Strategic Financial Management
Strategic financial management allows you to assess your financial requirements to meet and support many objectives and goals for your business or organization. This post will walk you through everything you need to know about strategic financial management.
What Is Strategic Financial Management?
Strategic financial management refers to managing a company’s finances with a primary objective of succeeding—achieving the company’s objectives and goals while taking advantage of shareholder value.
However, it’s important to note that a company must first define its objectives and goals before strategically managing itself financially. In other words, a company needs to develop a specific plan that will enable them to utilize its finances appropriately.
Strategic financial management’s main objective is to make profits for the company and ensure that the business gets a positive return on investment (ROI).
In a nutshell, strategic financial management involves financial decision-making, developing financial plans, and creating financial controls.
Understanding Strategic Financial Management
Financial management refers to having a deep understanding of how to control, allocate, and obtain the liabilities and assets of a company. Additionally, strategic financial management requires you to monitor revenues, accounts receivable and payable, expenditures, etc.
Strategic financial management includes continuously monitoring, planning, evaluating, and adjusting to keep the business in a prime position to achieve its goals. If all these are done correctly, a company’s finances will increase and ensure the company remains in business.
Importance of Strategic Financial Management
The idea behind strategic financial management is to help make rational decisions that align with the business’s overall objectives and goals.
Strategic planning, therefore, goes beyond just creating a company’s goals—it also helps in planning and taking on challenges that arise.
Furthermore, strategic financial management also takes care of steps a business needs to take to move forward and become financially solvent in the long term.
Strategic financial management also involves identifying strategies that can help a company maximize its full potential.
Additionally, it’s a benchmark of whether or not the company follows the set short and long-term goals.
If there are any diversions, then strategic financial management should detect that and find ways to keep the business aligning towards its goals.
That said, below are more reasons why a company needs strategic financial management:
- Strategic financial management helps a business determine its capital requirements—the resources needed to steer a company towards achieving its goals and objectives properly.
- It helps you determine the capital structure composition. This is when the financial manager needs to decide which capital structure is necessary for the business’s success.
- Strategic financial management can help you select the most appropriate funding source. To ensure that your company or business achieves its goals and objectives, you should identify and choose the most appropriate funding sources.
- Strategic financial management helps you invest the raised funds in different funds to help the company generate more profits and remain financially solvent in the long term.
- With strategic financial management, a company can decide on what amount is reinvested after realizing profits.
The Elements of Strategic Financial Management
Strategic financial management is critical for the success of any business. It’s applied across the organizational departments and in all operations, including developing elements that will help the company take advantage of its available financial resources.
There are no sure-fire approaches to strategic financial management, so companies will have to get creative. In other words, every company will have to develop elements that align with its business goals and objectives.
That said, below are some of the most common elements of strategic financial management:
Planning refers to developing ways in which a business will be able to achieve its goals and objectives. Planning must describe the resources needed, the activities involved, and how the activities will be carried out. In a nutshell, below is a summary of what planning entails:
- Identifying and clearly defining objectives
- Identify and list all the resources needed
- Writing a detailed business plan based on the above.
Budgeting refers to knowing how much income or money you’ll get during a specific period and knowing how much to spend, borrow or save. Financial budgeting is crucial for any business as it will help account for their money. Below is a summary of what financial budgeting entails:
- Budgeting improves financial efficiency and helps reduce waste
- Determines whether operational costs are exceeding the budgeted cost
- Budgeting helps with liquidity and ensures the business remains in business
- Identifies areas where the company or business needs to invest surplus funds
3. Managing and Assessing Risk
Risk management is the process of assessing, analyzing, and finding ways of eliminating potential hindrances or threats to the success of a business. Below is a summary of what risk management entails and how it would help with strategic financial management:
- It identifies, analyzes, and finds possible ways to mitigate threats before they happen, minimizing the chances of severe financial losses.
- Helps with the evaluation of financial exposure, thus effective strategic financial management
- Managing and assessing risks helps strategic financial managers develop metrics, such as value at risk, that will help in the overall economic analysis of a business.
4. Establishing Ongoing Procedures
The fourth element of strategic financial management is to establish ongoing procedures:
- Gather and analyze data
- Make consistent, rational decisions
- Monitor and analyze variance—the difference between what was budgeted and the results achieved
- Find problems and develop corrective measures
Strategic Versus Tactical Financial Management
Strategic financial management refers to the financial management practices based on long-term success, while tactical financial management refers to financial management practices looking forward to short-term successes.
If a company or business chooses to be strategic and not tactical with their financial management practices, then it means that they are looking for long-term results or success. In other words, this type of company or business is ready to sustain losses presently.
When is Strategic Financial Management Effective?
As mentioned earlier, strategic financial management involves putting financial management practices to achieve goals in the long term. Therefore, companies that employ strategic financial management can sacrifice short-term goals to attain long-term goals.
For example, a company may decide to close some of its stores or branches and reduce the number of staff due to the impact of the Coronavirus pandemic. By doing this, they’ll be affecting their short-term goals but will reap big in the long term.
Whether a company chooses to use strategic financial management or tactical depends on what stakeholders have in mind. If most stakeholders think that long-term success is good for the business, then strategic financial management will be ideal.
On the other hand, if business stakeholders think a short-term success is the best for the company, then tactical financial management will be a better option. That said, let’s look at the main features of strategic financial management:
Features of Strategic Financial Management
- Strategic financial management focuses on long-term goals instead of short-term goals.
- It emphasizes profitability and growth over the long term.
- It is flexible and can therefore be structured well.
- Strategic financial management is a continuous process—monitoring and revising strategies.
- It comprises innovative and multidimensional approaches to help the business solve problems.
- Strategic financial management helps in the development of strategies to aid in the supervision of actions.
- Strategic financial management helps with the analysis of both analytical and factual financial information for easy decision-making.
- Strategic financial management takes advantage of both financial and economic resources while taking a keen interest in the outcomes of strategies developed.
- You can develop solutions to the problems arising within your business industry.
Tips to Improve Your Financial Management
Strategic financial management is critical for the success of any business. As a strategic financial manager, you’ll need to organize, control, and monitor your company’s financial resources to achieve your business goals and objectives. Below are a few tips to help you improve your financial management strategies:
1. Draft a Business Plan
A business plan is a clear roadmap of where you want to get your business within a specified period. It should include how you will finance your operations and how you will carry out processes towards achieving your financial goals and objectives.
2. Know Your Financial Position
You need to monitor and track your business financial situation. You should track and know how much you spend and how much your business has in the bank. Most importantly, you should compare your current financial position against what’s in your business plan.
3. Ensure You’re Paid on Time
One of the reasons why businesses fail is late payments. Don’t entertain late payments as this could lead your company to serious financial problems. Instead, make your credit terms clear to customers who’d want to purchase items on credit to minimize the chances of late payments. An effective automated credit system can help you track what your customers owe you.
4. Know Your Everyday Costs
As a strategic financial manager, you’ll need to know your everyday costs. As a basic rule of thumb, you cannot manage your finances properly if you can’t account for every money. This is why you need to have a place where you record all the costs you incur daily.
5. Keep Your Accounting Records
Accounting records are essential for rational decision-making. Whether you choose to hire a financial expert to manage your financial books or decide to do it independently, ensure your accounting records are up to date. This way, financial decisions will be made based on actual values and not estimates.
One Step Away From Strategic Financial Management
Strategic financial management is critical for the success of any business or organization. However, before you employ any strategic financial management practices, you need to define your business goals and objectives. Once you have your goals and objectives defined, the above strategic financial management hacks should help you steer your company to success.