Managing a company’s finances is a complex process, regardless of the approach taken. Strategic finance is a popular approach that focuses on strategy rather than tactics. In other words, it focuses on long-term goals and objectives, even if this means accepting short-term losses that will help achieve long-term gains.
There is no recipe for strategic financial management, as the objectives will depend on the business model, the industry, and the vision and priorities of the company’s management. In this article, you will learn about strategic finance, its main objectives, and its limitations. Finally, you will learn about the elements involved in strategic financial management.
What is Strategic Finance?
Strategic Finance, also known as strategic financial management, is a long-term approach to managing a company’s finances. Unlike tactical financial management, which focuses on short-term gains, strategic financial management sets long-term goals and objectives for the company and manages its finances accordingly, sometimes incurring short-term losses.
There are many advantages to the strategic approach, but there are also disadvantages, as its implementation and execution can be expensive and time-consuming and requires a long-term commitment to objectives. Additionally, since it relies on estimates and predictions that may change due to external factors, it may become difficult or unwise to stick too closely to the original strategy.
What are the Objectives of Strategic Finance?
The objectives of strategic financial management are concerned with creating profits, increasing market value, and maximizing the return on investment for shareholders. Additionally, adherence to the plan needs to be monitored to evaluate progress. This often involves sacrifices in the short term to facilitate long-term objectives.
Strategic management requires continuous monitoring of progress, as well as making the necessary adjustments to the planning to ensure the company meets its long-term objectives. As a result, this approach is expensive and time-consuming, but it can be much more profitable in the long run than a tactical approach.
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What are the Limitations of Strategic Finance?
Like any approach, strategic financial management has some disadvantages and limitations. Below, you have a summary of the main limitations of this approach.
- Relies on predictions
- Short-term/long-term goals conflict
How to Develop a Strategic Finance Strategy?
Strategic finance is an approach rather than a technique, so there are many different ways in which to apply it to your company’s financial management. The specific goals that you set will depend on multiple factors, including your business model and your industry. However, there are some core elements that can help you develop your own strategy.
Developing a financial strategy is a complex process, so you should enlist the help of people who are knowledgeable about financial management to ensure that what you propose is achievable. The steps included below are general guidelines that account for the main elements of strategic financial planning. However, when developing and implementing your strategy, you may have to revisit earlier steps. In other words, you may need to go back to make adjustments to previous decisions or assumptions, which are likely also to affect later steps.
1. Explore & Define Goals
The first step or element in a financial strategy is to explore potential goals and objectives. You will need to consider these in order to decide on the most appropriate goals for your company. It’s important to spend time selecting the right goals for your company and not simply emulate those of others. This is a difficult task since you need to evaluate how realistic or reasonable your goals are, but this will be based on predictions and expectations rather than hard data.
2. Gather & Analyze Data
Once you have defined your strategic goals, you need to gather all the available data on expenses, revenue streams, and cash flows. This will give you a fuller picture of the company’s profits, losses, and cash flows. For existing companies, you will have historical data previously reported in required financial statements, like the income statement - also known as the profit and loss (P&L) statement - or the statement of cash flows.
You will need to analyze available data rigorously, using multiple techniques to ensure you’re making a well-informed decision. Historical data can serve as the basis for assumptions and projections but is not a guarantee of future behavior. It is equally important to conduct thorough research on competitors and other external factors to make reasonable assumptions about the future.
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3. Create Budget & Develop Strategy
Based on the previous step's results, you’ll have to create a budget and strategy that will allow you to achieve your long-term goals. It’s very important not to miss any income or expenses when you create the budget, so make sure the accountants take a good look at it.
Developing a strategy entails more than just creating the budget. You will need to evaluate projections for different lengths of time, usually for five and ten years in the future. Additionally, you should set up financial controls and periodically assess how well you’re sticking to the budget and whether initial assumptions and projections turn out to be accurate.
4. Implement Strategy
Now that you have your strategy, it’s time to start implementing it. Implementing the strategy will require time and effort from everyone involved, so it’s essential to include all employees in the process. You should inform employees regarding the changes to procedures and company goals, as this will make it easier for them to understand and implement your strategy.
Don’t forget to schedule regular reviews to evaluate progress with your financial team, as the strategic approach requires constant monitoring. It’s also helpful to set specific milestones that will help you assess the success of your strategy and its implementation.
As you have seen, strategic finance (or strategic financial management) is a long-term approach. While the tactical approach can increase short-term gains, the strategic approach is concerned with long-term profits and increased market value. Both approaches have advantages and disadvantages that need to be considered before making a choice.
You now know what strategic finance entails and how it differs from tactical financial planning. You also know the main elements or steps involved in developing a financial management strategy, so you can start developing your own. Given the complexity of creating the strategy and monitoring progress, a tool like Layer can help you synchronize your data across multiple locations and formats, as well as automate calculations and the sharing of reports.