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2. Financial strategy. Why be in business?

What is financial strategy? The question 'Why be in business?' has to be answered in order to reveal just what successful financial strategies are and what they deliver.

I have asked the question 'Why be in business?' over many years. The number one reply from hundreds of directors and managers is 'to make money', to which I reply, 'That is a vital "sub-objective"' - not as a put-down but rather pointing to the fact that making money without reference to what, if any, money has to be invested is at best misguided.

What does making money with respect to investment mean? A simple example is that £100 deposited in a bank will ensure a 'safe' return of, say, 3 per cent. That is your rate of return on investment (ROI), or your return on capital employed (ROCE) - the percentage return on capital - in this case employed by the bank. The bank will lend at 4 per cent or more, and thus make a return on your money - capitalism in action.

Content, order and logic of this chapter

Within this chapter we will cover the following topics:

- What do successful companies say?

- How does making a return on investment link with strategy?

- Making a good return is the objective, but what exactly is ROI?

- How does making a return on investment link with strategy?

- Strategic drivers of ROI.

Order and logic

As indicated in Chapter 1, companies and their executives may be confused about the meaning of the words they use. Nearly all will have strategies, but, if they exist, the objectives that the strategies are meant to arrive at are not always clearly stated. We start out by identifying what unquestionably successful companies understand by the question 'Why be in business?' Return is the key and therefore the meaning of this term and its drivers have to be understood.

 
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