The Rent vs. Buy Decision
The rent vs. buy decision is as old as the concept of financial planning itself. There are people who have very strong views on both sides of the spectrum. There are some people who believe that owning a home is always better and that renting a house is like throwing money away. At the same […]
Golden Rules of Accounting – 3 Main Principles
While the system of debit and credit is the foundation for maintaining balance and accuracy, it can often feel overwhelming for beginners and even for clerical staff who handle day-to-day bookkeeping. The Golden Rules of Accounting are designed to simplify these concepts into actionable principles that anyone can use. These rules break down the most […]
Exchange Traded Derivatives
Now since we have a basic idea regarding what derivatives really are and the function that they perform, it time to get into a little more detail. At this point, it is essential to introduce the concept of exchange traded derivatives and over the counter derivatives. We have briefly brushed on them in the previous […]
What is Bond Valuation and How is it Calculated ?
One of the Most Important Uses of Discounting The present value of a bond is the sum of all the future cash flows that can be derived from it. In this sense, the valuation of bonds really becomes simple, isn’t it? All we need to do is find out the future stream of payments that […]
The Green Shoe Option in Investment Banking
In many cases, IPOs are thought of as being underpriced. This means that as soon as the IPO is listed in the market, investor demand appears, and as a result, the price of the newly listed shares goes up. This is the situation that the issuing company, as well as the investment banker, wants to […]
The strategic financial planning process is different in the sense that it combines the functions of strategy formulation as well as financial planning. For many years, these two processes have been considered to be separate in most organizations around the world. Strategic financial planning merges these processes and created a hybrid approach.
In a broad sense, strategy formulation refers to the market in which the company decides to place itself. This means that the company decides to sell some products and services and excludes all other products and services. This decision in turn decides the opportunities that the company has as well as the competition that it is likely to face.
Using strategic financial planning to place a company in a strategically advantageous position has more benefits than having an ordinary strategic position and then competing. This long-term view of where the company sees itself a few years from now is kept in mind while making strategic financial decisions.
In this article, we will have a closer look at the strategic financial decision-making process.
The first step in the strategic financial planning process is scanning the external environment. This simply means that the organization pays close attention to social, political, demographic, and more importantly technological changes happening in the environment.
The organization tries to understand what the business environment will look like in the future. It tries to make an educated guess about the type of competition they will be facing and what competitive advantage will they have vis-a-vis their competitors. This process is done in the due course of strategic management as well. However, in the strategic financial management process, there is a lot of emphasis on numbers. Decisions are based on quantifiable information instead of being based on intuition.
The second step is for the company to clearly know its capabilities and shortcomings. The company needs to take a just and unflinching look at what its competitive advantage is today. The next step is for them to realize that this competitive advantage will change with the passage of time. A decision has to be made regarding whether the company should continue on the same course that it is on today, or whether it should change its strategic priorities and build a new competitive advantage.
Internal introspection can be challenging for many companies due to the paucity of relevant data. However, some resources should be spent in acquiring this data if it aids in the final decision-making. After all, the strategic priorities which the firm sets as a result of this exercise are likely to continue in the long run and will shape the financial future of the firm.
The process requires the creation of clear and compelling goals for the organization. In theory, mission and vision statements are present in every organization. However, in reality, they are often ignored. Also, the vision statements tend to be vague and can be used to include almost any line of business. This is done purposely to provide the organization with flexibility. However, it can work out to be disadvantageous in the long run. Also, these goals are generally set up at corporate level goal alignment meetings. Hence, the head office is generally under pressure from various departments to include their goals in the strategic goals as well.
The end result is a list of goals that dilute the focus of the organization. The entire process can end up being political if the senior management is not cognizant of the fact and does not try to steer the company in the right direction.
This is where strategic financial management is different. It clearly advocates that the organization should limit the number of strategic goals. The emphasis is on selecting a narrow set of goals and excluding everything else. The logic is that if the vast resources of the firm are concentrated on a narrow number of goals, then the firm will gain absolute superiority in such areas. On the other hand, vague and ambiguous strategic statements can be detrimental to the strategic financial management objective.
In an ideal scenario, the strategic vision of the management needs to be aligned with the strategic vision of the board of directors. However, it does not happen in practice in several organizations. This is the case particularly when a company undergoes a change in the top leadership. The new management often wants to bring in changes. However, it is the responsibility of the board of directors to ensure that the vision of the management stays aligned with the overall vision.
The fact of the matter is that management can change over a period of time. However, the company will remain for a longer period of time. The management should adapt to the company’s strategic vision and not vice versa. Even if the new management wants to bring in changes, they should be deliberated and brought in through the right channel.
The bottom line is that there are a few steps in the strategic financial planning process that need to be followed rigorously. In the short run, they might seem to be unnecessary. However, in the long run, they provide tremendous clarity and as a result, the company is able to organize its resources in order to obtain the best possible results.
Your email address will not be published. Required fields are marked *
