Functions of Strategic Financial Management:
Strategic Financial Management is the portfolio constituent of the corporate strategic plan that embraces the optimum investment and financing decisions required to attain the overall specified objectives. In this connection, it is necessary to distinguish between strategic, tactical and operational financial planning. While strategy is a long-term course of action, tactics are intermediate plan, while operations are short-term functions. Senior management decides strategy, middle level decides tactics and operational are looked after line management.
Irrespective of the time horizon, the investment and financial decisions functions involve the following functions:
- Continual search for best investment opportunities;
- Selection of the best profitable opportunities;
- Determination of optimal mix of funds for the opportunities;
- Establishment of systems for internal controls; and
- Analysis of results for future decision-making.
Since capital is the limiting factor, the strategic problem for financial management is how limited funds are allocated between alternative uses. This dilemma of corporate management is resolved by the pioneering work of Jenson and Meckling (1976)2, which is popularly known as ‘agency theory’ which you have already studied at your Intermediate (IPC) level. According to this theory, strategic financial management is the function of four major components based on the mathematical concept of expected NPV (net present value) maximization,- Financing decisions; Investment decisions; Dividend decisions; and Portfolio decisions.
The key decisions falling within the scope of financial strategy include the following:
1. Financing decisions: These decisions deal with the mode of financing or mix of equity capital and debt capital.
2. Investment decisions: These decisions involve the profitable utilization of firm's funds especially in long-term projects (capital projects). Since 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.
3. Dividend decisions: These decisions determine the division of earnings between payments to shareholders and reinvestment in the company.
4. Portfolio decisions: These decisions involve evaluation of investments based on their contribution to the aggregate performance of the entire corporation rather than on the isolated characteristics of the investments themselves. You have already, learnt about the Financing and Investment decisions in your Intermediate (IPC) curriculum, while Dividend and Portfolio decisions would be taken in detail later in this Study Material.
The key decisions falling within the scope of financial strategy include the following:
1. Financing decisions: These decisions deal with the mode of financing or mix of equity capital and debt capital.
2. Investment decisions: These decisions involve the profitable utilization of firm's funds especially in long-term projects (capital projects). Since 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.
3. Dividend decisions: These decisions determine the division of earnings between payments to shareholders and reinvestment in the company.
4. Portfolio decisions: These decisions involve evaluation of investments based on their contribution to the aggregate performance of the entire corporation rather than on the isolated characteristics of the investments themselves. You have already, learnt about the Financing and Investment decisions in your Intermediate (IPC) curriculum, while Dividend and Portfolio decisions would be taken in detail later in this Study Material.
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