Most people who think about economics and accounting regard these disciplines as extremely exact and analytical. However, they often ignore the management part, which requires some creativity and the ability to look into the future. Strategic financial management is not as analytical as it is imaginative, and requires a great capacity of prediction.
What is strategic financial management?
Definition of the term
Strategic financial management implies the careful planning of a company’s monetary resources. This planning deals with the management and future use of the resources, so that all of the company’s objectives are reached. In the end, the company should also be able to return the necessary resources to the shareholders.
During this process, the company first has to settle on some objectives. Then, it has to define them clearly. This way, the company members will be aware of the resources necessary to attain the objectives. Then, the creative part steps in.
Planning the resource use for the future
The road towards the goal is often difficult, and not all resources are always readily available. Therefore, the financial management process per se consists of creating a spending plan for the finances. Also, the plan should seek data gathering and plenty of attention to the financial fluctuations. Judging from these factors, the plan might change, but the final purpose should be the achievement of the goal.
Sometimes, the difference between the plan and reality might be big. This is why the managers need to be creative and find solutions to overcome difficulties. They should not deviate from the main goal, and find ways to make the company successful.
What does the process actually mean?
The strategic part in this process has as its final goal long-term success. Financial management, on the other hand, means handling all the resources that a company can offer. These resources include profitability, revenue, expenditure, or cash flow. The manager has to monitor and use them cleverly.
The monitoring is part of general financial management. The strategic part comes into action when the managers develop a plan to keep the resources under control. Through this plan, they also direct the profits towards goals, both long-term and short-term. Also, their main concern is to increase these profits, and the overall value and reputation of the company.
Strategic financial management might sometimes mean sacrifice. The ultimate purpose of the process is long-term success, and this might require managers to give up smaller goals. By abandoning some smaller quests, the company can direct more finances towards the endpoint. This might bring disadvantages over a short period, but it’s better when looking in the future.
How to perform strategic financial management?
One company performs strategic financial management through all sorts of operations. All of them require a documented use of the resources, to avoid sudden losses. Whenever this process occurs, the managers have to consider a series of elements.
All kinds of organizational operations require a strict budgeting. The purpose is the most important, but the company shouldn’t suffer severe losses. Therefore, the financial part in the process is represented by budgeting.
Budgeting consists of allocating resources for different tasks judging from different factors. The expenses shouldn’t exceed a certain limit, and shouldn’t perturb the overall activity of the company. However, through budgeting, managers can discover those activities which require the highest costs, and know how to deal with them.
Budgeting is more than necessary in strategic financial management. It means the company have some special funds for a certain purpose, and a fixed sum of money for each task. This way, the company can access these funds without having to resort to unexpected expenses. Also, it will learn how to work strictly on a budget for long-term advantages.
We mentioned before that strategic financial management is creative, as it requires people to find solutions and make predictions about the future. It’s also based on analyzing, but many elements remain unknown.
Budgeting helps managers minimize the chances of being surprised, but there are also many risks involved. These people should be able to assess the risks which come with every action they choose, and then find solutions for every possibility.
Risk assessment and management is mostly obtained by taking a look at some figures. Based on past expenses and the current expenditure rate, one might know what risk one might face. However, people shouldn’t only look at their business. The state of the entire market is important.
Evaluating the situation of the company
You have planned your finances, and then have considered all possible risks. Now it’s time to start fighting to reach the goal. While this happens, it’s better to know how to act in the near future. Managers can do it by closely evaluating their decisions and their outcome.
This way, they can see how good they are at keeping the business going. Based on their failures, they know what to change in the future. Also, based on their successes, they are aware of the strategies that work. In fact, strategic financial management represents all these elements put together.
Things managers should keep in mind
Whenever you are planning a strategy to reach a goal, you should pay attention to variations. As mentioned above, don’t look only inside your company. The success of your plan often depends on external factors.
First, pay attention to prices. Most actions you will make will bring some costs, and these are strictly related to the fluctuation of capital. If prices rise or decrease, you can also shape your spending strategy. Also, don’t forget the political and economic climate of the region where you activate. Any major event can affect your business.
Strategic financial management is necessary in order to achieve long-term success. It compiles all the methods to achieve a goal, while paying attention to all the factors that contribute to the process. Whenever a manager makes a decision, it’s important to pay attention to the financial resources he uses and what influences them. This way, he will make sure he won’t use up all the resources before achieving the long-desired goal.