Be it across any industry worldwide, strategic financial management is a must for every organization. Simply put, the two main objectives of strategic financial management are to generate profit for a business as well as ensure an acceptable ROI (Return on Investment). Both these can be achieved with the help of various tools, financial plans, effective financial management, and decision-making.
The following article will take you through all the details of strategic financial management, its importance, and its scope in today’s economy. So, without further ado, let’s get started!
Understanding Strategic Financial Management: The Basics
Strategic financial management is an umbrella term encompassing all the techniques and tools used to meet a company’s strategic goals. Starting from ensuring that the plan is implemented successfully to achieve the desired results, strategic financial management includes all these processes. As the name suggests, it is strategic by nature and primarily focuses on meeting the long-term financial goals of an organization. That said, depending on the industry or type of business, the financial management plan can differ accordingly.
However, before doing so, there should be a clear understanding of the goals and objectives of the organization, as well as an accurate estimate of its available resources. Following this, it can devise a financial plan that syncs with its finances and capital resources to meet those goals. Financial management planning is not just limited to this alone. It also includes other crucial aspects, such as monitoring operational and financial items, such as cash flow and expenditure, as well as controlling and allocating the assets and liabilities of a company.
Significance Of Strategic Financial Planning
A plethora of reasons can be attributed to the significance of strategy in financial decisions. As stated earlier, good strategic financial planning is required to boost the decision-making process that ultimately leads to the fulfillment of a company’s long-term goals and objectives. However, apart from this, financial planning also plays a crucial role in creating a platform that can design and implement effective strategies required to tackle the everyday challenges that might haunt business operations.
Furthermore, strategic financial planning also enables the identification of possible strategies that can effectively maximize an organization’s market value. It is responsible for properly implementing the said plans or strategies to attain long-term and short-term objectives.
Oftentimes, there can be scenarios where businesses might need to cut down on their short-term goals, to meet the long-term ones. One such example might include when a company has witnessed a net loss in the previous year. In such a case, the best way to deal with the situation is to cut down on its assets by closing down facilities or taking other appropriate measures to lower operational costs. All these steps will undoubtedly harm the short-term goals of the said company but will definitely secure its long-term success.
A Glance Into The Functions Of Strategic Financial Management
Strategic financial management does not comply with a one-size-fits-all approach. It differs from business to business. This means that companies need to be creative enough while designing financial strategies to implement the company’s money most effectively. Nonetheless, a few basic functions of the same have been highlighted below.
This involves performing tasks such as
- Defining the goals and objectives of an organization precisely.
- Identifying the potential resources available.
- Designing a budget for specific businesses.
The ultimate goal of budgeting is to provide the necessary aid required for organizations to be more economically efficient and generate less waste. It includes
- Identifying the areas which tend to exceed the specified budget costs.
- Ensuring sufficient liquidity that meets all the operational costs without the need for relying on an external source.
- Identifying potential areas of investing which can lead to greater profit.
Risk assessment can be described as the process of identifying, analyzing, and successfully mitigating any kind of uncertainties that might occur in decisions related to investment. It involves the use of various risk management tools and metrics, including the Sharpe Ratio, R-Squared Value-at-risk Strategies, and Standard Deviation.
- Collecting and analyzing valuable data.
- Making data-driven business decisions.
- Keeping track of the key differences between the estimated budget and the actual results.
- Identifying potential areas of problems and taking the necessary actions.
Features Of Strategic Financial Management
The following list highlights some of the top features of strategic financial management that make it valuable to every organization.
- Primarily focused on long-term fund management.
- Responsible for the organization’s overall profitability, growth, and maximization of the shareholder’s wealth.
- It is not rigid and can be designed in a flexible manner as well.
- A dynamic process of constantly adapting and revising strategies, helping to meet financial goals.
- An effective and innovative approach to dealing with common business challenges.
- With the help of strategic financial management, one can develop effective strategies while ensuring that the action plans align with the business objectives.
- Utilizes various analytical financial methods, alongside quantitative and qualitative reasoning, to properly analyze the factual information.
Scope Of Strategic Financial Management
The scope of financial management across different fields of business encompasses four major factors. Those are
As a financial manager, you will be responsible for providing valuable insights for making the right investment decisions for an organization. Typically, there are two kinds of investment decisions: short-term and long-term. The former includes the different funds of a company that are invested in the current assets. Long-term investment decisions, on the other hand, mainly include capital budgeting.
Financing decisions can be divided into two main types, financial planning decisions, and capital structure decisions. The former refers to finding sources of income and investing in them accordingly to increase a company’s fixed assets. Contrary to this, the latter refers to the process of identifying the various sources of funds.
Dividend decision is another crucial area that comes under the scope of strategic financial management. As a financial manager, you will need to decide on a profit distribution model that works best for the company you will be working for. Furthermore, you will also be responsible for accurately estimating the percentage of profit that can be considered retained earnings.
Last but not least, liquidity can be described as the availability of assets that can be converted into cash. As a financial manager, you will be required to make valuable decisions that will help to liquefy a company’s assets and make it profitable in different market conditions.
As of now, the average salary of a financial manager is estimated to be $131,710 per annum. Considering the current trends in the economic sector and the importance of strategic financial management across different industries, it can be safe to say that the demand for the same is likely to increase in the coming years.
Strategic financial management is one of the necessary skills that every business must possess. If a business does not know how to manage its money, it can’t sustain itself, especially in today’s dynamic environment. A well-developed financial plan is just one small part of financial management. It involves a lot of different other components and factors, all of which have been highlighted in the above-mentioned article. If you wish to emerge as a successful finance manager, you need to consider all these components to come up with effective plans and strategies.
Additionally, you can also benefit from an MBA course that specializes in the field of finance.
To help you with the same, Golden Gate University, in collaboration with upGrad, presents to you its Master Of Business Administration program. It offers five main areas of concentration: Finance, Adaptive Leadership, General, Marketing, and Business Analytics. You will be given the flexibility to choose anyone according to your preference. Furthermore, unlike most other MBA courses, which usually take up to 2 years to complete, at GGU, you can achieve your degree within just 15 months, making it the best choice for working professionals!
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Q1: What are the different types of financial management?
Typically, there are three types of financial management: Capital Budgeting, Capital Structure, and Working Capital Management.
Q2: Is Financial Management a good career choice?
A career in financial management can prove to be beneficial, considering its huge demand in today’s world. However, it also demands a lot of hard work and effort to qualify for the role of a financial manager. If you feel you are resilient and passionate enough for this role, then you should definitely consider pursuing a career in it.
Q3: How can I become a financial management professional?
Different companies lay out different eligibility criteria for candidates to be suitable for the role of financial manager. Nonetheless, the most basic ones include having a Bachelor’s degree in Financial management or any other similar field. If you wish to apply for roles in senior management, you need to have a Master’s degree in financial management. Additionally, a financial management certification course can also prove to be beneficial in enhancing your career prospects.