Strategic Financial Management is an approach for managing the finances of a company. Its main objective is to design and execute strategies that create profit, ensure an acceptable ROI, and maximize shareholders’ value. Due to its focus on planning and achieving short-term and long-term goals for an organization’s financial health, this subject is relevant for most managerial and senior-level professionals today.
Let’s begin by understanding the goal-setting process.
Types of Goal Setting
The two Types of Goal Settings are given below:
is the traditional method to provide an overall sense of direction, motivation, and clear focus to the organization and teams. SMART is an abbreviated version of Specific, Measurable, Achievable, Realistic, Timely goals. We have explained these aspects in detail below.
- Specific: Identifying and defining clear goals.
- Measurable: Setting particular criteria to check progress towards the goals.
- Achievable: Determining goals that are attainable and not impossible to reach.
- Realistic: Selecting goals that align with the purpose and can be achieved given the time and resources.
- Timely: Deciding and communicating clearly defined deadlines for tasks, starting dates, and target goals.
FAST is another approach that allows businesses to adopt iterative goal-setting and remain agile. It follows the Frequent, Ambitious, Specific, and Transparent criteria to change with time and circumstances.
- Frequent: Embedded in ongoing discussions, review processes, and feedback.
- Ambitious: Difficult but not unrealistic or unattainable.
- Specific: Translated into key metrics and milestones to guide performance.
- Transparent: Made public for all employees to see.
While identifying goals and designing action plans form a significant portion of Strategic Financial Management, its scope also extends to executing and coordinating resources. In the end, the purpose is to strategize for the sustained financial health of the company. The following section delves further into the usefulness of this activity.
Importance of Strategic Financial Management
In practice, the strategic aspect of financial Management focuses on creating a strategy that maximizes the organization’s market value. Strategy managers prepare plans, set up financial controls, and monitor the activities to strengthen the business core and increase profit. So, in essence, this field of work prioritizes the continued financial success of an organization. And thus, every type of business seeks to find skilled professionals to undertake this integral role.
While formulating effective strategies, it is essential to consider the following factors:
1. Involvement of Teams
Introducing and executing change is not an easy task. It requires careful deliberation and collaboration. In the modern work landscape, Strategic Financial Managers consult Marketing and Information Technology (IT) departments to build comprehensive plans that all employees can support.
2. Key Performance Indicators (KPIs)
KPIs are measurable values that demonstrate progress towards specific objectives. They may be quantitative, tied to a financial target, or indicate qualitative aspects. Some examples include:
- Revenue per month
- Profit margin
- Client satisfaction rate
- Customer experience and satisfaction levels
KPIs help track changes, team performance, and efficiency of business functions. They give you a well-rounded view and prompt you to dig deeper for improvement.
The strategic process does not end at charting out the action plan. The management team needs to develop a timeline for reaching specific targets and adjust the strategy whenever required. So, Strategic Financial Management is a continuous and interactive process.
The strategy should contain marketing campaigns, sales plans, and other initiatives that take the business closer to its financial goals. Every chosen alternative is guided by foresight and insight.
Financial Management Functions
Now that we have discussed what it means and why it is important, let us look at the standard functions of Strategic Financial Management.
1. Financing Decisions
This decision is concerned with selecting the right financing mix of equity and debt for the company. In the end, you want to maintain an optimum capital structure, whether through raising funds via the issue of shares or through bonds, debentures, loans, etc. Choosing a strategy requires estimating risks and costs, among other factors like retaining adequate cash flow and a certain degree of control over operations.
2. Investment Decisions
These decisions involve the allocation of funds in different types of assets for yielding a return over time. Investments can be made both in long-term or short-term projects. When the benefits are derived for an extended period, it is known as Capital Budgeting. Whereas, when you invest in current or liquid assets, the term Working Capital Management is used.
Long-term investment decisions are evaluated against a predetermined rate of return. On the other hand, a tradeoff between profitability and liquidity is crucial for investment in current assets.
3. Dividend Decisions
Finance managers have to decide the proportion of payout to the shareholders of the company. This is also referred to as the Earnings Per Share or EPS. The other alternative is to retain the earnings and use them for investment opportunities within the firm. So, financial management strategically includes picking a combination of EPS and retained earnings to accomplish a win-win situation for shareholders and the company.
4. Portfolio Decisions
Here, you do not look at the isolated characteristics of financial investments. Instead, you evaluate them based on their contribution to the aggregate performance. Portfolio decisions also involve prioritization and control of a corporation’s projects to align with the strategic goals.
In a nutshell, every organization has limited financial resources. And financial managers are concerned with allocating these funds into alternative uses to maximize the firm’s value and shareholders’ wealth. The strategic part of the job is dynamic and comprises the following steps:
- Keep an eye out for lucrative investment avenues;
- Select the best and most profitable opportunities;
- Determine the optimal mix of funds for the alternatives;
- Establish systems for internal control; and
- Analyze results to aid future decision-making.
Additionally, strategic financial managers must perform operative tasks and undertake leadership duties like any other management professional.
Nowadays, you can pursue specialized courses in Strategic Financial Management to build industry-oriented skills for the job. Such programs offer training in:
- Business strategy basics;
- Revenue and cost-cutting strategies;
- Collecting and analyzing information from multiple sources;
- Structured thinking and logical judgment;
- Strategy implementation;
- Understanding of business support systems;
- Business communication skills;
- Prioritizing work and managing projects to meet deadlines;
- Delivering, monitoring, and evaluating results;
- Technology adoption and change management.
Such learning experiences not only prepare you for the usual Strategy Manager and Financial Analyst positions but also for other high-paying roles, such as:
- Research Investigator
- Business Analyst
- Product Strategist
- Project Manager
- Consumer Insights Analyst
- Marketing Consultant
- Business Development Professional
Financial Management is an essential part of the curriculum in most advanced management programs and MBA courses. Even if you don’t want to pursue a core finance job, the knowledge of numbers and money management will bode well for you in the workplace. With upGrad’s MBA Courses you can choose from six specializations, including marketing, finance, supply chain management, HR, analytics, and strategy & leadership. The course offers numerous benefits, such as a flexible learning module, mentorship support, and online interactions with experts; you can stand out from the crowd and accelerate your career!
What is Strategic Financial Management?
Strategic Financial Management is about managing the finances of an organization with an intention to succeed. It involves understanding planning, allocating, monitoring, controlling, and evaluating the company’s operational finances and capital resources. The purpose is to align the strategies with the long-term goals and increase the firm’s profitability and market value, maximizing the shareholders’ wealth.
Why is Strategic Financial Management important?
Strategic Financial Management prioritizes the projects that optimize the risk-return tradeoff. This results in lower costs and enhanced profitability, which benefits both the company and the shareholders. Moreover, defining the strategy and objective, setting proper participation procedures, focusing on the key performance indicators, and monitoring the timelines allow managers and other strategy professionals to discharge their responsibilities effectively.
What are the functions of Strategic Financial Management?
Strategic Financial Management includes the fundamental managerial principles of Planning, Organising, Leading, and Controlling. More specifically, it deals with decisions relating to the allocation and utilization of the limited funds of the firm. This requires decision-making efforts in the financing, investing, dividend policy, and portfolio management. Aspiring strategic financial managers should seek to build knowledge and skills in business strategy, research, communication, implementation, monitoring and evaluation. Pursuing specialized financial courses can prepare you for a wide range of jobs besides the standard Financial Analyst and Strategy Manager roles.