No Financial Strategy Means a Strategy for Failure

Do you think the organizations handing out bad loans, buying securities of bundled bad loans, and selling credit default swaps had a well-thought out financial strategy for business success?
If the financial strategy was expressed at a now defunct mortgage lender, what would it have sounded like?


Mortgage Lender CEO to Board of Directors and Executive Staff:

Okay – here is the plan folks. We are going to give people mortgage loans for hundreds of thousands of dollars. Before we write the checks let’s not do any due diligence by verifying their financial information like income and credit background, or even by making sure we have accurate information about what the home is worth. Just to keep it interesting, let’s throw in some curveballs like unrealistic low beginning payments followed by crippling rate increases and ballooning payments, no matter what the prime rate is doing. Then, when our lendees can’t make payments and foreclosures start skyrocketing, the bottom will fall out of the housing market. Once that happens hardly anyone will be buying and selling houses, no one will be getting loans, our cash flow completely dries up, and we will be out of business in no time.


Does that sound good to everyone??

Board of Directors and Executive Staff: Hear Hear!! Bravo!!


Mortgage Lender CEO: Alright! Let’s get out there and make it happen!!


It sounds kind of ridiculous when you say it out loud, doesn’t it? But what did they THINK would happen? Did these organizations not have any strategy at all?? Apparently they were thinking: let’s just keep writing loans and charging fees as long as there are people who want them. There was apparently no clear plan or vision regarding what these activities meant for the future of the organization. No strategy is a strategy for failure.


Strategy Management Incorporate Goals, Environment, and Risks
A clear strategy and plan not only incorporates goals and the activities needed to reach these goals, but it also addresses risks. Obviously, the risk of handing out loans for hundreds of thousands of dollars without the proper due diligence and transparency was not accounted for in managing the financial strategies of these organizations.


Of course the above scenario of formulating a horrible strategy never really happened, but that is the point. Having no strategy is really the equivalent of having the worst possible strategy. The same concept moves right up the chain from the mortgage sellers to the investment banks who were buying and selling credit default swaps that they couldn’t cover, and to investors who were buying bundled securities that turned out to be virtually worthless because the real value was indeterminable.


Business Success Takes Planning
Conversely, you can find examples of businesses in the financial industry where a well-thought out strategy prevented them from being another victim of the financial crises. Perhaps the most visible is Bank of America. Executives at this institution say that they made a conscious decision about eight years ago not to get involved with the sub-prime loan market. They just didn’t see how lots of risky loans fit their long term financial strategy. Now, while so many other financial businesses are facing catastrophe, Bank of America is strong enough financially to grow by snapping up bargains. Recent acquisitions include well-known organizations like Merrill-Lynch, MBNA, and Countrywide Mortgage.

Anyone who has ever watched It’s a Wonderful Life knows that the best time to buy is when others are panicking and selling. But, of course, you have to be in a position to buy; and that is usually the result of a well-thought out and managed financial strategy.


How important is a clear financial strategy? Apparently it can mean the difference between growing your business and going out of business.


Financial Strategies are the Starting Point of Internal Control
For strategies to be effective, however, they have to be communicated and implemented throughout the organization. That means operations in various departments at various levels have to create their own strategies and plans that align with, and execute, top level strategies. This is accomplished though training, policies, procedures, and implementing best practices – an excellent starting point for internal control.


One final point. Most businesses cannot survive on a good financial strategy alone. A good financial strategy, for example, doesn’t mean much to a business without customers. So thoughtful strategies must be created and implemented across the balanced scorecard: finance, customers, internal processes, and learning and growth.


There are never any guarantees for business success, but creating financial strategies gives your business direction and guidance. Without that, there is no telling where you will end up. Perhaps owned by Bank of America.