Strategic Financial Management - Meaning and Its Functions
The study of financial management is imperative for anyone trying to make a career in the industry. However, traditional financial management helps to make short-term decisions. For example, the main purpose of financial management is to guide corporations about making three decisions viz. the investment decision, the financing decision as well as the dividend decision. However, these decisions are taken with a short to medium-term perspective in mind.
Over time, research has shown that companies that tend to become most successful financially tend to have a long-term horizon while making decisions. This is the reason why strategic financial management has become an important subject. In this article, we will have a closer look at what strategic financial management is and how it differs from traditional financial management.
What is Strategic Financial Management?
The term strategic financial management is a combination of two terms viz. strategy and finance. Strategy, by definition, implies a long-term perspective. Hence, as explained above strategic financial management is about the management of the finances of any company in such a manner that it enables the meeting of the long-term goals. The assumption here is that the company has a clear idea of what its long-term financial goals are. This is because, in the absence of such knowledge, it is impossible to make any long-term decisions.
Traditional financial management emphasizes that any project which provides a positive net present value must be accepted. However, strategic financial management has a different opinion in this case. Strategic financial management realizes that many projects can have a positive net present value. However, the company may not have the capital to go through with all the projects. Hence, some projects may need to be prioritized over others. In such cases, simply prioritizing the projects with the maximum net present value may not be feasible. This is where strategic financial management comes into play. It helps companies select the most optimal projects, which will give them the maximum probability of meeting their long-term objective.
The bottom line is that strategic financial management helps companies identify projects which may appear to be sub-optimal in the short run but may actually be the most optimal in the long run. It changes the lens through which the company views its operations as well as its finances.
Functions Performed by Strategic Financial Management
Strategic financial management encompasses the entire spectrum of financial activities performed by any organization. Some of the key decisions which are enabled by strategic financial management have been mentioned below.
The bottom line is that strategic financial management is not a new technique of modeling financial data for making business decisions. In most cases, the tools and models used are the same. The change lies in the manner in which these results are interpreted. The long-term point of view changes how appealing each option looks and may influence the one which gets selected.
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