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The term short selling is often seen in the news. This tactic is regularly used by well-known investors. They are also very public about the shares they have shorted. This prompts many retail investors to follow suit. While, it may be true that many funds and high net worth investors make a lot of money […]
Financial Modelling For Leveraged Buyouts (LBOs)
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Types of Risks in Commercial Banking
Banking activity is generally considered to be risky. Banks earn money by borrowing money from people and then lending them to other people at a higher rate of interest. However, commercial banking activity is considered to be even riskier. This is generally because of the huge dollar value of the transactions in commercial banking. Hence, […]
The Consequences of Negative Interest Rates
Warren Buffet once told that interest rates are like gravity. If there is no gravitational pull on asset values, then values can be infinite. Little did Warren Buffet know that the world is heading towards a strange phenomenon called negative interest rates. This strange new world is both confusing and counter-intuitive. The common man is […]
Availability Bias in Behavioural Investing
All of us have seen movies or have read novels wherein there are several witnesses who are describing the same crime scene. However, each of them describes the scene in different ways. This is because their experiences are colored with their own thought processes. This makes different people look at the same situation in different […]
The field of strategic financial management has become increasingly popular in the past few years. This has been because of the various advantages that accrue to the practitioners of this philosophy. In this article, we will have a closer look at some of the important advantages which result from following this philosophy.
Aligns The Vision of the Board and the Management: The biggest advantage of strategic financial management is that it ensures that all the stakeholders are on the same page. In companies where strategic financial management is not practiced, it is common for the board of directors to have a different vision for the future of the company as compared to the management of the firm. Strategic financial management makes it mandatory for all the parties to spell out their vision for the future in clear terms.
The free cash flow generated by the firm must then be utilized to meet these commonly agreed-upon strategic goals.
Strategic financial management helps streamline the actions of various stakeholders in the company. This might seem obvious. However, in reality, companies can be large and complex and often work in ways that can be counterproductive. This is where strategic financial management comes in handy.
Common Framework: Strategic financial management helps in setting up common goals. These common goals are then cascaded to lower levels of the organization. The employees are encouraged to think about achieving strategic objectives instead of innovating in ad-hoc ways. This common framework guides the distribution of various resources which are controlled by the organization. This helps align short-term resource allocation with long-term strategic goals.
Guides Innovation and Technology Adoption: In the modern world, companies are required to make huge investments in technology. Information technology companies are amongst the biggest and most strategically important partners to big multinational corporations. Since such a large amount of money is going to be spent towards building information technology resources, it is imperative that the resources be built in a strategic manner.
This is where strategic finance comes into the picture. The discipline of strategic finance forces the company to envision itself a couple of decades into the future. The company is forced to think about the type of technology that they want to have in order to become a market leader.
Investments in information technology are not considered on a piecemeal basis. Instead, they are considered to be part of a larger system that will emerge a few years later.
David Ogilvy famously said that advertisements must not be considered to be an expense. Instead, they must be considered to be an investment towards building the company’s brand in the long term. The same philosophy can be applied to information technology-related spending within companies.
Strategic finance makes the priorities of the company clear. Once these priorities are explained to the workforce, they can then use their domain knowledge in order to bring in rapid innovation.
Helps Create Buy-In: Strategic financial management sensitizes the higher management of the company towards the need to bring in change. Once this has been done, the managers and the board of directors become more receptive to change. This helps create buy-in once new projects are presented. In the absence of strategic financial management, the board of directors would be more likely to support the status quo. Strategic financial management sensitizes the management to the fact that change is inevitable and that it can be pleasant if brought about voluntarily instead of being forced upon by market realities.
Aligns Performance Management Goals: Strategic financial management helps to align the various departments of the organization. The human resource department is also included in this exercise. This is because the firm can only further its strategic objectives if the people are inclined to do so.
It is the job of the human resource department to use funds in order to motivate employees to achieve the firm’s long-term financial goals. Hence, strategic financial management also encourages the firm to build a system of performance management wherein people who help achieve strategic goals are compensated fairly.
Improved Focus on Competitive Landscape: Lastly, the discipline of strategic financial management makes the company more focused on the competition. In the absence of strategic financial management, the firm is unlikely to benchmark its performance with that of its peers.
The focus on competitive strategy and the continuous scanning of the corporate environment makes firms better prepared to meet market challenges.
Companies that follow strategic financial management conduct simulations on how the competitive landscape can change and how these changes would impact their performance. This helps them build an organization that is more versatile, resilient and can therefore survive competitive pressures.
The bottom line is that there are significant benefits that accrue to companies that follow strategic financial management. The focus on this discipline is relatively new. However, with the passage of time, more and more companies are realizing its importance and are implementing the same in their organization.
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