While financial planning is a wider term, strategic financial planning is more specific. The key difference is the length of the future outlook. Whenever the word strategic is mentioned, it invariably means long-term.
Let’s try to understand what is strategic financial planning, how it is different from tactical or day-to-day financial planning, some examples of strategic financial management and the steps that are undertaken to conceive and achieve a strategic financial plan.
What Is Strategic Financial Planning?
Strategic financial planning and strategic financial management are interchangeably used terms, which mean that financial managers are not only interested in managing a company’s finances, but there is also the aligned objective of company’s success, which is linked with the achievement of long-term goals and objectives and in the process maximizing shareholders’ assets and value over some time.
Strategic Versus Tactical Financial Planning
As we briefly hinted above, strategic financial planning focuses on practices needed for long-term business success. On the other hand, tactical financial planning decisions are geared towards the short-term positioning of the company.
Thinking in strategic terms, a company may even opt for losses in the short term to achieve strategic results and success in the long run.
Therefore, Effective strategic management may sometimes include adjustment of short-term goals or even their sacrifice to achieve the long-term goals and targets more efficiently.
For example, a company may have suffered a net loss from closing some loss-making facilities or reducing staff to reduce operating losses. Such a step might involve restructuring costs, which would hurt the finances of the company in the near term, but the company may succeed more in the long term as a result of a permanent reduction of operating losses in the coming years.
While making these short-term and long-term trade-offs resulting from strategic financial planning, the needs of various business stakeholders must be kept in mind. A case in point may be shareholder’s unhappiness with any strategic decisions that negatively affect the company’s share price, even though those decisions might improve the company’s financial health in the long run.
Tactical financial planning is a tool business owners use to achieve immediate business success. While it is essential for day-to-day survival in the market, any decisions made without looking at the long-term view can prove risky.
But tactical and strategic financial planning have their own places and importance in financial management.
Examples of strategic financial planning
Understanding the subtle difference between strategic financial planning and financial management is also helpful.
Simply speaking, strategic financial planning is creating plans for growth, profit maximization and the company’s sustainability. This may have sub-activities like setting clear objectives, finding resources to achieve those objectives and the detailed steps needed to reach those objectives.
Strategic financial planning may also be considered a subset of strategic financial management. The planning process deals with creating a roadmap for long-term financial management activities. However, strategic financial management also includes everyday strategic decisions, course correction where needed and refining and adjusting strategic financial plans as the market or business conditions change.
Examples of Strategic Financial Planning
Below are a few examples:
Expansion Plans: A company might plan expansion into new markets. This will entail a whole range of financial planning activities like estimating financial costs of expansion, surveying and forecasting revenue generation from the new market and most importantly planning sources of funding to finance such expansion.
Product Development: A software company might plan to develop a new app or service. Again, the financial planning would include market need analysis, research, and product development cost, determining price points and revenue streams and time required to break even. And even more importantly, the financing needs and how to meet these.
Debt Management: A company under heavy debt might plan to get rid of the debt load. The strategic financial planning in this case, will involve negotiating new terms with the creditors, negotiating lower interest rates or planning to set aside some percentage of profits for retiring debt every year.
Cost Reduction: This is a very popular financial planning tool. Companies suffering from losses or seeing reduced profit margins usually consider cost reduction. The planning process will involve identifying areas for cost reduction, improving processes for enhanced operational efficiencies, considering outsourcing or non-core business activities and even renegotiating major supplier contracts.
Succession Planning: Succession planning may be required for a small family-owned business if the current owner dies or dies. Different financial planning tools available in such situations are setting up trusts, estate planning and life insurance etc.
Acquisition or Merger: If a company is considering merging with another company or acquiring another company, the strategic financial planning process will include a detailed and comprehensive evaluation of the target company, considering various methods of acquisition like cash, stock or debt, analyzing the financial impact in case of merger or acquisition and how to use the sale proceeds.
Divestiture or Spin-off: When a unit or division of a company is not performing or it does not sit well with the core business of the company, it may decide to sell or spin it off. Financial planning for such situations will include valuation of the division, finding potential buyers interested in purchasing it and planning to use sale proceeds.
Since all such strategic steps carry a lot of risk and uncertainty, the strategic financial planning process also needs to carry out contingency planning, sensitivity analysis, and scenario analysis where needed.
Industry-Specific Strategic Financial Planning
Strategic financial management strategies are not universal for all companies. Those companies who work in growth-focused industries like IT or technical services would naturally like to focus on strategies that trigger and ignite their growth path. This might be achieved by launching new products or new services or adding new features.
On the other hand, traditional low-growth industries like coal extraction, sugar manufacturing etc would think of strategic financial planning in terms of reducing expenses or asset protection.
Key benefits of strategic financial management
With long-term focus, companies can rough out the difficult short terms patches with reduced opportunities and still maintain their long-term goals in sight. Thus, there are more chances for a company to stay stable and profitable when it has a long-term financial plan to follow. Strategic management is not only about setting targets for the company but also provides a broad roadmap and guidelines for pursuing and achieving those objectives in the face of challenges.
