Strategic Financial Management and SME performance

The main causes of business failure are the lack of financial planning, limited access to funding, lack of capital, unplanned growth, low strategic and financial projection, excessive fixed-asset investment and capital mismanagement.

Strategic financial management consists of financial strategies which are goals, patterns or alternatives designed to improve and optimize financial management in order to achieve corporate results, where financial strategy represents a path to achieve and maintain business competitiveness and position a company as a world-class organization.

Despite the importance of strategic thinking and implementation on the conduct of financial management in SMEs, which have to operate in contexts of high risks and uncertainty with limited resources, SME owner/managers regard production/service or marketing functions as priorities particularly in the start-up phase of new ventures, which eventually results with poor financial management, and in most cases failure of business.

Any process of strategic management starts with “strategy formulation”, where environmental scanning is undertaken for identifying the factors which have the potential to affect the organization’s survival and success, followed by the formulation of strategies for reaching organizational goals.

While the conduct of financial planning is executed when managing daily operations of the company, such as making deciding on the receivables collection period or bank credit maturities and amounts, a more strategic outlook adds a long-ranged view and goal-orientation elements to overall managerial perspective, resulting with the direction and focusing of the limited financial resources towards the required ends. Therefore, this “seeing the big picture” and formulating financial plans and actions accordingly, contributes to the improvement of both financial and overall performance of the company, to a large extent. This phase is very critical for every company, as lack of strategy formulation results in a “going with the flow” style of management and eventually ineffective and inefficient use of resources and low organizational performance.

Formulation of financial strategies is important for small and medium sized companies as well as large corporations, as SMEs have to compete with very limited resources in contexts of high risk and uncertainty. Therefore, it can be proposed that, an effective and efficient strategic financial planning would result with improved performance in small and medium sized companies.