Strategic financial management refers to the process of managing a company’s finances in order to achieve its strategic goals. It is a management strategy that employs various techniques and financial tools to create a strategic plan. Financial strategic planning ensures that the chosen strategy is carried out in order to achieve the desired results.
Strategies of financial management are concerned with making a profit for the company while also ensuring an acceptable rate of return on investment (ROI). Financial management is accomplished through financial business plans, financial control implementation, and financial decision-making.
Understanding and properly managing a company’s assets and liabilities, as well as tracking operating finance items such as expenditure, sales, receivable and payable accounts, cash flow, and profitability, are all part of financial strategy management.
All of the above, as well as ongoing assessment, planning, and improvement, are part of strategic financial management, which keeps the business focused and moving toward long-term goals. When a company manages strategically, it deals with short-term issues on the fly while keeping its long-term vision in mind.
Theories of strategic financial management
- Modern theory
- Normative theory
- Fisher’s separation theorem
Modern theory
According to modern theory, SFM is an idealized picture of shareholders as wealth-maximizing individuals, for whom management is ultimately accountable. It should also be noted that shareholders are those individuals who demand higher returns to compensate for the increased risk. It is a theoretical assumption that shareholders are rational, risk-averse people.
Normative theory
Strategic management finance’s normative goal should be an optimal combination of investment and financing policies that maximize shareholder wealth as measured by the overall return on ordinary shares.
Normative finance theory provides a strong logic for developing information and decision-making structures to aid corporate planning.
The theory takes into account marketing investment, capacity expenditures, working capital, and the impact of “experience” on costs and revenues over time. This strategy is developed by maximizing long-term profit subject to a short-term net cash flow limit and then repeating the maximization over a range of values for the short-term net cash flow limit.
Fisher’s separation theorem
Fisher’s Separation Theorem is an economic theory that holds that, in the presence of efficient capital markets, a firm’s investment decisions are independent of its owners’ investment preferences, and thus the firm should only be motivated to maximize profits.
To put it another way, the firm should not be concerned with shareholders’ utility preferences for dividends and reinvestment. Instead, it should strive for an optimal production function that results in the highest possible profits for shareholders.
To put it another way, a firm’s investment decisions and the preferences of its owners or shareholders are two distinct goals. This theorem believes that a firm’s shareholders have different investment ideas than the firm’s managers. As a result, managers should focus on how to maximize the firm’s value or profit while ignoring shareholder utility preferences.
Importance of strategic financial management
- It helps with financial planning.
- Assists in the acquisition of funds from various sources.
- Aids in the investment of an appropriate amount of funds.
- It improves organizational efficiency.
- Reduces production delays.
- Reduce your financial expenses.
- Lowers the cost of funds.
- Ensures that funds are used properly.
- Assists businesses in making financial decisions.
- Creates guidelines for maximizing profits while minimizing costs.
- Increases the wealth of shareholders.
- can manage the financial aspects of the company
- financial reporting provides information
- Makes employees aware of the importance of saving money.
Functions of strategic financial management
Strategic financial management incorporates the fundamental managerial principles of planning, organizing, leading, and controlling. It is more specifically concerned with decisions about how to allocate and use the firm’s limited funds.
This necessitates financial, investing, dividend policy, and portfolio management decisions. Aspiring strategic financial managers should look for opportunities to broaden their knowledge and skills in areas such as business strategy, research, communication, implementation, monitoring, and evaluation.
Other than the traditional Financial Analyst and Strategy Manager roles, specialized financial courses can prepare you for a variety of jobs.
Here are the highlighted functions of strategic financial management:
- Planning
- Budgeting
- Risk assessment and management
- Establish ongoing proceedings
Planning
- Define your objectives precisely.
- Determine and quantify existing and potential resources.
- Create a detailed business budget.
Budgeting
- Assist your company in becoming more financially efficient and waste-free.
- Determine the areas where the majority of operating costs are incurred or exceed the budgeted costs.
- Maintain adequate liquidity to cover operating costs without relying on external resources.
- Find out where a company’s profits can be invested to help it achieve its goals more effectively.
Risk assessment and management
- Determine, analyze, and reduce uncertainty in investment decisions.
- Examine Capital Spending (CapEx) and Workplace Policies to assess the potential for financial commitment.
- Calculate the degree of operational leverage, standard deviation, and value-at-risk (VaR) strategies using risk metrics such as B.
Establish ongoing proceedings
- Data collection and analysis
- Consistently make financial decisions.
- Keep track of and analyze variance, which is the difference between budgeted and actual results.
- Determine the source of the problem and take appropriate corrective action.
Strategic financial management courses
Strategic management finance courses combine financial management and strategic management. This course will teach you how to use financial criteria to make all management decisions, with an emphasis on two key components: cash flow and net present value. This course will help you think about the role of accounting in a new and dynamic world.
On completion of a strategic financial management course, you will gain an understanding of:
- Traditional accounting models’ limitations in an increasingly dynamic and rapidly changing world
- How to make a more effective contribution to corporate strategy by being more proactive and forward-thinking
- How to respond to rapid change through increased awareness, anticipation, and adaptation
- The use of alternative profit expressions that begin with a recognition of the impact on the cash flow of a company’s various stakeholders
- The various relationships between profits, growth, and cash flow in traditional accounting and financial management models
- How to track the success of projects, strategies, and even entire businesses over time by articulating NPVs
Who should attend the strategic financial management course
Strategic financial management training is intended for Senior Business Executives, Project Managers, those in charge of business planning and development, and others who want to help their organization take the lead in the global environment.
Strategic financial management books
These books can help you broaden your horizons in strategic management finance:
- Strategic Financial Management: Managing for Value Creation by Prasanna Chandra
- Strategic Financial Management For CA Final by A. N. Sridhar
- Work-out Strategic Financial Management, By Ade Omolehinwa
- Strategic Financial Management, By Ravi M. Kishore
- First Lessons in Strategic Financial Management, By V Pattabhi Ram & S D Bala
- Strategic Financial Management, By Kalyani Karna
- Strategic Financial Management: PartI, By Robert Alan Hill
Financial modeling
The process of calculating a company’s financial performance using a spreadsheet or an excel spreadsheet is known as financial modeling. It is based on past performance and future projections. The financial analyst will forecast the company’s future earnings using various numerical models and theories.
The following are the financial modeling objectives:
- Valuing a business
- Raising capital
- Growing the business
- Acquisition
- Selling/divesting assets and business units
- Capital allocation
- Budget and forecasting
How does strategic financial management work?
Strategic financial management entails identifying and setting goals, defining and tracking key metrics, and implementing specific strategies to achieve long-term goals.
To understand how current market conditions affect your business strategy, conduct extensive research into current market conditions and your key competitors.
Based on this information, you can create forecasts to predict various future scenarios and create strategic plans to optimize your company’s operations for each scenario. You can define metrics for each scenario to measure your progress toward key goals and adapt your strategies over time.
Strategies for wealth management
Creating wealth and managing it are two entirely different things. You’ve probably heard of people who were millionaires but now have nothing. What caused this to happen?
Inadequate wealth management abilities or strategies. While there is no single strategy for wealth management, there are several tips you can use to help manage your wealth.
The following are some strategies for wealth management to consider:
- Setting financial goals
- Budgeting
- Diversify your investment
- Debt management
- Insurance
- Work with professionals
Conclusion
Strategic Financial Management prioritizes projects that optimize the risk-return tradeoff. Cost reduction and profit growth benefit both the company and its shareholders. Furthermore, managers and other strategy professionals can effectively discharge their responsibilities by defining the strategy and objectives, establishing proper participation procedures, focusing on key performance indicators, and monitoring timelines.
FAQs about Strategic Financial Management
What is the meaning of strategic financial management?
Strategic financial management refers to the process of managing a company’s finances in order to achieve its strategic goals.
What are the importance of strategic financial management?
- It helps with financial planning.
- Assists in the acquisition of funds from various sources.
- Aids in the investment of an appropriate amount of funds.
- It improves organizational efficiency.
What are the characteristics of strategic financial management?
It focuses on long-term fund management while keeping a strategic perspective in mind. It promotes the firm’s long-term profitability, growth, and presence while attempting to maximize shareholder wealth. It can be both flexible and structured.
Reference
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