What is Strategic Financial Management
Strategic financial management refers to specific planning of the usage and management of a company's financial resources to attain its objectives as a business concern and return maximum value to shareholders over the long run. Strategic financial management involves precisely defining a company's business objectives or goals, identifying and quantifying its available or potential resources, and devising a plan for utilizing finances and other capital resources to achieve its goals. After the initial planning phase, strategic management requires establishing ongoing procedures for collecting and analyzing data, making consistent financial decisions, and tracking and analyzing variance, or differences, between budgeted and actual results to identify problems and take appropriate corrective actions as a dynamic process of adjustment and fine-tuning.
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.
BREAKING DOWN Strategic Financial Management
Financial management involves understanding and properly controlling, allocating and obtaining all of a company's assets and liabilities, including monitoring operational financing items such as expenditures, revenues, accounts receivable and accounts payable, cash flow and profitability. Strategic financial management encompasses all of the above, along with ongoing evaluation, planning and adjustment in order to keep the company focused and on track toward long-term goals with an overarching focus on maximizing the company's profitability and value, while dealing with short-term issues on a more tactical or ad hoc basis in a way that does not derail the long-run vision.
Part of effective strategic financial management may thus 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 facility closures or staff reductions, thereby decreasing its necessary 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 they put the company in a better overall position to move toward its long-term goals.
These short-term vs. 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 is made more solid by the same decisions.
Elements of Strategic Financial Management
Strategic financial management is applied throughout a company's organizational operations and involves elements designed to make the maximum efficient use of the company's financial resources. Key elements of strategic financial management include budgeting, risk management, and ongoing review and evaluation.
Careful budgeting of a company's financial resources and operating expenses is essential in strategic financial planning. Budgeting helps a company function with increased financial efficiency, reduced waste, and it aids in identifying areas of the company that incur the largest amount of operating costs or that regularly exceed budgeted cost. Budgeting includes ensuring sufficient liquidity to cover day-to-day operating expenses without accessing outside financial resources unnecessarily. Budgeting also addresses the question of how a company can invest earnings to achieve long-term goals more effectively.
Strategic financial management also involves risk assessment and risk management, evaluating the potential financial exposure a company incurs by making capital expenditures (CAPEX) or by instituting certain workplace policies. Financial companies may also employ strategies such as value-at-risk (VaR).
Since strategic financial management is all about maintaining focus on attaining a company's long-term business goals, it necessarily includes developing and putting in place regular procedures for review and evaluation of how well the company is doing in terms of staying on track.