What Is Strategic Financial Management?- Functions and Importance

Strategic-Financial-Management

Strategic financial management is more than just taking care of a company’s money. It also means achieving the company’s goals and maximizing shareholder value over time. However, before a company can strategically manage itself, it must 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 making money for the business and ensuring good returns on investment (ROI). Financial management is accomplished through business financial plans, establishing financial controls, and making financial decisions.

Understanding of Strategic Financial Management

Strategic financial management is about making money for the business and ensuring good returns on investment (ROI). Financial management is achieved through financial business plans, established financial controls, and financial decisions.

Financial management means knowing a company’s assets and debts and ensuring they are managed, spread out, and kept in good condition. It also involves keeping an eye on operational financial factors like expenses, sales, accounts receivable and payable, cash flow, and profitability.

Strategic financial management encompasses all of the above and 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.

What is the Meaning of Strategic Financial Management?

In brief, strategic financial management is the practice of managing a company’s finances to achieve the organization’s goals. It is a management style that creates a strategic plan using financial instruments and a combination of techniques. It also ensures that the strategy is implemented as anticipated and that it is long-term attainable.

What are the Types of Financial Management?

Here are the 4 types of financial management:

  • Working capital management
  • Capital structure
  • Capital budgeting

Functions of Strategic Financial Management

A company will use strategic financial management in all of its operations. This means it will design parts that make the best and most efficient use of the company’s money. 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.

#1. Planning

  • Define goals precisely.
  • Identify and quantify available and potential resources.
  • Write a specific business budget.

#2. Budgeting

  • 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 profits to achieve its goals effectively.

#3. 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.

#4. Establish ongoing proceedings

  • Collect and analyze data.
  • Make consistent financial decisions.
  • Track and analyze variance and the differences between budgeted and actual results.
  • Identify problems and take appropriate corrective action.

What are the Main Functions of Strategic Finance

Strategic finance’s ultimate purpose is to direct the organization toward its objectives, including revenue growth, sustainability, environmental impact, and other objectives. Everyone must go along for the ride when transforming a company’s culture. Because of this, the finance function completely controls the transformation game.

Strategic vs. Tactical Financial Management

According to Financesyrup, “strategic” refers to financial management practices geared towards long-term success instead of “tactical” management decisions focusing on short-term positioning. When a business is strategic instead of tactical, it makes financial decisions based on what it thinks will work in the long run or the future. To achieve these results, a company sometimes has to tolerate losses in the present.

The tactical plan outlines the steps to accomplish your goal, while the strategic plan gives you a basic concept of how to get there. Strategic planning often takes place at the start of a year, quarter, or month since the goals stated in the plan are more broad-based and assessed over a longer time frame. Every three months, these plans should be revisited.

Following the creation of the strategic plan, tactical planning takes place. If necessary, the tactical plan may then be reviewed more frequently.

Since tactical planning is more straightforward, it is frequently more tailored to your team or company. But strategic plans are frequently comprehensive enough to include an entire market or sector. For instance, strategic planning for sales may entail certain shared objectives among several businesses, but their tactical strategies may differ.

When Strategic Management is Effective

Effective strategic financial management may involve giving up or changing short-term goals so that the company can reach its long-term goals more quickly. For example, suppose a company suffered a net loss in the previous year. In that case, it might reduce its assets by closing down facilities or cutting back on staff, 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.

With multiple stakeholders in mind, these short-term and long-term tradeoffs often need to be made. 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 strengthen the company’s long-term health.

How Do You Develop a Financial Strategy?

To effectively develop a good financial strategy, you’d have to:

  • Establish a basic budget and expand from there.
  • Don’t misuse social media.
  • Utilize any new mortgage payments.
  • Be in charge of your retirement.
  • Consider money as a tool, not as a goal.
  • Your biggest asset is you.
  • There’s still time.
  • Compare salaries and perks.

How Can Financial Management Strategies be Improved?

You can improve on managing your finances in any of the following ways

  • Recover debts.
  • Reduce or reorganize your spending.
  • Assets should be sold.
  • Offer price reductions or raise your prices.
  • Clear your debts.
  • Make use of innovative marketing strategies.
  • Provide more payment alternatives.
  • Finally, consult with an accountant or a business expert about your financial situation if you haven’t already. In other words, seek professional advice.

What is the Best Financial Strategy?

Ultimately, the easiest strategy for most people to save money is to make saving automatic. This can be accomplished through a tax-deferred employment retirement savings plan or automatic stock or mutual fund investment schemes.

Importance of Strategic Financial Management

  • Helps you determine the capital requirements of the business: Financial management helps estimate the financial resources necessary for a business’s proper functioning. 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 to choose the most suitable and accurate one.
  • Increased allocation and investment in funds: Once the exact amount of funds has been raised, they 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 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 bills, 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 company’s objectives. Ensures that all activities are carried out following pre-established plans and, if not, precise control measures are taken.

Conclusion

This is one of the most important skills for any business organization to have, because no organization can work well if the money isn’t managed well. Before using the strategic financial management technique, the organization’s objectives must be defined precisely and clearly so that the appropriate financial needs can be calculated and the necessary funds can be raised in various ways.

First, a good financial plan is one of strategic financial management’s three most important parts. Then, controls are put in place to ensure that all financial activities go according to plans that have already been made. Finally, money decisions 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.

You should note that both tactical and strategic planning have a goal. Each advances your company’s development toward more essential aims and objectives. You’ll be ready to grow your business if you have a solid strategic and detailed tactical plan. At Businessyield Consult, we present plans to help your business reach its full potential. We can start up a tactical and strategic plan for your business, contact us today and let’s walk you through the process.

FAQs on Strategic Financial Management

What is the main objective of financial management?

Financial management’s primary goal also includes maximizing wealth (shareholder value). Maximizing wealth refers to generating the most money possible for the stockholders. Therefore, the finance manager seeks to provide the shareholders the highest dividend possible. Additionally, he makes an effort to raise the share’s market worth.

What are the three types of financial management?

Investment, financing, and dividend decisions are the three basic categories under which financial management classifies financial decisions.

What are the main functions of strategic finance?

It entails comprehending, planning, allocating, overseeing, controlling, and assessing the capital and operational resources of the organization. The aim is to maximize the wealth of the shareholders by increasing the firm’s profitability and market value and aligning the strategies with the long-term goals.

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