The Advantages of Strategic Financial Management
The area of strategic financial management has become increasingly popular in the past several years. This has been because of the multiple advantages that come to the practitioners of this ideology. In this post, we will have a deeper look at some of the significant advantages that emerge from following this concept.
Aligns The Vision of the Board and the Management:
The primary advantage of strategic financial management is that it ensures that all the stakeholders are on the same page. In organizations where strategic financial management is not implemented, it is usual for the board of directors to have a different vision for the future of the company as opposed to the management of the firm. Strategic financial management makes it important for all parties to put out their vision for the future in unambiguous words. The free cash flow generated by the corporation must be leveraged to accomplish these commonly agreed-upon strategic goals. Strategic financial management helps streamline the operations of numerous stakeholders in the firm. This might seem obvious. However, companies can be huge and complex and often work in ways that can be harmful. This is when strategic financial management comes in handy.
Common framework
Strategic financial management helps in setting up common goals. These common goals are subsequently cascaded to lower levels of the organization. The personnel is encouraged to think about accomplishing strategic objectives instead of inventing in ad-hoc ways. This common framework directs the distribution of diverse resources that are controlled by the organization. This helps match short-term resource allocation with long-term strategic goals.
It guides innovation and technology adoption:
In the modern world, companies are required to make huge investments in technology. Information technology companies are amongst the biggest and most strategically essential partners of multinational organizations. Since such a large amount of money is going to be invested in constructing information technology resources, the resources must be constructed strategically.
This is where strategic finance comes into the picture. The discipline of strategic finance compels the organization to foresee itself a couple of decades into the future. The company is compelled to think about the type of technology that they want to have to become a market leader. Investments in information technology are not considered on a piecemeal basis. Instead, they were believed to be part of a broader system that would develop a few years later. David Ogilvy famously said that advertisements must not be considered an expense. Instead, they must be considered an investment in building the company’s brand in the long run. A similar idea can be applied to information technology-related spending within firms.
Strategic finance makes the priorities of the organization obvious. Once these priorities are conveyed to the workforce, they can then apply their domain knowledge to bring in rapid innovation.
It helps create buy-in.
Strategic financial management sensitizes the higher management of the company towards the need to bring in change. Once this has been done, the managers and the board of directors become more receptive to change. This helps establish buy-in if new projects are introduced. In the absence of strategic financial management, the board of directors would be more likely to accept the status quo. Strategic financial management sensitizes the management to the idea that change is inevitable and that it may be pleasant if brought about voluntarily instead of being imposed upon by market realities.
Aligns Performance Management Objectives:
Strategic financial management helps to align the various departments of the organization. The human resources department is also participating in this activity. This is because the corporation can only further its strategic objectives if its personnel is inclined to do so. It is the role of the human resource department to use cash to incentivize personnel to meet the firm’s long-term financial goals. Hence, strategic financial management also pushes the corporation to develop a system of performance management wherein personnel who help achieve strategic goals are compensated properly.
Improved Focus on the Competitive Landscape:
Lastly, the discipline of strategic financial management makes the organization more focused on the competition. In the absence of strategic financial management, the firm is unlikely to benchmark its performance with that of its counterparts. The focus on competitive strategy and the continuous scanning of the business environment make firms better equipped to address market problems. Companies that use strategic financial management run simulations to see how the competitive landscape might change and how this might affect their performance. This helps them construct an organization that is more versatile and robust and can thus resist competitive challenges.
The bottom line is that there are enormous benefits that accrue to organizations that pursue strategic financial management. The concentration on this discipline is relatively new. However, as time passes, more and more businesses recognize its value and implement it in their operations.
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