H2.4 Financial Management Strategies

What are they and why are they important?

Financial Management strategies are tools that firms can use to achieve strategic financial objectives: profitability, liquidity, solvency, efficiency and growth.

Profit maximisation is the core goal (of most firms), but this requires attention on the other objectives to be obtained. 

Firm’s require the short-term and long-term stability to continue to grow in its ability to make profit for the owners. 

They are important because:

• Without attention to cash flow, a business will quickly become unable to pay its obligations, ceasing to function;

• All other activities of key functions (operations, human resources, marketing) are measured by the financial performance of the firm;

• Without strategies to manage the financial resources of the firm, wastage occurs, inefficiencies creep in and profitability is reduced;

• Provide clear direction to firms experiencing specific kinds of financial difficulties; they can be tailored to specific firm requirements.

Important:

Depending upon the circumstances of the firm - that is, the most critical financial issues faced (as identified through Monitoring and Controlling and Financial Ratio Analysis), a different strategy would be required. You must know what strategy best ‘fits’ the business and make justifications as to how it will improve the firm’s financial position / performance.

You may be required to evaluate the effectiveness of strategies or recommend strategies for certain types of firms in various business situations. Some will fit brilliantly, other not so much. Here we have the medical model - the best doctors prescribe medicine that aligns with the patient's major ailment.