Strategic Financial Management03/09/2022 0 By indiafreenotes
Strategic financial management means not only managing a company’s finances but managing them with the intention to succeed that is, to attain the company’s long-term goals and objectives and maximize shareholder value over time.
Features of Strategic Financial Management
- It focuses on long-term fund management, taking into account the strategic perspective.
- It promotes profitability, growth, and presence of the firm over the long term and strives to maximize the shareholders’ wealth.
- It can be flexible and structured, as well.
- It is a continuously evolving process, adapting and revising strategies to achieve the organization’s financial goals.
- It includes a multidimensional and innovative approach for solving business problems.
- It helps develop applicable strategies and supervise the action plans to be consistent with the business objectives.
- It analyzes factual information using analytical financial methods with quantitative and qualitative reasoning.
- It utilizes economic and financial resources and focuses on the outcomes of the developed strategies.
- It offers solutions by analyzing the problems in the business environment.
- It helps the financial managers to make decisions related to investments in the assets and the financing of such assets.
Importance of Strategic Financial Management
The approach of strategic financial management is to drive decision making that prioritizes business objectives in the long term. Strategic financial management not only assists in setting company targets but also creates a platform for planning and governing plans to tackle challenges along the way. It also involves laying out steps to drive the business towards its objectives.
The purpose of strategic financial management is to identify the possible strategies capable of maximizing the organization’s market value. Also, it ensures that the organization is following the plan efficiently to attain the desired short-term and long-term goals and maximize value for the shareholders. Strategic financial management manages the financial resources of the organization for achieving its business objectives.
There are various ways to set goals for strategic financial management. However, regardless of the method, it is important to use goal-setting to enable conversations, ensure the involvement of the main stakeholders, and identify achievable and striving strategies. The following are the two basic approaches followed for setting the goals:
SMART is a traditional approach to setting goals. It establishes the criteria to create a business objective.
FAST is a modern framework for setting goals. It follows the strategy of iterative goal setting that enables the business owners to remain agile and accept that goals or circumstances may change with time. It follows the below criteria for business objectives.
The management of an organization needs to decide on which goal-setting approach would best fit their business as well as the requirements of strategic financial management.
Certain factors need to be addressed while determining the objectives of strategic financial management. They are as follows:
- Involvement of Teams
Other departments, such as IT and marketing, are often involved in strategic financial management. Hence, these departments must be engaged to help create the planned strategies.
- Key Performance Indicators (KPIs)
The management team needs to determine which KPIs can be used for tracking the progress towards each business objective. Some financial management KPIs are easy to determine as they involve working towards a specific financial target; however, other KPIs may be non-quantitative or track short-term progress and help ensure that the organization is moving towards its goal.
It is important to decide how long it would take the organization to reach that specific target. The management team needs to decide actionable steps depending on the timeline and adjust the strategies whenever required.
The strategies planned by the management should involve steps that would move the business closer to achieving its goals. Such strategies can be marketing campaigns and sales initiatives that are considered critical for a business to reach its goal.
Functions Performed by Strategic Financial Management
Strategic financial management encompasses the entire spectrum of financial activities performed by any organization. Some of the key decisions which are enabled by strategic financial management have been mentioned below.
- Decisions Regarding Capital Investments:
The point of view of strategic financial management makes organizations view their capital investment decisions in a new light. For example, the recent 15-20 years have seen the emergence of asset-light businesses. For instance, Uber, Airbnb, Facebook are all leaders in their own industries. However, they own very few assets. Companies that use strategic financial management to make decisions about their long-term assets would have noticed this trend earlier than other companies. Hence, they would have invested in making long-term commitments towards illiquid assets which may end up providing a sub-optimal return in the long run. It is strategic financial management that sensitizes the organization about the effectiveness of its decision when a broader time frame is considered. It is no coincidence that companies which place a higher emphasis on strategic financial management have invested heavily in the digitization of their business even though it might be eating into their profits in the short run.
- Decisions Regarding Location:
Companies that take a strategic point of view about their investments also use different methods to select where they will locate their business. For example, many American companies have been located in China in the past. However, if the decision were to be made now, fewer companies would choose to locate in China. This is because of the continuous tensions and trade wars between the two countries. This is what makes long-term location in China a riskier proposition than locating in another country that may be slightly more expensive in the short run but less prone to trade wars in the future.
- Decisions Regarding Mergers and Acquisitions:
Strategic financial management helps companies take a careful look at their business models. It is during this deep dive that companies often discover whether organic growth is best for them or whether they too can choose the inorganic way. The guiding principle remains the same. If the company can absorb the costs of acquiring another company and add value in the long run, such an acquisition would be justified. However, strategic financial management ensures that companies keep their long-term goals in mind before taking a decision regarding an acquisition.
Component of a financial strategy
When making a financial strategy, financial managers need to include the following basic elements. More elements could be added, depending on the size and industry of the project.
Start-up cost: For new business ventures and those started by existing companies. Could include new fabricating equipment costs, new packaging costs, marketing plan.
Competitive analysis: analysis on how the competition will affect your revenues.
Ongoing costs: Includes labour, materials, equipment maintenance, and shipping and facilities costs. Needs to be broken down into monthly numbers and subtracted from the revenue forecast.
Revenue forecast: over the length of the project, to determine how much will be available to pay the ongoing cost and if the project will be profitable.
Role of a financial manager
Broadly speaking, financial managers have to have decisions regarding 4 main topics within a company. Those are as follow:
- Investment decisions: Regarding the long and short term investment decisions. For example: the most appropriate level and mix of assets a company should hold.
- Financing decisions: Concerns the optimal levels of each financing source – E.g. Debt – Equity ratio.
- Liquidity decisions: Involves the current assets and liabilities of the company – one function is to maintain cash reserves.
- Dividend decisions: Disbursement of dividend to shareholders and retained earnings.