What is Strategic Financial Management?
Strategic financial management refers to managing the finance of a firm with a long-term objective considering the strategic goals of the firm. It plays a key role in the maximisation of the wealth of the shareholders by efficient utilisation of the firm’s economic resources. Strategic financial management mainly deals with the decisions such as investment, financing and dividend decisions.
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Characteristics of Strategic Financial Management
As already discussed, strategic financial management deals with the long- term financial decisions of a firm. Long-term decisions are different from the administrative and other routine decisions of a firm as they are strategic in nature.
For example, maintaining the daily financial records is a routine work for a firm; however, making an acquisition or strategic alliance decision is a strategic decision as it may have a high potential impact on the financial health of the firm.
Following are the main characteristics of strategic financial management:
- Deals with long-term financial decisions.
- Emphasises allocation or acquisition of new resources.
- Deals with complex strategic decisions.
- Covers a wide range of activities of a firm.
- Helps in harmonising resource capabilities of a firm with threats and opportunities.
- Involves the top-level management of a firm Establishes coordination of the long-term objectives of a firm with the financial capability to support firm’s decision.
- Incorporates creative and multi-dimensional approaches.
- Promotes long-term growth, sustainability and profitability of a firm.
Scope of Strategic Financial Management
The broad scope of strategic financial management can be summed up in the following manner:
- Decision in respect of the assets of company: In this, the financial manager has to determine the most appropriate usage of the assets of the firm.
- Decision of financing: Decisions need to be taken regarding how much investments should be financed and how to raise it.
- Decision of financing involves questions such as:
- Should a new plant be established for the new product or is the existing production capacity sufficient for producing the new product?
- Should the firm produce the particular product or buy it from outside?
- What proportion of each source of funds should be used for funding?
- At what cost should the funds be availed?
- Should dividends be paid now or later?
- Should the advantage of cash discount be taken or not?
- Which kind of bank facility is most appropriate for the firm?
Importance of Strategic Financial Management
Strategic financial management helps a firm in running business in an effi- cient way. Strategic management is basically concerned with management of the current financial activities of a firm that have an impact on the future business. It ensures the long-term survival of the firm. The importance of strategic financial management can be summed up in the following manner:
Financial planning
Strategic financial management acts as a tool for the achievement of the long-term goals of a firm by way of financial planning, execution and control. The financial planning step of strategic financial management deals with determining the requirements of funds.
Acquisition of funds
Once the requirements of the firm are determined, the next step is to acquire funds from different sources, such as equity and debt. The available sources are explored and then the most appropriate one is chosen for funds arrangement.
Utilisation of funds
Strategic financial management deals with the action plan in respect of the utilisation of funds. Proper allocation and utilisation of funds is a very important aspect of financial management as they not only increase the value of a firm but also reduce its cost of capital.
Improvement in profitability
The profitability of any firm is dependent upon the proper utilisation of funds. A firm’s profitability can be improved with strong financial devices like budgetary control, ratio analysis, etc.
Maintenance of liquidity
Strategic financial management provides adequate funds, which helps in the maintenance of adequate liquidity and provides a cushion against unforeseen contingencies.
Value creation for firm
Strategic financial management adds value to a firm as it takes into account the sensitivity of the business environment and fulfils the needs of the stakeholders.
Hedge against risks
Strategic financial management provides coverage against risks, i.e., a cushion is provided against a probable loss that may occur due to events such as currency or price fluctuations.
Success Factors for Strategic Financial Management
Some of the critical success factors for strategic financial management can be summed up in the following manner:
Principled economic approach
This approach states that superior revenues can be generated without compromising on business and ethical values. At times, companies with the objective of earning short-term profits compromise their ethical values, but for long-term sustainability, ethical values should not be compromised.
Internal competencies
Strategic financial management in a firm should focus on improving internal competencies, like strong Research and Development (R&D), technological infrastructure, etc., so that long-term benefits can be reaped. These internal competencies help a firm in expanding its profitability through better exploitation of market opportunities. For example, a firm with better R&D is in a better position to innovate as compared to its competitors.
Flexibility
The strategic financial management programme of a firm should be flexible enough to deal with the changing needs of the business and the unforeseen business environment.
Long-term approach
Strategic financial management should emphasise a long-range perspective on managing the costs of a firm. Short-term costs should be incurred to derive long-term benefits. At times, firms compromise on quality for getting short-term advantages, but this should be avoided as it may have an impact on the long-term sustainability of the firm.
Dynamic approach
The business environment is dynamic, and changes occur very frequently in it. Strategic financial management facilitates evaluation of projects and funds, which helps a firm to respond quickly in such a dynamic environment.
Adaptability
Efficient strategic financial management requires a futuristic approach of problem-solving in which the market is closely studied, long-term trends are observed and necessary corrective actions are taken to adapt to the market changes. Therefore, adaptability requires evaluation of the external environment and development of internal capabilities.
Constraints of Strategic Financial Management
For managers to formulate useful strategies with respect to financial management, they must be aware of certain constraints, some of which are as follow:
Technical capability
A strategist requires the technical knowledge of complex financial methods, financial statements, decision-making tools, etc. Therefore, if the strategist does not possess the required technical skills, the goals of strategic financial management cannot be achieved.
Resource constraints
Strategic financial management is a long-term approach, and its benefits may not always be derived immediately. Therefore, when a firm falls short of resources, it may focus only on the short-term goals and fail to invest for strategic financial management.
Personal attributes and competencies
The attitude of the decision maker or the strategist determines the quality of the decisions made. If the strategist or the decision maker is not capable, the goals of strategic financial management cannot be achieved. Innovation: Strategic financial management requires an innovative approach to problem-solving. This is because real-life business problems are unique and require a unique approach to for dealing with them.
Conflicts
These may arise in strategic financial management due to differences among individuals accountable for decision making. Conflicts may also arise between the owner(s) of the firm and the strategist(s) because of differences in the understanding of the business environment, future perspectives, ethical differences, vision, etc. These conflicts do not allow a firm to derive the full benefits of strategic financial management.
