Strategic financial management is basically about the identification of the possible

strategies capable of maximizing an organization's market value. It involves the

allocation of scarce capital resources among competing opportunities. It also
encompasses the implementation and monitoring of the chosen strategy so as to
achieve agreed objectives.
The key decisions falling within the scope of financial strategy include the following:
1. Financial decisions - this deals with the mode of financing or mix of equity capital
and debt capital. If it is possible to alter the total value of the company by alteration in
the capital structure of the company, then an optimal financial mix would exist -
where the market value of the company is maximized.
2. Investment decision - this involves the profitable utilization of firm's funds
especially in long-term projects (capital projects). Because the future benefits
associated with such projects are not known with certainty, investment decisions
necessarily involve risk. The projects are therefore evaluated in relation to their
expected return and risk. For these are the factors that ultimately determine the market
value of the company. To maximize the market value of the company, the financial
manager will be interested in those projects with maximum returns and minimum risk.
An understanding of cost of capital, capital structure and portfolio theory is a
prerequisite here.
3. Dividend decision - dividend decision determines the division of earnings between
payments to shareholders and reinvestment in the company. Retained earnings are one
of the most significant sources of funds for financing corporate growth, dividends
constitute the cash flows that accrue to shareholders. Although both growth and
dividends are desirable, these goals are in conflict with each other. A higher dividend
rate means rate means less retained earnings and consequently slower rate of growth
in future earnings and share prices. The finance manager must provide reasonable
answer to this conflict.
It should be noted that the theory of corporate finance is based on the assumption that
the objective of management is to maximize the market value of the company. More
specifically, it is settled in finance that the main objective of a company should be to
maximize wealth of its ordinary shareholders.

What Is Strategic Financial Planning?

Gilberto Fuentes is a copywriter based in New York and has been developing web-
based content on business-related topics since 2009. He has developed copy for
websites in the US, UK and published work in the online edition of the "San Francisco
Chronicle," NerdWallet and LendingTree. Fuentes holds a dual Bachelor of Arts in
English and economics from St. Edward’s University.
By Gilberto Fuentes, eHow Contributor
updated: April 01, 2010
What Is Strategic Financial Planning?
Strategic financial planning is an investment framework used to accomplish your
particular financial goals. There are a number of factors that may influence how you
carry out your investment plans and may ultimately help you decide how to move
your money in your portfolio to increase the likelihood of favorable returns.
Planning
o One of the basic tasks of strategic financial planning may involve
planning your investment framework to meet long- and short-term financial
needs. This framework may include deciding how much money to invest and
which securities to invest in.
Assets
o You may choose from a wide variety of investments for your portfolio.
Common investments include stocks, bonds, mutual funds, certificates of
deposit, money market accounts. Each of these investments has its advantages
and disadvantages in terms of risk and returns.
Risk
o Generally, investments of all kinds carry varying degrees of risk. Equity
investments like stocks are typically riskier in comparison to certificates of
deposit at your local bank. If your investment is guaranteed by the federal
government, the risk of loss is practically eliminated.
Evaluation
o A part of strategic financial planning includes estimating how much
money your investments will make and tracking progress. If you have a
particular return rate in mind, you may want to optimize your portfolio to
include investments most likely to meet your earnings goals.

Information
o There are large amounts of information from financial institutions,
company annual reports and corporate filings with the Securities and Exchange
Commission. You can analyze the financial condition of your investments and
determine whether your current strategy is working in your favor. Through
research, you may be able to find badly managed companies, unsuccessful
funds and other threats to your financial strategy.

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What is strategic and financial planning?

In order to succeed in its industry or field, a corporation, institution or organization
has to know where it is going. A strategic plan can help define and set the course.
A strategic plan is the result of strategic planning. It is during this process that the
organization decides, in finite, simple terms, its place in the world right now, and
where it ultimately would like to go [source: McNamara]. In other words, a business
provides a certain service, let's say high-speed Internet access. The plan defines what
the institution does, for whom, and how they intend to excel and beat the competition.
But how will it adapt to the changing world and marketplace to deliver the same
service (or not) in the future? Most importantly, why does the organization want to go
where it's going, and how is it going to get there? This is strategic planning. It's a
survival method, the cornerstone of an organization, and the voice that informs the
company culture, or overall "feel," philosophy and code of an organization.

Strategic planning is essentially the "why" that drives an operation. Once it knows the
"why," it can figure out the "how" by outlining the requirements to get there,
including where to place financial resources, how to forecast human resource needs,
and where to place investments, otherwise known as financial planning. Financial
planning is all about allocating finite resources -- such as money, employees and
equipment -- over time, to reach the broad goals set out in strategic planning. To do so
involves measuring current performance against past data and trends for the future.
Read on to find out more about how a strategic plan comes together.

The Strategic Planning Process

In today's highly competitive business environment, budget-oriented planning or

forecast-based planning methods are insufficient for a large corporation to survive and
prosper. The firm must engage in strategic planning that clearly defines objectives
and assesses both the internal and external situation to formulate strategy, implement
the strategy, evaluate the progress, and make adjustments as necessary to stay on
track.
A simplified view of the strategic planning process is shown by the following
diagram:
The Strategic Planning Process

Mission &
Objectives

Environmental
Scanning

Strategy
Formulation

Strategy
Implementation

Evaluation
& Control

Mission and Objectives

The mission statement describes the company's business vision, including the
unchanging values and purpose of the firm and forward-looking visionary goals that
guide the pursuit of future opportunities.
Guided by the business vision, the firm's leaders can define measurable financial and
strategic objectives. Financial objectives involve measures such as sales targets and
earnings growth. Strategic objectives are related to the firm's business position, and
may include measures such as market share and reputation.
Environmental Scan
The environmental scan includes the following components:
• Internal analysis of the firm
• Analysis of the firm's industry (task environment)
• External macroenvironment (PEST analysis)
The internal analysis can identify the firm's strengths and weaknesses and the external
analysis reveals opportunities and threats. A profile of the strengths, weaknesses,
opportunities, and threats is generated by means of a SWOT analysis
An industry analysis can be performed using a framework developed by Michael
Porter known as Porter's five forces. This framework evaluates entry barriers,
suppliers, customers, substitute products, and industry rivalry.

Strategy Formulation
Given the information from the environmental scan, the firm should match its
strengths to the opportunities that it has identified, while addressing its weaknesses
and external threats.
To attain superior profitability, the firm seeks to develop a competitive advantage over
its rivals. A competitive advantage can be based on cost or differentiation. Michael
Porter identified three industry-independent generic strategies from which the firm can
choose.

Strategy Implementation
The selected strategy is implemented by means of programs, budgets, and procedures.
Implementation involves organization of the firm's resources and motivation of the
staff to achieve objectives.
The way in which the strategy is implemented can have a significant impact on
whether it will be successful. In a large company, those who implement the strategy
likely will be different people from those who formulated it. For this reason, care must
be taken to communicate the strategy and the reasoning behind it. Otherwise, the
implementation might not succeed if the strategy is misunderstood or if lower-level
managers resist its implementation because they do not understand why the particular
strategy was selected.

Evaluation & Control

The implementation of the strategy must be monitored and adjustments made as
needed.
Evaluation and control consists of the following steps:
 1. Define parameters to be measured
2. Define target values for those parameters
3. Perform measurements
4. Compare measured results to the pre-defined standard
5. Make necessary changes

What is financial planning?

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If strategic planning is the "what" and "why" of a company, financial planning is the
"how" and "when."
Strategic planning informs financial planning; strategic is the "what" and "why," while
financial planning concerns the "how" and "when." Financial planning is built around
financial projections. A company's data and financial analysts look at a number of
things to determine the financial outlook of the present and future of both the
economy and outside factors including:
• Trends - An electronics manufacturer, for example, might look at sales trends
for plasma TVs and LCD TVs. If plasma TV sales are dipping, and LCD TV
sales are rising, then the manufacturer would allocate more money to making
and marketing LCD TVs.
• The competition - It's important to look at how the "other guy" is navigating
the landscape. A soft drink company would look at how its primary rival is
performing in emerging overseas markets, and allocate accordingly, or if the
rival's new salmon-flavored drink is selling well, then it might decide to spend
some money developing a new, weird flavor of its own.
• Profit margins - A bakery would examine how the cost of raw goods like
sugar and wheat are influencing its bottom line. Will wheat cost more in six
months due to a drought in a wheat-producing state, thus driving up the price,
and lowering the bakery's profit margins?
• Expenses - A business is always acutely aware of its overhead and expenses,
but in financial planning, it examines overhead and expenses intricately and
makes projections on how they may fluctuate due to outside forces, or how
they may rise and fall due to internal decisions.
• Economic indicators - A business does not exist in a vacuum -- it's part of an
economy, which involves unemployment levels, disposable income levels and
the changing (or non-changing) government regulation climate.
Financial planning is more precise than strategic planning. Rather than dealing with
setting idealized goals, financial planning is about manipulating real-world factors --
specifically, money and human resources -- to make the strategic plan tenable in a
measurable period. The strategic plan may call for a lofty goal to happen in 10 years,
but financial planning may dictate that it is more likely to happen in nine years, 11
years, or even 50 years (which would indicate a woefully inept strategic plan). As
such, financial planning is long-term oriented. You could say that strategic planning is
about determining a destination and financial planning is about making sure the
destination is reached.
For financial planning to work effectively and assuredly, it has to be integrated with
strategic planning early and thoroughly.
The Pros and Cons of Strategic and Financial Planning
Perhaps the way strategic planning can be most invigorating to a company is that it
gets everybody on the same page, following a precise, singular purpose that is clearly
presented in writing. This in turn creates a company-wide focus in the long-term
toward specific goals. It helps the organization grow, of course, but even in some not-
so-obvious ways. The strategic plan can be used as a litmus for hiring new employees
-- passion about the mission statement can determine which new hires are a great fit
for the company and its long-term goals.
It's also very valuable to morale and company culture to have a well thought-out,
clearly defined purpose, because everyone can carve out a unique niche in that
environment. And the more intricate a strategic plan, the more that it may be itemized
and quantified in terms of allocation of employees, cash, facilities and investments,
which segues nicely into financial planning territory.
The cons of a strategic plan can present themselves when financial resources are low.
When this happens, morale and purpose might become hard to come by. If times are
good for the company, it's easy to work toward what is essentially just a "nice idea."
However, if things get muddled, the strategic plan may grow out of focus.
In financial planning, every dollar counts (especially when the future is unclear), so
foresight equals preparation and protection. Anticipating the future allows a company
to prepare for things financially. Good financial planning helps a company maximize
cash flow with pinpointed resource allocation and investment strategies. On the other
hand, that means money can become tied up in long-term investments and investment
strategies And if a company's strategic plan or financial plan ends up being woefully
wrong, it may not have the money it needs to immediately rectify a problem.
It's much harder to convince shareholders and stakeholders of a company how to
properly execute the company's finances; it's easier to get everyone behind a strategy,
because it's goal-oriented, not cash-oriented. But the two can be integrated.