If you are wondering What is Strategic Finance, you’re not alone. The world of financial management has been evolving rapidly over the last few years. It’s now more commonly referred to as Strategic Financial Management (SFM). Here are some important facts about SFM and its benefits for businesses. Strategic financial management aims to improve performance by focusing on the long-term financial goals of an enterprise. Here are some common strategic finance mistakes to avoid.
Traditional financial planning and analysis is based on a three-statement model. While these are important components of financial planning, they are not sufficient to power strategic financial decision-making. Balance sheets, income statements, and cash flow statements do not provide a full understanding of a business’ operations. Therefore, strategic financial decision-making requires a more holistic view of the business. This makes strategic finance critical to business growth. Strategic finance helps organizations overcome these problems and create a culture of fairness and inclusion.
A vital element of strategic finance is planning. Creating a long-term goal requires defining key objectives and developing a realistic plan. A review of key goals helps create a strategic plan that helps allocate resources more efficiently and effectively. Strategic financial management models include specific business plans written by business developers. The business owner should consult with the finance team to understand the key goals of the company and the importance of financial forecasting. In addition, strategic finance includes a review of the company’s financial reports on a weekly or monthly basis.
The strategic financial management process puts the company’s long-term vision and growth at the core of the financial function. The decisions made through this process may be controversial or require immediate sacrifices, but they are always based on data. Key decision makers use strategic analysis to dig deeper into operational issues and formulate action plans. In essence, strategic finance drives a company’s financial planning process. When done well, it helps a business achieve its long-term goals.
FP&A at most companies places a high emphasis on financial planning. FP&A teams handle month-end close, forecasts and financial reporting. Strategic Finance, on the other hand, involves little or no budgeting or forecasting. Strategic Finance teams work on ad-hoc studies, competitive intelligence, market sizing, and analysis of new business initiatives. In short, strategic finance focuses on improving the way the company manages its business.
Financial planning and analysis are important for any business. But a company’s financial performance can make or break it. Using financial data and analytics to make financial decisions in real-time allows a business to respond to changing market conditions. However, strategic finance requires a shift in mindset and culture for the employees. Once this is in place, it can make a significant difference in the bottom line of a business. This proactive approach to financial management is the foundation for many successful companies.
Another critical component of strategic finance is managing risk. Strategic financial managers must analyze the risk involved in each business investment to determine whether they are worthwhile. While some investments require high levels of risk, others have higher rewards. The key is to understand the risk-reward balance between the two factors and decide whether or not to take it. Ultimately, the financial managers must make the best decision for the business. In addition to evaluating the risks and rewards, strategic financial managers need to determine the appropriate way to compensate shareholders.