Strategic financial management, according to experts, is simply the process of distributing cash to a company or business when it is needed and on terms that are most favorable to the organization’s objectives. Fund raising is the primary emphasis of the approach, which may be broadened to include other instruments, institutions, and behavioral patterns. It also covers the legal and accounting relationships that a company has with the people who provide its funding. Capital raising is only one aspect under nature of strategic financial management, which includes a slew of other actions and choices.
Money is the lifeblood of every contemporary corporation since it is employed in every aspect of our economic activities. In order to run a business, we require money pooled resources. It is used to gather physical and material resources for productive activities and commercial operations that have an influence on sales, as well as to compensate providers of physical and monetary resources for their efforts. As a result, strategic financial management is a critical organic function of a company.
Nature of Strategic Financial Management
As a nature of financial management, investment choices have risen to the top of the priority list in a company’s decision-making process. These decisions are based on the company’s forecasts for growth and profitability. The choice aids the company in achieving its long-term objectives of survival, expansion, product market share, and production leadership, among other things. Let us take an overview on nature of strategic financial management in depth below.
Dividends Options
Dividends are yet another important decision in the nature of strategic financial management. The strategic financial management team must decide whether to disperse all profits or to keep a portion of the profits and distribute the remainder. Whether or if the company or its shareholders can make better use of the capital and create a higher rate of return should be considered while making the decision.
Additional factors such as the market price of shares, earnings trend, shareholder tax status, cash flow position, future growth requirements, and Companies Act restrictions all play a role in deciding the dividend policy of a corporation. As well as choosing the best dividend payout ratio, bonus payments, and interim dividends, the finance manager must make other decisions.
Financial Option
Once an investment choice has been made, the next step in process of strategic financial management is to raise the necessary funds to complete the investment. The balance sheet of a firm reveals that it has received long-term loans from shareholders, whether ordinary or preferred, debenture holders, financial institutions, banks, and other sources of funding.
The rules governing the issuing of preferred shares, debentures, and loan instruments differ from one jurisdiction to the next. The finance mix, also known as the capital structure, regulates the amount of money that may be raised from various sources. It is necessary to determine the optimum finance combination for a firm. Take a look at the company’s financial structure, as well as its short and intermediate-term financing plans.
By using capital budgeting, long-range planning, assessing alternative uses of money, and establishing measurable financial performance standards, top-level policy creation is now totally integrated with financing choices. To what degree does a company’s financing policy have an influence on the cost of equity capital? Should corporate funds be allocated to specified objectives or withheld from such uses?
In the business sector, senior management is largely concerned with the planning of cash sources and uses, as well as the evaluation of performance and profitability. Efficiency in capital allocation choices has been helped by the development of computer-assisted measurement tools. A successful nature of strategic financial management program results in the selection of investments and financial decisions that are made collectively. Despite the fact that these judgements are diverse in scope, they are intertwined.
Capital Structure
In addition to finding the optimal equity-to-debt ratio and striking a balance between fixed and working capital requirements, as previously indicated, financial factors include: The goals of financial management is to maximize returns on investment while minimizing risk exposure. To determine the most effective capital structure for a business unit, risk and return analysis is frequently employed in conjunction with other methods. Debt increases the riskiness of a company’s financial structure by increasing the amount of money owed.
The analysis of a company’s earnings before interest and taxes, variable expenditures, and contribution is called earnings before interest and taxes. The investigation of operating leverages under scope of financial management. Financial leverage is also used to determine the earnings per share that will be given to shareholders in the future. The study of both aspects is known as combined leverage.
Criteria Options
The aim of the decision-making process determines the selection criteria that should be used. The primary objectives of a business are to maximize profit while minimizing costs. In nature of strategic financial management, the criteria for investment decisions and the criteria for financing decisions can be handled independently.
In order to achieve the following objectives, a fair decision criterion should be able to distinguish between acceptable and unacceptable concepts. All decision-makers should adhere to the “Better and Bigger” notion as well as the “Bird in Hand is Better than Two in the Bush” philosophy, among other things. When it comes to the first notion, greater is better, and when it comes to the second, early is better than later
Both of the notions that have come before them are dependent on the rare circumstance that “all other things being equal.” In practise, however, these principles are strictly adhered to, particularly when it comes to capital planning and determining the cost of capital in project financing bids.
Investment Actions
Investment is the use of money with the purpose of making a profit or receiving a return. This can be accomplished by the creation of physical assets with the money, the acquisition of business shares or debentures, or even the purchase of a consumer durable such as a building. An rise or decrease in profits or gains is anticipated by investors in a company’s securities on the stock market, which is known as the capital market. However, within a scope of strategic financial management, a finance manager determines where the firm’s resources should be allocated, and, more significantly, who should be in charge of making financial decisions for the company.
A marketing manager may desire a new show room, a new production manager, or a new lathe in order to assure consistent and successful manufacturing. Furthermore, top management may decide to enter a new market, such as expanding a textile firm into the electronics industry. All of these ventures are profitable endeavors. However, funds are limited. As a result, accepting one concept while rejecting others preserves the status quo.
As a nature of strategic financial management, investment decisions are concerned with the issue of whether to accumulate tangible assets through time. When making such a decision, several elements must be taken into consideration, such as the necessity of the investment, the factors that influence investment decisions, and the criteria that are used to assess investment decisions.
Capital Budgeting
Capital budgeting is required in order to make investment decisions. In the corporate world, capital budgeting and investment decisions are almost similar. Increasing the value of capital assets now will generate revenue tomorrow, which will pay expenditures. Investment decisions are essentially financial commitments undertaken in the hope of reaping future economic benefits. It is necessary to make a decision between existing resources and investment opportunities.
The company takes pleasure in capitalizing on economic prospects. in the same way that While selecting equipment, investment selections must be made based on the quality of the equipment and the most recent technological advancements. Acquisitions, reorganizations, and rehabilitation all include economic and financial concerns, and they all have a financial and economic impact on nature of strategic financial management.
Removing and replacing an existing asset, plant, machinery, or facility in order to take advantage of new technology, decrease production costs, increase labor efficiency, and so on. Other areas of investment include capital re-allocation, which is used to better match capital with production policy.
- Acquire, hire, or lease a piece of property.
- The cost of capital.
- Company failures and reorganizations, as well as growth and contraction.
- The management of current assets and liquid assets;
When making investment decisions, the components and scope of strategic financial management are the elements that influence the decision. Capital is a limited resource with a high cost of production. The following considerations must be taken into account while making optimal investment decisions.
- Issues about capital availability and cost of capital that are centered around financial analysis.
- It is a set of rules that may be used to choose a project for implementation and to optimize revenues. It is mostly based on logic and mathematics.
Conclusion
Nature of strategic financial management is concerned with making decisions about investments, financing, and dividends that are consistent with the company’s goals. The interests of shareholders must be taken into consideration while making such choices. Increasing shareholder wealth, which is dependent on increased net worth of capital invested plus earnings reinvested for company expansion and performance, serves as a motivator for them to achieve success. As a result, the market is prepared to accept a lower or higher price for particular stocks depending on the circumstances. As a result, it is possible to analyze the type of investment, financing, and dividend decisions made.
