Strategic Financial Management - Meaning and Its Functions
Anyone interested in pursuing a career in financial management should study the subject. Traditional financial management, on the other hand, aids in making short-term judgments. The primary goal of financial management, for example, is to assist firms in making three decisions: investment, financing, and dividend. These judgments, however, are made with a short- to the medium-term horizon in mind.
Over time, research has revealed that financially successful firms tend to make decisions with a long-term view in mind. This is why strategic financial management has become a topic of interest. In this post, we'll look at what strategic financial management is and how it varies from traditional financial management.
What is Strategic Financial Management?
The phrase "strategic financial management" is a combination of the words "strategic" and "finance." By definition, strategy entails a long-term outlook. As previously stated, strategic financial management is concerned with the management of a company's finances in such a way that long-term objectives may be met. The presumption is that the corporation knows what its long-term financial objectives are. This is because it is impossible to make long-term judgments without such information.
Any project with a positive net present value must be accepted, according to traditional financial management. Strategic financial management, on the other hand, holds a different viewpoint in this scenario. Many initiatives might have a positive net present value, according to strategic financial management. However, the corporation may not have enough funds to complete all of the projects. As a result, certain initiatives may need to take precedence over others. It may not be possible to simply prioritize the projects with the highest net present value in such instances. This is where financial strategic planning comes into play. It assists businesses in selecting the most ideal initiatives that will provide them the best chance of achieving their long-term goals.
In the end, strategic financial management aids businesses in identifying initiatives that may appear to be sub-optimal in the near term but are, in fact, the most ideal in the long run. It shifts the company's perspective on its operations and finances.
Functions Performed by Strategic Financial Management
The term "strategic financial management" refers to an organization's whole range of financial activities. The following are some of the critical decisions that strategic financial management facilitates.
Capital Investment Decisions:
From the perspective of strategic financial management, companies' capital investment decisions are viewed in a new light. Asset-light enterprises, for example, have emerged in the last 15-20 years. Uber, Airbnb, and Facebook, for example, are all industry leaders. They do, however, hold very few assets. Companies that employ strategic financial management to make long-term asset decisions would have picked up on this trend sooner than others. As a result, they would have invested in illiquid assets with long-term obligations that may provide a sub-optimal return in the long run.
When a longer period is taken into account, strategic financial management alerts the business to the success of its choice. It's no accident that organizations that place a higher priority on strategic financial management have spent extensively on digitizing their operations, even if it means sacrificing short-term revenues.
Location Decisions:
Companies that take a strategic approach to their investments utilize a variety of ways to choose where they will site their operations. Many American corporations, for example, have had a presence in China in the past. However, fewer firms would opt to locate in China if the decision were made now. Because of the ongoing tensions and trade disputes between the two nations, this is the case. This is why establishing a long-term presence in China is riskier than establishing a presence in a nation that may be somewhat more expensive in the short term but is less vulnerable to future trade disputes.
Mergers and Acquisitions Decisions:
Strategic financial management assists organizations in taking a close look at their business models. Companies frequently find if organic development is ideal for them or whether they may opt for inorganic growth during this deep dive. The driving philosophy hasn't changed. Such an acquisition would be appropriate if the firm could absorb the expenditures of purchasing another company while also adding value in the long term. Strategic financial management, on the other hand, ensures that corporations keep their long-term objectives in mind while making purchase decisions.
In the end, strategic financial management is not a novel method of analyzing financial data to make company choices. The tools and models utilized in most situations are the same. The difference is in the way these outcomes are interpreted. The long-term perspective alters how enticing each alternative appears and may impact which one is chosen.
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