What are Black Friday Sales and What are its Economic Impact on Retailers
The retail industry has been rapidly evolving for many years. The industry has adapted to a wide range of changes varying from the introduction of online retailing to the widespread use of automation. However, there are some aspects of retailing which have not changed for a long time. Retail companies all across the world still […]
Vendor Finance in Infrastructure Projects
Debt and equity from investors remain the two conservative sources of funding when it comes to infrastructure financing. However, with the advent of time and financial innovation, newer sources of funding have now become available. Vendor financing is one such mode of funding which is now being widely used in infrastructure projects. The concept of […]
Calculating Free Cash Flow to Firm: Method 3: EBIT
In the previous articles, we learned about how to calculate the cash flow from operations if the cash flow statement or the income statement were given in the question paper. In many cases, these financial statements may not be given in full in the question paper. Instead, some excerpts from these statements may be provided […]
Limitations of Behavioral Finance
The theory of behavioral finance has become exceedingly popular in the past few years. This is largely because of the fact that it mixes the dry, numerical subject of finance with the interesting world of psychology. Most people who read about biases described in behavioral finance books often have a “me too” moment. The biases […]
What is Venture Leasing? – Advantages and Disadvantages
In the previous few articles, we have already learned about how venture capital and venture debt work. We now also know the pros and cons of venture debt. However, there is another form of debt called venture leasing which is commonly used by investors in the marketplace. In this article, we will have a closer […]
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.
Your email address will not be published. Required fields are marked *
