What Is Strategic Finance, and Why Is It Important?

Having a sound financial strategy can help your business achieve its goals. While the realm of financial management is complex, there is one approach that can help achieve sustainability and long-term growth: strategic finance.

But what is strategic finance and why is it important?

What is a Financial Strategy?

Strategic finance takes a look at the bigger picture and the company’s future. Rather than setting short-term goals, like you would with tactical financial management, the business sets long-term goals.

Once these goals are set, the company’s finances are managed accordingly. At times, this means having to incur short-term losses to reach long-term objectives. Those losses will only be temporary, and the reward will be well worth the effort.

The end goal of strategic finance is to create long-term value for the company and ensure an acceptable ROI. It will also help support sustainability and future growth.

The process involves:

• Defining the company’s objectives
• Identifying and quantifying all resources, both current and potential
• Developing a plan for utilizing these finances and resources to achieve the company’s goals

As part of the process, companies must also determine the best ways to allocate, control and obtain assets and liabilities to support its long-term goals. To do this, businesses must monitor expenses, cash flow, accounts receivable, revenues, profitability and other financing items.

The Role of Finance in Business Operations

Finance is the backbone of any business operation, no matter its size. It's what keeps a company’s doors open. Without funds, a business can’t maintain its day-to-day operations let alone reach its long-term goals for growth.

In any operation, finance plays a pivotal role in:

• Cash flow management: Businesses need adequate cash flow to cover its operational expenses, including overhead, rent, salaries and more.
• Risk management: Financial experts can assess not only the market, but the risks associated with certain investments or initiatives.
• Decision-making: To grow and reach its goals, companies must make their investment decisions carefully. Financial analysis can help with this process.

Finance impacts virtually every aspect of operating a business. For any organization to reach its goals, it must manage its finances accordingly.

Strategic financial management plays a key role in this process. Let’s take a closer look at how finance affects the processes above and other areas of the organization’s operations.

Financial Analysis

Financial analysis plays a key role in assessing an organization’s financial health, but it also helps company leaders make informed decisions and provides insights into operational efficiency.

Before financial management strategies can be developed, a financial analysis must be performed.

Financial analysis involves the evaluation of a company’s financial statements, which include its:

• Balance sheet
• Cash flow statement
• Income statement

These analyses are performed by the company's accounting department and reported to management to aid in the decision-making process.

Risk Management

Effective risk management helps businesses mitigate financial-related risks. Lower risk helps ensure the stability and future of the business.

Simply put, risk management helps protect an organization’s economic value.

The process may involve the analysis of:

• Market risk, or the risk of the business environment itself. Increased competition or changing markets can increase risks for organizations.
• Liquidity risk, or the risk of cash being tied up in some parts of the business. Having too much cash tied up in inventory, for example, puts a business at risk of not being able to cover its operational expenses.
• Operational risk, or the risks that may arise during the course of doing business. These are potential issues that may arise and make the organization unable to deliver its products or services.
• Credit risk, or the risk of clients not making payments on time. Late payments or defaults can disrupt a company’s cash flow, putting it at financial risk.

When it comes to strategic finance and risk management, organizations can employ risk metrics such as standard deviation, operating leverage calculations and value-at-risk strategies to minimize financial exposure.

Risk management plays a crucial role in a company’s overall financial management. Without proper risk mitigation, a business risks significant losses and cash flow shortages.

Capital Budgeting

When developing a finance strategy, capital budgeting helps organizations allocate their resources effectively and prioritize their investments.

For example, if a company wants to construct a new plant or make an investment in an outside venture, a capital budget would be needed so that management can make an informed decision. The initiative may be approved or rejected based on its financial impact on the business and the risk associated with the venture.

Driving Decision-Making Processes

Strategic financial management is one of the main drivers in the decision-making process for organizations. It allows businesses to:

• Evaluate the profitability of an initiative, such as opening a new plant or launching a new product.
• Properly assess an investment opportunity to ensure it will provide an acceptable return on investment (ROI).
• Make informed strategic choices when it comes to growth, spending and other activities.

Long-Term Value Creation

One of the primary objectives of strategic finance is to create long-term value for the company, which can help drive and support sustainable growth.

Strategic financial planning, when done carefully and properly, gives businesses the tools they need to navigate uncertainties. It allows companies to be more agile and adapt to shifting market conditions.

Setting long-term goals and a roadmap to achieving those goals allows businesses to grow and thrive, creating added value in the process.

Improved Financial Performance

Developing a well-thought-out financial strategy can help improve an organization’s financial performance over the long term. Adopting strategic finance practices can also:

• Increase an organization’s profitability
• Enhance shareholder value

Achieving the long-term goals set with strategic financial planning will allow a company to accomplish its goals for growth.

Resource Allocation and Cost Management

Strategic financial management helps businesses optimize their resource allocation and manage their costs. With the right plan, organizations can also identify new opportunities for growth.

Resource allocation will play an important role in helping a business achieve its long-term objectives. Organizations must know where to put their resources so that they can minimize risk and maximize opportunity. Strategic financial management can help them achieve that goal.

Additionally, strategic financial management can help companies determine where to cut costs and optimize their expenditures.

Stakeholder Confidence

Organizations must make decisions that not only help them achieve growth, but also deliver value to their stakeholders. Strategic finance can help bolster stakeholder confidence because the organization has mapped out its long-term goals and developed a strategy to achieve those goals.

Not only can strategic finance improve current stakeholder confidence, it can also help the organization:

• Attract new investors
• Maintain strong financial health

A business that has a plan for the future and how to manage its finances will be a more attractive option for investors.

Conclusion

Having a strategic financial strategy is beneficial for any organization. After all, financial management is the key to success when it comes to growth and sustainability. But organizations have to consider their long-term objectives and how they will reach them. That’s where strategic financial management comes into play.

From risk management to decision-making and improving stakeholder confidence, implementing strategic finance into your organization’s practices can help create long-term value while helping your organization remain competitive in an ever-changing business landscape.