What Is Strategic Financial Management?

Strategic financial management means not only managing a company's finances

but managing them with the intention to succeed—that is, to attain the company's
goals and objectives and maximize shareholder value over time. However,
before a company can manage itself strategically, it first needs to define its
objectives precisely, identify and quantify its available and potential resources,
and devise a specific plan to use its finances and other capital resources toward
achieving its goals.

Strategic financial management is about creating profit for the business and
ensuring an acceptable return on investment (ROI). Financial management is
accomplished through business financial plans, setting up financial controls, and
financial decision making.

[Important: "Strategic" management focuses on long-term success and

"tactical" management relates to short-term positioning.]

Understanding Strategic Financial Management

The Operative Word: Strategic
Financial management itself involves understanding and properly controlling,
allocating, and obtaining a company's assets and liabilities, including monitoring
operational financing items like expenditures, revenues, accounts receivable and
payable, cash flow, and profitability.

Strategic financial management encompasses all of the above plus continuous

evaluating, planning, and adjusting to keep the company focused and on
track toward long-term goals. When a company is managing strategically, it deals
with short-term issues on an ad hoc basis in ways that do not derail its long-term
vision.

Strategic Versus Tactical Financial Management

The term "strategic" refers to financial management practices that are focused on
long-term success, as opposed to "tactical" management decisions, which relate
to short-term positioning. If a company is being strategic instead of tactical, then
it makes financial decisions based on what it thinks would achieve results
ultimately—that is, in the future; which implies that to realize those results, a firm
sometimes must tolerate losses in the present.

When Strategic Management Is Effective

Part of effective strategic financial management thus may involve sacrificing or
readjusting short-term goals in order to attain the company's long-term objectives
more efficiently. For example, if a company suffered a net loss for the previous
year, then it may choose to reduce its asset base through closing facilities or
reducing staff, thereby decreasing its operating expenses. Taking such steps
may result in restructuring costs or other one-time items that negatively affect the
company's finances further in the short term, but which position the company
better to succeed in the long term.

These short-term versus long-term tradeoffs often need to be made with various
stakeholders in mind. For instance, shareholders of public companies may
discipline management for decisions that negatively affect a company's share
price in the short term, even though the long-term health of the company
becomes more solid by the same decisions.