STRATEGIC FINANCIAL MANAGEMENT

Strategic financial management means not only managing a company's finances but managing
them with the intention to succeed—that is, to attain the company's long-term goals and
objectives and maximize shareholder value over time.

• Strategic financial management is about creating profits for the business over the long run.

• It seeks to maximize return on investment for stakeholders.

• This differs from tactical management, which looks to seize near-term

opportunities.

• A financial plan is strategic and focuses on long-term gain.

• Strategic financial planning varies by company, industry, and sector.

STRATEGIC VS. TACTICAL FINANCIAL MANAGEMENT

The term "strategic" refers to financial management practices that are focused on long-
term success, as opposed to "tactical" management decisions, which relate to short-
term positioning. If a company considers strategic considerations instead of tactical
ones, it makes financial decisions based on long-term objectives rather than short-term
metrics. To realize those results, a firm sometimes must tolerate losses in the present.

ELEMENTS OF STRATEGIC FINANCIAL MANAGEMENT

• Planning

- Define objectives precisely.

- Identify and quantify available and potential resources.
- Write a specific business financial plan.

•Budgeting

 Help the company function with financial efficiency, and reduce waste.
 Identify areas that incur the most operating costs, or exceed the budgeted cost.
 Ensure sufficient liquidity to cover operating expenses without tapping external
resources.
  Uncover areas where a firm may invest earnings to achieve goals more
effectively.

•Managing and Assessing Risk

 Identify, analyze, and mitigate uncertainty in investment decisions.

 Evaluate the potential for financial exposure; examine capital expenditures
(CapEx) and workplace policies.
 Employ risk metrics such as degree of operating leverage calculations, standard
deviation, and value-at-risk (VaR) strategies.

•Establishing Ongoing Procedures

- Collect and analyze data.

- Make financial decisions that are consistent.
- Track and analyze variance—that is, differences between budgeted and actual
results.
- Identify problems and take appropriate corrective actions.

Goal-Setting Process

There are various ways to set goals for strategic financial management.
However, regardless of the method, it is important to use goal-setting to
enable conversations, ensure the involvement of the main stakeholders, and
identify achievable and striving strategies. The following are the two basic
approaches followed for setting the goals

2. SMART

SMART is a traditional approach to setting goals. It establishes the criteria to

create a business objective.

 Specific
 Measurable
 Attainable
 Realistic
 Time-bound
2. FAST

 FAST is a modern framework for setting goals. It follows the strategy of

iterative goal setting that enables the business owners to remain agile and
 accept that goals or circumstances may change with time. It follows the
below criteria for business objectives.
 Frequent
 Ambitious
 Specific
 Transparent

Certain factors need to be addressed while determining the

objectives of strategic financial management

1. Involvement of Teams

Other departments, such as IT and marketing, are often involved in strategic

financial management. Hence, these departments must be engaged to help
create the planned strategies.

2. Key Performance Indicators (KPIs)

The management team needs to determine which KPIs can be used for
tracking the progress towards each business objective. Some financial
management KPIs are easy to determine as they involve working towards a
specific financial target; however, other KPIs may be non-quantitative or
track short-term progress and help ensure that the organization is moving
towards its goal.

3. Timelines

It is important to decide how long it would take the organization to reach

that specific target. The management team needs to decide actionable steps
depending on the timeline and adjust the strategies whenever required.

4. Plans

The strategies planned by the management should involve steps that would
move the business closer to achieving its goals. Such strategies can
be marketing campaigns and sales initiatives that are considered critical for
a business to reach its goal.

RISK MANAGEMENT
Risk management is the process of identifying, assessing, and mitigating potential risks that
could negatively affect an organization’s operations, finances, or reputation. It is a core
component of strategic planning and financial decision-making.

The goal of risk management is to minimize potential losses while maximizing opportunities. It
involves:

1. Risk Identification – Recognizing internal and external risks.

2. Risk Assessment – Analyzing the likelihood and impact of each risk.

3. Risk Mitigation – Developing strategies to reduce or control risk.

4. Monitoring and Review – Continuously tracking risk exposure and effectiveness

of mitigation plans.

Risk management applies to all types of risks, including financial, operational, strategic,
compliance, and reputational risks.

a.) VARIANCE ANALYSIS

Variance analysis is a key component of strategic financial and risk management. It involves
comparing actual financial performance with budgeted or forecasted figures to identify and
explain differences (variances).

Variance analysis identifies deviations between planned financial outcomes and actual results.
These variances can be either:

• Favorable (F): Actual revenue is higher than budgeted, or actual costs are lower.
 • Unfavorable (U): Actual revenue is lower than budgeted, or actual costs are
higher.

TYPES OF VARIANCE

a. Sales Variance

• Sales Volume Variance = (Actual units sold – Budgeted units) × Standard selling
price

• Sales Price Variance = (Actual selling price – Budgeted price) × Actual units sold

b. Cost Variance

• Material Cost Variance = (Standard cost – Actual cost) × Actual quantity used

• Labor Cost Variance = (Standard rate – Actual rate) × Actual hours worked

• Overhead Variance includes fixed and variable overhead differences

c. Profit Variance

• Compares actual profit with budgeted profit.

Profit Variance = Actual Profit – Budgeted Profit

d. Operating Variance

• Looks at variances in operational efficiency and cost control.

STRATEGIC FINANCIAL MANAGEMENT PERSPECTIVE

Variance analysis supports:

 • Performance evaluation – Identifies underperforming areas.

• Cost control – Helps identify cost overruns or inefficiencies.

• Forecast accuracy – Improves budgeting by revealing consistent variances.

• Strategic decision-making – Informs future investments, pricing, and resource

allocation.

RISK MANAGEMENT PERSPECTIVE

Variance analysis can also:

• Detect financial risks early – Spot warning signs of financial distress.

• Support scenario planning – Understand how changes impact results.

• Aid in compliance – Ensure financial practices are within budgetary limits.

b.) MARKET ENTRY/EXIT BARRIERS

Assessment of Market Entry Barriers

Market entry barriers are obstacles that make it difficult for a company to enter a new market.
These barriers increase the initial risk and cost of investment.

Common Entry Barriers:

1. Capital Requirements

• High upfront investment in infrastructure, technology, or distribution may deter

new entrants.
 2. Economies of Scale

• Existing players may benefit from cost advantages due to large-scale operations.

3. Brand Loyalty & Customer Switching Costs

• Strong brand loyalty or high switching costs can discourage consumers from
trying new entrants.

4. Regulatory & Legal Hurdles

• Licensing, trade restrictions, and compliance with local laws can complicate
entry.

5. Access to Distribution Channels

• Established competitors may control the most effective sales or distribution

networks.

6. Technological or Product Differentiation

• Innovation and proprietary technology can create competitive barriers.

Assessment of Market Exit Barriers

Exit barriers are obstacles that make it difficult for a company to leave a market. High exit
barriers can increase risk, especially if the market becomes unprofitable.

Common Exit Barriers:

1. High Fixed Assets or Specialized Investments

• Assets that can’t be easily sold or repurposed increase the cost of exit.

2. Contractual Obligations

• Long-term supplier, lease, or labor contracts may limit exit options.

3. Emotional or Strategic Attachment

• Firms may avoid exiting markets they view as strategic or symbolic.

 4. Government or Social Pressure

• Exiting a market may be politically or socially sensitive, especially in public

interest sectors.

5. Severance and Closure Costs

• Layoffs, facility shutdowns, and other closure expenses can be high.

Strategic Implications

• Financial Planning: Firms must budget for both entry costs and potential exit
liabilities.

• Risk Management: High barriers increase strategic risk and may require
contingency planning.

• Due Diligence: Market research and legal analysis are essential before committing
to a new market.

c.) BREAK-EVEN ANALYSIS

What Is Break-Even Analysis?

Break-even analysis compares income from sales to the fixed costs of doing business. The five
components of break-even analysis are fixed costs, variable costs, revenue, contribution margin,
and break-even point (BEP).

 Fixed Costs are expenses that remain constant regardless of

production volume (rent, salaries, insurance)
 Variable Costs are expenses that change directly with production
volume (materials, direct labor, commissions)
 Contribution Margin is the amount each unit contributes toward
covering fixed costs and generating profit
 • Revenue the total amount of money brought in by a
company's operations, measured over a set amount of time.

• Break-Even Point is the exact level of sales where a

company’s revenue equals its total expenses, meaning the
business neither makes a profit nor has a loss.

Break-Even Point Formula

BEP = Total Fixed Costs / (Price Per Unit - Variable Cost Per Unit)

Contribution Margin = Item Price - Variable Cost Per Unit

Break-Even Point in Dollars

Formula;

Contribution Margin Ratio = Contribution Margin Per Unit / Item Price

BEP (Sales Dollars) = Total Fixed Costs / Contribution Margin Ratio

Why Break-Even Analysis Matters

 Pricing: With a clear understanding of their cost structure and a break-even
numbers, companies can set prices for their products that cover their fixed and
variable costs and provide a reasonable profit margin.
 Decision-Making: When it comes to new products and services, operational
expansion, or increased production, businesses can chart their profit to sale
volume and use break-even analysis to help them make informed decisions
about those activities.
 Cost Reduction: Break-even analysis helps businesses to pinpoint areas where
they can reduce costs to increase profitability.
 Performance Metric: Break-even analysis is a financial performance tool that
helps businesses ascertain where they stand in achieving their goals.
d.) CONTROLLING COST
What Is Cost Control?
Cost control is the practice of identifying and reducing business expenses to increase
profits, and it starts with the budgeting process. A business owner compares the
company's actual financial results with the budgeted expectations, and if actual costs
are higher than planned, management has the information it needs to take action

- Cost control is the practice of identifying and reducing business expenses to

increase profits, and it starts with the budgeting process.

- Cost control is an important factor in maintaining and growing profitability.

- Outsourcing is a common method to control costs because many businesses

find it cheaper to pay a third party to perform a task than to take on the work
within the company.

What Types of Costs do Businesses Incur?

In general, business costs can be categorized as fixed vs. variable and direct vs.
indirect.

- Fixed costs are those that do not change, such as rent or insurance payments.

- Variable costs will change with productivity such as wage labor or energy usage.

- Direct costs are those involved with production or operations, such as costs of
raw materials.

- Indirect costs include things like overhead, which are not directly related to the
business’s core operations.

References:

 https://corporatefinanceinstitute.com/resources/accounting/variance-analysis/?
utm_source=chatgpt.com
 https://corporatefinanceinstitute.com/resources/economics/barriers-to-entry/
 https://www.investopedia.com/terms/s/strategic-financial-management.asp
 https://corporatefinanceinstitute.com/resources/management/strategic-financial-
management/
 https://www.accountsiq.com/accounting-glossary/what-is-strategic-financial-
management/
 https://www.investopedia.com/terms/b/breakevenanalysis.asp
 https://www.investopedia.com/terms/c/cost-control.asp#:~:text=Key
%20Takeaways-,Cost%20control%20is%20the%20practice%20of%20identifying
%20and%20reducing%20business,in%20maintaining%20and%20growing
%20profitability