Disadvantages of Strategic Financial Management
There is no philosophy in the management domain which has not been criticized. The strategic financial management philosophy is no exception. Although it has been proven that there are numerous benefits to implementing this framework of decision making, there are some associated costs as well. This is because of the various disadvantages that accompany the […]
What are Unicorns?
In our day-to-day life, we often use the term unicorn to refer to a mythical horse-like creature. In the year 2013, a venture capital investor named Aileen Lee borrowed the term to describe a particular kind of startup company. The unicorn term was used to describe the startup companies which were thought to be so […]
Next Day Funding – Meaning and its Benefits
In the previous article, we have already studied how commercial banks help in providing point-of-sale services to their corporate customers. We have also studied how point-of-sale systems have become strategically important for corporations. However, they are some pain points in the point-of-service system as well. Commercial banks provide another service called next-day funding in order […]
Longevity Bonds and Longevity Derivatives
In the previous article, we have already seen how pension funds have been adversely affected by an increasing amount of longevity risk. The increase in the average lifespan of people is definitely a positive development. However, it has an adverse impact on the financial situation of most pension funds. In order to mitigate longevity risks, […]
Advantages of Public Private Partnership Model
Building stadiums or other sporting venues is an essential activity that plays a crucial role in the success or failure of sporting leagues as well as sporting franchises. However, as we have seen in the past articles, the financing of such stadiums is not an easy task and requires committing huge amount of money as […]
The field of strategy is not an exact science. This is because strategies are made based on the assumptions that an individual or a group of people have about the future.
It is for this reason that if different people undertake the activity of strategic financial management, they are likely to come up with different results. As a result, the output from the strategic financial management process can be quite diverse.
Therefore, some guiding principles have been created to ensure that there is some form of standardization across various organizations. The basic principles which govern the implementation of strategic financial management have been listed in this article.
While implementing the principles of strategic financial management, an organization must be aware of the quantum of resources that it is likely to control in the long run. The company should also have a clear picture of the proportion in which these assets will be deployed across their portfolio.
The deployment of current resources has to be based on the final objective. Strategic investments are expensive to modify. For instance, it is difficult and expensive to shut down a factory after it has been set up. The financial experts help in understanding the level of projected economic activity in the future and how the resources can be best organized.
The field of strategic financial management is long-term in nature. However, the firm has to stay solvent in the short term for it to meet its long-term objectives. Hence, strategic financial management has to operate within the bounds of solvency.
A company should not continue making excessive investments, which would lead to cash burn in the short run, even if such research and development promise to make the company a market leader in the future.
If the cash burn continues unabated, the organization may find itself in a precarious position facing a hostile takeover. Hence current minimum objectives must be met. After meeting the basic objectives, the firm is free to deploy the excess cash flow with a longer time frame in mind.
The investing decision may appear to be the key decision when it comes to strategic financial management. However, the financing decision is also equally important (if not more important).
Companies implementing strategic financial management should be aware that capital is a finite resource. They should be aware of the various sources of funding that they have at their disposal. They should also be aware of the cost of each of these sources of funding.
Companies generally have a target capital structure which they want to follow in the long run. The use of this target financial structure helps in tying up the short-term financing decisions with the long-term strategic decisions. It helps integrate the process of strategy and financial management.
Strategic financial management suggests that companies always maintain a debt ceiling beyond which borrowing should be strongly discouraged.
Companies should continuously monitor their strategic alternatives. This includes using strategies such as partnerships and even outsourcing in order to meet their long-term objectives.
In some cases, outsourcing may even seem expensive in the short run. However, it gives the organization the opportunity to scale its operations up and down at will. This option is valuable to many firms as they would rather invest their capital in their core activities instead of spending it on building manufacturing hubs.
Similarly, many companies use franchising to grow in the long term. They are able to gain more market share even though it means a loss of control and division of profits in the short run.
The guiding principle here is that a company must try to maximize the upside in the long run while minimizing what the downside risks can be. Also, when companies view their relationships with other organizations as long-term partnerships, they are less likely to be transactional in nature.
The strategic financial management philosophy emphasizes the use of tools such as a balanced scorecard. These tools can be modified in order to inculcate the financial aspect into the stated objectives.
The purpose of strategic financial management is to ensure that the financial objectives of the company are in line with its other strategies. In a traditional financial management context, financial decisions are made only by financial managers. However, strategic financial management emphasizes that the company must have deeper communication channels. It discourages working in silos.
According to this philosophy, there is nothing called a financial decision. The financial decision is just the spending of financial resources in the strategic interests of the firm. Since the strategic interests are shared across the firm, the decisions must also be shared.
These above-mentioned five principles serve as guiding pillars across organizations. This helps strategic financial management to follow the same path even though the implementation may vary across organizations.
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