What Is Strategic Financial Management?
- Strategic financial management is a process of systematically arranging, planning and regulating an organisation’s financial resources to meet or achieve it’s long term goals and obligations.
- It refers to making strategic choices which will have an effect on the organisation’s overall sustainability and financial position.
- It’s primary goal is to increase the performance and value of the organisation while lowering its financial risks.
- Strategic financial management plays a critical role in the success and sustainability of organisation and integrates the various branches of management like financial planning, budgeting, risk management and investment research.
- Strategic financial management primarily focuses on the management of finances of the organisation with the help of various financial tools and makes strategic decisions in order to achieve those financial objectives.
- Financial management focuses on coordinating various financial choices with the organisation’s strategic objectives and visions.
- As the word strategic financial management in itself means, financial management in a way which is strategically framed and it promotes organisation’s expansion by offering the financial foundation for growth, diversification, mergers and acquisition.
Features Of Strategic Financial Management:
- Mainly focused on long-term fund management and fundamental growth.
- Takes into consideration the organization’s overall profitability, growth, and maximization of the shareholder’s wealth.
- Strategic long term investments, and appropriate allocation of funds, while taking into consideration the probably risks and returns.
- Helps in the development of effective strategies while ensuring that the action plan aligns with the business objectives.
- Helps us to avoid and mitigate certain risks.
- The key element of strategic financial management and in the business world is to decide how to raise finance for operational and investment purpose.
- The strategic financial management offers important and useful financial data and various work papers to assist in making strategic decisions.
- Strategic financial management is a tool which helps various business organisations to maintain its financial position in the long run.
The Key Components of Strategic Financial Management:
Financial Planning: Strategic financial management involves recognising the financial goals and objectives of the business organisation and creating a plan of action to atain those goals.
Investment: Making strategic long term investments, and appropriate allocation of funds, while taking into consideration the probably risks and returns.
Risk Management: Strategic financial management requires the identification and control of various financial risks. Risk management is one of the important elements of strategic financial management. It helps us to avoid and mitigate certain risks, if appropriate planning and analysis is done on the timely basis.
Cost Management: Cost management refers to the accurate assertainment of costs related to various business processes. It is integral for preserving the profitability and long term financial viability of the business organisation. The cost management element primarily focuses on controlling both the fixed and variable costs.
Raising Finance: The key element of strategic financial management and in the business world is to decide how to raise finance for operational and investment purpose. The finance manager has to assertain the best combination of debt and equity funding and the conditions with lenders and investors. The capital structure of the organisation should have a balance of both debt and equity.
Performance Evaluation: This process refers to the measurement of performance on a timely basis, it is necessary to regularly evaluate and assess the financial performance of the business organisation to compare and to set targets and goals. The performance measurement tool is important to compare the various financial ratios like profitability ratio, return on equity, etc.
Financial Estimations: Financial estimations help businesses to ascertain the future financial performance based on the previous data and market trends. These estimations give a rough estimation in regards to the working of the organisation.
Liquidity Management: Liquidity in economics refers to something which has the capacity to be immediately converted into cash. Financial stability requires that the company has enough free cash reserves and liquid assets in order to meet its short term obligations.
Dividend Policy: The dividend policy prevalent within the organisation decides how much of the company’s revenue is to be retained for future business expansion and investment activities and how much is to be distributed to the shareholders in the form of dividends.
The Requirement and Importance of Strategic Financial Management:
Long Term Oriented: Strategic financial management is primarily concerned with the creation of long term financial plans and strategies. It analysis financial objectives, searching for various investment opportunities, with the ultimate aim of providing with long term financial stability and sustainability of the business organisation.
Allocation of Fund: Strategic financial management is a guiding factor which helps organisations in decisions relating to allocation of resources effectively, giving them the opportunity to properly deploy the financial resources and channelising them to appropriate investments.
Risk Management: Strategic financial management helps organisations to detect, evaluate and manage financial risks associated to the business organisation. In order to mitigate potential risks effective risk management procedures are a necessity.
Effective Decision Making: The strategic financial management offers important and useful financial data and various work papers to assist in making strategic decisions. Effective decisions help in the betterment of the performance which intern leads to the success of the business organisation.
Performance Forecasting: This process refers to the measurement of performance on a timely basis, it is necessary to regularly evaluate and assess the financial performance to compare and to set targets and goals. The performance measurement tool is important to compare the various financial ratios like profitability ratio, return on equity, etc. Strategic financial management enables companies to access their financial performance in comparison to predetermined benchmarks and objectives. This procedure helps to find out deviations, if any, and the solutions to make them right.
Capital Budgeting: Strategic financial management makes judgements about the capital budgeting, evaluates various investment opportunities. Based on the data provided by the strategic financial management on the expected returns and compatibility with the strategic goals and its objectives, business entities can make a strategic decision in which project or assets to make investment in.
Cost Ascertainment: Cost management is the core concepts of strategic financial management. In order to preserve the profitability, businesses must make sure that it’s resources are used optimally and their cost structures are effective and consistent with their strategic objects.
Financial Stability: Strategic financial management is a tool which helps various business organisations to maintain its financial position in the long run. Organisations can continue to exist and compete in the markets with a strong fundamental position just by making wise and strategic financial decisions with successful and optimum allocation of its resources.
Stakeholder Assurance: The confidence and trust of stakeholders which consists of shareholders, investors, lenders, employees, creditors and debtors is significantly increased by effective strategic financial management procedures. A robust financial management makes a business fundamentally strong and stands out in comparison to its pears and attracts investors and keeps good ties with important stakeholders.
Legal Compliance: Strategic financial management makes sure that the business complys to the reporting and financial regulation standards. There should be compliance of the concept of full disclosure and maintain transparency and accountability as well as legal and regulatory compliance.
Strategic Growth: As the word strategic financial management in itself means, financial management in a way which is strategically framed and it promotes and organisation’s expansion by offering the financial foundation for growth, diversification, mergers and acquisition. It helps the organisations to strategically plan its plan of action and to take important business decisions for its betterment.
Flexible: Strategic financial management helps businesses to quickly adapt to changing market dynamics, monitor policy and the economic environments. It helps the business organisations to create financial plans by taking into account the changing external conditions and transforming the weaknesses into strengths.
