Strategic financial management is about creating profit for the business and ensuring an acceptable return on investment (ROI). Financial management is accomplished through business financial plans, setting up financial controls, and financial decision making.
Understanding Strategic Financial Management
Financial management itself involves understanding and properly controlling, allocating, and obtaining a company's assets and liabilities, including monitoring operational financing items like expenditures, revenues, accounts receivable and payable, cash flow, and profitability.
Strategic financial management encompasses all of the above plus continuous evaluating, planning, and adjusting to keep the company focused and on track toward long-term goals. When a company is managing strategically, it deals with short-term issues on an ad hoc basis in ways that do not derail its long-term vision. Strategic financial management includes assessing and managing a company's capital structure, the mix of debt and equity finance employed, to ensure a company's long-term solvency.
Strategic Versus Tactical Financial Management
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. If a company is being strategic instead of tactical, then it makes financial decisions based on what it thinks would achieve results ultimately—that is, in the future; which implies that to realize those results, a firm sometimes must tolerate losses in the present.
When Strategic Management Is Effective
Part of effective strategic financial management thus may 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 closing facilities or reducing staff, thereby decreasing its 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 which position the company better to succeed in the long term.
These short-term versus 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 becomes more solid by the same decisions.
Key Takeaways
- Strategic financial management is about creating profit for the business.
- A financial plan that is strategic focuses on long-term gain.
- Strategic financial planning varies by company, industry, and sector.
The Elements of Strategic Financial Management
A company will apply strategic financial management throughout its organizational operations, which involves designing elements that will maximize the firm's financial resources and using them efficiently. Here a firm needs to be creative, as there is no one-size-fits-all approach to strategic management, and each company will devise elements that reflect its own particular needs and goals.
