning is that the former predicts how much will be required from a business over a set time, whereas the latter predicts how much free money or surplus there will be in any given period.
This is useful for businesses when they want to invest in a business opportunity or purchase new equipment.
- Dividend Strategy
Businesses often use a dividend strategy to return cash to their shareholders and thus secure continued investment in the company. If businesses are not paying dividends, they may be considered poorly by potential investors who will look for opportunities elsewhere where they can receive a dividend.
- Capital Structure Planning
Capital structure planning is when businesses identify the assets and liabilities they have, their current level of debt, and how that will affect a business in the future. This helps to anticipate future improvements in business cash flow or capital restructuring cost-saving measures needed to resolve any difficulties.
It also helps businesses consider any opportunities for a change in corporate structure, i.e., converting a sole trader business into a company limited by shares or reverse.
Businesses can use other financial strategies to resolve their cash flow issues and improve their short-term liquidity positions and the long-term viability of the business.