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Functions of Strategic Financial Management

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.

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.

Functions of Strategic Financial Management

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.

Functions of Strategic Financial Management

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