Table of Contents Hide
- What is Strategic Financial Management?
- Understanding of strategic financial management
- Functions of Strategic Financial Management
- Strategic vs tactical financial management
- When strategic management is effective
- Importance of Strategic Financial Management
What is Strategic Financial Management?
Strategic financial management means not only managing a company’s finances, but also with the intention of being successful – that is, achieving the company’s goals and objectives and maximizing shareholder value over time. However, before a company can strategically manage itself, it must first clearly define its goals, identify and quantify its available and potential resources, and devise a specific plan for using its finances and other capital resources to achieve its goals. .
Strategic financial management is about generating profits for the company and ensuring an acceptable return on investment (ROI). Financial management is accomplished through business financial plans, the establishment of financial controls, and the making of financial decisions.
Understanding of strategic financial management
Strategic financial management is about generating profits for the company and ensuring an acceptable return on investment (ROI). Financial management is achieved through financial business plans, established financial controls, and financial decisions.
Financial management itself requires knowing and properly managing, distributing and maintaining a company’s assets and liabilities, including overseeing the operational financial elements such as expenses, sales, accounts receivable and payable, cash flow and profitability.
Strategic financial management encompasses all of the above as well as ongoing evaluation, preparation, and improvement to keep the business focused and achieve long-term goals. When a company manages strategically, it deals with short-term problems on an ad hoc basis in a way that does not affect its long-term vision.
Functions of Strategic Financial Management
A company will employ strategic financial management in all organizational operations, which means designing elements that maximize and efficiently use the company’s financial resources. This is where a company needs to be creative as there is no one-size-fits-all approach to strategic management and every company develops elements that reflect its own particular needs and goals. However, some of the more general functions of strategic financial management could include the following.
- Define goals precisely.
- Identify and quantify available and potential resources.
- Write a specific business budget.
- Help your company be financially efficient and with less waste.
- Identify the areas where most operating costs are incurred or exceed budgeted costs.
- Ensure sufficient liquidity to cover operating costs without resorting to external resources.
- Discover areas where a company can invest its profits to more effectively achieve its goals.
Risk assessment and management
- Identify, analyze, and mitigate uncertainty in investment decisions.
- Assessment of the potential for financial commitment; Examine Capital Spending (CapEx) and Workplace Policies.
- Use risk metrics such as B. Calculations of the degree of operational leverage, standard deviation, and value-at-risk (VaR) strategies.
Establish ongoing proceedings
- Collect and analyze data.
- Make consistent financial decisions.
- Track and analyze variance, the differences between budgeted and actual results.
- Identify problems and take appropriate corrective action.
Strategic vs tactical financial management
The term “strategic” refers to financial management practices that are geared towards long-term success as opposed to “tactical” management decisions that focus on short-term positioning. When a company is strategic rather than tactical, it makes financial decisions based on what it believes will ultimately produce results, i.e. in the future. To achieve these results, a company sometimes has to tolerate loss in the present.
When strategic management is effective
Part of effective strategic financial management, therefore, may be sacrificing or realigning short-term goals in order to more efficiently achieve the company’s long-term goals. For example, if a company suffered a net loss in the previous year, it may choose to reduce its asset base by closing facilities or downsizing, thereby lowering its operating costs. Such steps can lead to restructuring charges or other one-time items that can have an even greater impact on the company’s finances in the short term, but better position the company for long-term success.
These short-term and long-term tradeoffs often need to be made with multiple stakeholders in mind. For example, shareholders of public companies can discipline management for decisions that have a negative short-term impact on a company’s stock price, even though the same decisions make the company’s long-term health stronger.
Importance of Strategic Financial Management
- Helps you determine the capital requirements of the business: Financial management helps to estimate the financial resources necessary for the proper functioning and functioning of a business. This is one of the main responsibilities of CFOs. The financial requirements of any business vary based on the size of the business, its profit goal, and various other goals and responsibilities.
- Helps you decide on the composition of the capital structure: Once the capital requirements of the business are calculated, the next step is for the finance manager to decide what type of capital structure it should have.
- Helps you choose the right funding source: Since there is another source to raise funds, these are available in the market. This step is simply to choose the most suitable and accurate one.
- Increased allocation and investment in funds: Once the exact amount of funds has been raised, these funds are invested in various funds that generate income for the business and also meet the goals and objectives of the business.
- Using the excess amount: It is a decision about the profit made by the company and how it is used.
- Control of all cash expenses: This simply means managing cash so that none of the expenses are out of budget. It consists of various expenses that require cash payments such as wages and salaries, water and electricity bill expenses, and the amount required to buy raw materials, etc.
- Control of all finances: It is one of the important functions as it plays a very effective role in achieving the objectives of the company. Ensures that all activities are carried out in accordance with pre-established plans and, if not, the precise control measures are taken.
This is one of the most important techniques required in any business organization because no function in the organization can function properly unless the finances of the business are properly managed. Before using the technique of strategic financial management, it is very important that the objectives of the organization are defined precisely and clearly so that the appropriate financial needs can be calculated and the necessary funds raised in various ways.
The three basic elements of strategic financial management are, first, the formulation of an adequate financial plan. Various controls are then put in place to ensure that all financial activities proceed according to pre-established plans and ultimately decisions related to financial matters are made. From this, it can be concluded that the scope of financial management is very deep in the business and has several important functions.
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