Principles of Strategic Financial Management
The study of strategy isn't a precise science. This is because tactics are developed based on an individual's or a group's expectations about the future. As a result, if various persons carry out the task of strategic financial management, they are likely to produce diverse outcomes. As a result, the strategic financial management process' outcome might be extremely varied. As a result, several guiding principles have been developed to guarantee that some level of consistency exists across different businesses. This article outlines the fundamental ideas that govern the execution of strategic financial management.
Principle #1: Matching Resources with Objectives
An organization must be aware of the number of resources it is likely to control in the long term while adopting the concepts of strategic financial management. The organization should also have a good understanding of how these assets will be distributed across its portfolio. The allocation of present resources must be guided by the end goal. It is costly to change strategic investments. For example, shutting down a plant once it has been established is difficult and costly. The financial specialists assist in determining the degree of future economic activity and how resources should be optimally managed.
Principle #2: Maintaining Productive Capacity To Meet Current Objectives
Strategic financial management is a long-term profession. However, to accomplish its long-term goals, the company must remain solvent in the short term. As a result, strategic financial management must work within the constraints of solvency. Even if such research and development promise to make the firm a market leader in the future, a corporation should not continue to make excessive investments that would result in cash burn in the short term. If the cash burn continues unabated, the company might be in jeopardy of being taken over by a hostile takeover. As a result, existing minimal goals must be satisfied. Following the completion of the fundamental objectives, the company is free to invest the extra cash flow over a longer period.
Principle #3: Keeping an Eye on Financing
When it comes to strategic financial management, the decision to invest may appear to be the most important. The choice of finance, on the other hand, is crucial (if not more important). Capital is a finite resource, and companies practicing strategic financial management should be cognizant of this. They should be informed of the numerous financing options that are available to them.
They should also be informed of the costs associated with each of these funding options. Companies often have a long-term capital structure that they intend to follow. The usage of this objective financial structure aids in the integration of short-term funding and long-term strategic choices. It aids in the integration of the strategy and finance management processes. Companies should always maintain a debt ceiling over which borrowing should be severely discouraged, according to strategic financial management.
Principle #4: Evaluating Strategic Alternatives
Companies should keep a close eye on their strategic options. In order to achieve their long-term goals, they employ techniques such as collaborations and even outsourcing. In certain circumstances, outsourcing may appear to be costly in the near term. It does, however, allow the organization to scale its activities up and down at will. Many businesses prefer to invest their cash in their main activities rather than developing industrial centers, thus this alternative is appealing.
Similarly, many businesses employ franchising to expand over time. They are able to get more market share, despite the fact that this results in a loss of control and profit division in the near term. The driving premise here is that a corporation should aim to maximize long-term value while avoiding potential adverse risks. Furthermore, when businesses see their ties with other businesses as long-term partnerships, they are less likely to be transactional.
The use of instruments such as a balanced scorecard is emphasized in the strategic financial management concept. These tools can be tweaked to incorporate a financial component into the specified goals.
Principle #5: Integration of Financial Strategy with Other Strategies
The goal of strategic financial management is to make sure that the company's financial goals are aligned with its other initiatives. Only financial managers make financial choices in a typical financial management framework. Strategic financial management, on the other hand, highlights the need for the organization to have more extensive communication channels.
Working in silos is discouraged. There is no such thing as a financial choice, according to this ideology. The financial choice is simply the allocation of financial resources in the firm's strategic interests. Because the firm's strategic interests are shared, choices must be shared as well.
The five concepts listed above act as guiding pillars in all businesses. This allows strategic financial management to stay on track, even if the execution differs from one company to the next organizations.
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