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.

RELATED TERMS
  1. Corporate Finance

    Corporate finance is the division of a company that deals with ...
  2. Operations Management

    Operations management is the administration of business practices ...
  3. Annual Budget

    An annual budget outlines projected items on income, balance ...
  4. Budget

    A budget is an estimation of revenue and expenses over a specified ...
  5. Funds Management

    Funds management is the management of a financial institution's ...
  6. Money Manager

    A money manager is a person or financial firm that manages the ...
Related Articles
  1. Investing

    What Is Strategic Asset Allocation?

    A strategic asset allocation takes a long-term approach to help an investor achieve their financial goals. Here's how it works.
  2. Personal Finance

    Here's How to Create a Successful Budget

    Break your expenses into needs, wants, and savings goals for a budget plan you can stick to.
  3. Tech

    Management Tips Of Top Financial Advisors

    A new book from Fidelity Investments offers management tips from top financial advisers; learn from their successes (and failures).
  4. Personal Finance

    How budgeting works for companies

    Budgeting is an integral part of running a business efficiently and effectively. Learn more about the two types of budgets that companies commonly use: static and flexible.
  5. Investing

    Capital Budgeting

    Learn the process through which businesses determine whether projects are worth pursuing.
  6. Personal Finance

    4 Critical Habits for Financial Success

    When it comes to pursuing financial success, these four habits are key.
  7. Personal Finance

    Money and Millennials: Setting Financial Goals

    Managing savings and expenses, and setting goals early in life, will help Millennials get on a path to long-term financial success.
RELATED FAQS
  1. How should a company budget for capital expenditures?

    Learn the difference between capital expenditures and operational expenses, and discover the importance of budgeting for ... Read Answer >>
  2. Why working capital management matters

    Learn about a company's working capital, and why good working capital management is essential to maintaining a company's ... Read Answer >>
  3. Why are the tangible assets of a company important to investors?

    Learn what the significant difference is between a financial forecast and a financial plan, for either individuals or for ... Read Answer >>
  4. How should I analyze a company's financial statements?

    Discover how investors and analysts use a company’s financial statements to evaluate a company's financial health and investment ... Read Answer >>
  5. Financial Risk vs Business Risk

    Understand the key differences between a company's financial risk and its business risk – along with some of the factors ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center