What Is Strategic Financial Management?
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 goals and objectives and maximize shareholder value over time. However, before a company can manage itself strategically, it first needs to define its objectives precisely, identify and quantify its available and potential resources, and devise a specific plan to use its finances and other capital resources toward achieving its goals.
Strategic financial management is about creating profit for the business and ensuring an acceptable return on investment (ROI). Financial management is accomplished through business financial plans, setting up financial controls, and financial decision making.
[Important: "Strategic" management focuses on long-term success and "tactical" management relates to short-term positioning.]
Understanding Strategic Financial Management
The Operative Word: Strategic
Financial management itself involves understanding and properly controlling, allocating, and obtaining a company's assets and liabilities, including monitoring operational financing items like expenditures, revenues, accounts receivable and payable, cash flow, and profitability.
Strategic financial management encompasses all of the above plus continuous evaluating, planning, and adjusting to keep the company focused and on track toward long-term goals. When a company is managing strategically, it deals with short-term issues on an ad hoc basis in ways that do not derail its long-term vision. Strategic financial management includes assessing and managing a company's capital structure, the mix of debt and equity finance employed, to ensure a company's long-term solvency.
Strategic Versus Tactical Financial Management
The term "strategic" refers to financial management practices that are focused on long-term success, as opposed to "tactical" management decisions, which relate to short-term positioning. If a company is being strategic instead of tactical, then it makes financial decisions based on what it thinks would achieve results ultimately—that is, in the future; which implies that to realize those results, a firm sometimes must tolerate losses in the present.
When Strategic Management Is Effective
Part of effective strategic financial management thus may involve sacrificing or readjusting short-term goals in order to attain the company's long-term objectives more efficiently. For example, if a company suffered a net loss for the previous year, then it may choose to reduce its asset base through closing facilities or reducing staff, thereby decreasing its operating expenses. Taking such steps may result in restructuring costs or other one-time items that negatively affect the company's finances further in the short term, but which position the company better to succeed in the long term.
These short-term versus long-term tradeoffs often need to be made with various stakeholders in mind. For instance, shareholders of public companies may discipline management for decisions that negatively affect a company's share price in the short term, even though the long-term health of the company becomes more solid by the same decisions.
- Strategic financial management is about creating profit for the business.
- A financial plan that is strategic focuses on long-term gain.
- Strategic financial planning varies by company, industry, and sector.
The Elements of Strategic Financial Management
A company will apply strategic financial management throughout its organizational operations, which involves designing elements that will maximize the firm's financial resources and using them efficiently. Here a firm needs to be creative, as there is no one-size-fits-all approach to strategic management, and each company will devise elements that reflect its own particular needs and goals. However, some of the more common elements of strategic financial management could include the following.
- Define objectives precisely.
- Identify and quantify available and potential resources.
- Write a specific business financial plan.
- Help the company function with financial efficiency, and reduced waste.
- Identify areas that incur the most operating costs, or exceed the budgeted cost.
- Ensure sufficient liquidity to cover operating expenses without tapping external resources.
- Uncover areas where a firm may invest earnings to achieve goals more effectively.
Managing and Assessing Risk
- Identify, analyze, and mitigate uncertainty in investment decisions.
- Evaluate the potential for financial exposure; examine capital expenditures (CapEx) and workplace policies.
- Employ risk metrics such as degree of operating leverage calculations, standard deviation, and value-at-risk (VaR) strategies.
Establishing Ongoing Procedures
- Collect and analyze data.
- Make financial decisions that are consistent.
- Track and analyze variance—that is, differences between budgeted and actual results.
- Identify problems and take appropriate corrective actions.
Examples of Strategies Based on Industry
Just as financial management strategies will vary from company to company, they also can differ according to industry and sector.
Firms that operate in fast-growing industries—like information technology or technical services—would want to choose strategies that cite their goals for growth and specify movement in a positive direction. Their objectives, for example, might include launching a new product or increasing gross revenue within the next 12 months.
On the other hand, companies in slow-growing industries—like sugar manufacturing or coal-power production—could choose objectives that focus on protecting their assets and managing expenses, such as reducing administrative costs by a certain percentage.