What is Strategic Financial Management?
Strategic financial management is a term used to describe the process of managing the finances of a company to meet its strategic goals. It is a management approach that uses different techniques and financial tools to devise a strategic plan. Strategic financial management ensures that the strategy chosen is implemented to achieve the desired goals.
- Strategic financial management is an approach used for managing the finances of a company to meet its strategic goals.
- The approach is used to identify and implement strategies that will maximize the market value of the organization.
- Strategic financial management helps financial managers make decisions related to investments in the assets and the financing of those assets.
Features of Strategic Financial Management
- It focuses on long-term fund management, taking into account the strategic perspective.
- It promotes profitability, growth, and presence of the firm over the long term and strives to maximize the shareholders’ wealth.
- It can be flexible and structured, as well.
- It is a continuously evolving process, adapting and revising strategies to achieve the organization’s financial goals.
- It includes a multidimensional and innovative approach for solving business problems.
- It helps develop applicable strategies and supervise the action plans to be consistent with the business objectives.
- It analyzes factual information using analytical financial methods with quantitative and qualitative reasoning.
- It utilizes economic and financial resources and focuses on the outcomes of the developed strategies.
- It offers solutions by analyzing the problems in the business environment.
- It helps the financial managers to make decisions related to investments in the assets and the financing of such assets.
Importance of Strategic Financial Management
The approach of strategic financial management is to drive decision making that prioritizes business objectives in the long term. Strategic financial management not only assists in setting company targets but also creates a platform for planning and governing plans to tackle challenges along the way. It also involves laying out steps to drive the business towards its objectives.
The purpose of strategic financial management is to identify the possible strategies capable of maximizing the organization’s market value. Also, it ensures that the organization is following the plan efficiently to attain the desired short-term and long-term goals and maximize value for the shareholders. Strategic financial management manages the financial resources of the organization for achieving its business objectives.
There are various ways to set goals for strategic financial management. However, regardless of the method, it is important to use goal-setting to enable conversations, ensure the involvement of the main stakeholders, and identify achievable and striving strategies. The following are the two basic approaches followed for setting the goals:
SMART is a traditional approach to setting goals. It establishes the criteria to create a business objective.
- FAST is a modern framework for setting goals. It follows the strategy of iterative goal setting that enables the business owners to remain agile and accept that goals or circumstances may change with time. It follows the below criteria for business objectives.
The management of an organization needs to decide on which goal-setting approach would best fit their business as well as the requirements of strategic financial management.
Certain factors need to be addressed while determining the objectives of strategic financial management. They are as follows:
1. Involvement of Teams
Other departments, such as IT and marketing, are often involved in strategic financial management. Hence, these departments must be engaged to help create the planned strategies.
2. Key Performance Indicators (KPIs)
The management team needs to determine which KPIs can be used for tracking the progress towards each business objective. Some financial management KPIs are easy to determine as they involve working towards a specific financial target; however, other KPIs may be non-quantitative or track short-term progress and help ensure that the organization is moving towards its goal.
It is important to decide how long it would take the organization to reach that specific target. The management team needs to decide actionable steps depending on the timeline and adjust the strategies whenever required.
The strategies planned by the management should involve steps that would move the business closer to achieving its goals. Such strategies can be marketing campaigns and sales initiatives that are considered critical for a business to reach its goal.
Thank you for reading CFI’s guide to Strategic Financial Management. To keep learning and developing your knowledge base, please explore the additional relevant resources below: