It basically deals with decisions related to capital expenditures, dividend policy, investment, cost control and tax planning, etc. This company has been particularly successful in maintaining a low cost for power, which is a major input in cement manufacturing. The management should bear in mind environmental factors such as – general condition of economy, state of capital markets, state regulations and tax policy. b. Marketing strategies are long-term, forward-looking approaches to planning. Annual budgets are most common, although the period of time for a budget can range from one day to more than ten years. The forecasts are prepared on the basis of information about estimated sales, production plan, purchasing plan, financing plan and capital expenditure budget. Equity capital provides security, and free from paying interest and financial risk. The leasing strategy needs to be formulated after evaluating the alternatives. Securing funding also requires the finance department to develop and maintain good relationships with financial institutions and other funding sources. Nearly all financial institutions require a projected financial statements whenever a business seeks capital. From this angle, debt should occupy a prominent place in the capital structure of an organization because it is the cheapest source of financing. Financial management is … Evaluation of capital expenditure proposals in terms of cash flows. Financial strategy may be defined as the science of the management of assets and liabilities to achieve an intended objective. Account Disable 12. Financing costs – The mix of capital in the business between debt and equity will determine the cost of capital. In all these cases, it is necessary to establish the financial worth or cash value of a business to successfully implement strategies. Thus, an appropriate capital structure strategy helps the firm in reducing the cost of capital, risks involved in debt capital management and enchasing the equity shareholder’s wealth. (ii) What credit terms are expected from suppliers? Investment in assets – This will affect value creation as follows –. Sources of finance are very closely related to the capital structure. The finance manager must ensure that funds are provided at a reasonable cost and with minimum risk. Based on these forecasts, various budgets can be prepared. Risk element involved in the business due to the commitment of funds for long-term; c. The commitment of large amount of funds; and. The investment decisions are made with the help of the following techniques: After identification of assets in which investment is to be made in such a manner that a better return is obtained besides achieving the possibility of realising short term and long term objectives and goals in the form of production of goods and services; the next set of decision relates to the sources of finance technically known as financing decisions. Financial budgets can be viewed as the planned allocation of a firm’s resources based on forecasts of the future. This is measured by the debt equity ratio. Equity financing is much preferred for related diversification whereas debt financing is preferred for unrelated diversification. Collection of all relevant information to evaluate investment opportunities is imperative to avoid bad decisions. To minimize the effect of this last concern, managers should increase the participation of subordinates in preparing budgets. A description of a number of strategic options for financing your organisation, including donor funding, earned income, member fees, fundraising from the general public, investments and careful spending. ii. Next dimension of financial strategy is the leveraged buyout. (iii) Are long term bonds, stock issues, or short term borrowings to be used? The financial strategic plan of a company regarding the sources, usage and management of funds should consider the following points: (a) Capital structure – The planning of capital structure centres around the desirable mix of debt and equity, which must be ‘optimum’. Management of working capital is very important because it can maximize the shareholder’s wealth, if managed efficiently. These decisions will be influenced by ownership—for example, whether the business is privately held or publicly quoted —and by the overall corporate goals of the organisation. Credit policy determines the volume of credit sales, credit period, credit standards, terms and collection efforts. Plans and policies for the usage of funds deal with investment or asset-mix decisions i.e., which asset to be purchased and which to dispose off, etc. It is the responsibility of the finance department to secure funding for the current and future operations of the company. Up to a certain level, tax benefits of leverage tend to be higher than the cost associated with debt financing. There are two conflicting objectives of inventory management. iv. (ii) Another influencing factor may be the gestation period. Credit creates receivables and unless the debtors pay, it will not augment cash flow of the organisation. Theoretically, an enterprise should have enough debt in its capital structure to boost its return on investment, but too much debt in the capital structure of an organization can endanger stockholders’ return and jeopardize company survival. If the cost of leasing is found higher than the cost of borrowing, it is better to buy the asset by borrowing necessary funds. [[block:sampledoc]] Cost of capital and equity financing. Thousands of transactions occur each year in which businesses are bought or sold in the United States. Management desiring to retain control must raise funds through bonds since equity stock carries voting rights, issue of new equity shares will dilute control of existing shareholders. Allocating Resources in the most efficient manner: (i) Are the long term benefits from the proposed project commensurate with the long term cost? The following are common types of financial objective. Multinational firms must deal with the differing monetary, political, and financial aspects of these assignments since they operate in many countries. Dividend strategy enables the shareholders to satisfy their desire for steady income and reduces the tax burden on income in addition to meet the company’s goal of less costly capital structure. Moreover, strategic planning seems to be becoming more financially sophisticated. Key Elements 5. Strategies relating to each aspect of working capital strategies are cash management, accounts receivables and inventory management. (b) ‘Production’ and selling costs—both made up of fixed and variable elements. Instead they utilize those funds for further growth of the firm, which in turn results in higher sales, high profits, and capital appreciation of stocks. This is a strategic decision. It should include specific goals to help you reach your dream. It should be noted that funds involve cash and are available in limited quantity, the company has to make very prudent decisions regarding the total amount of assets to be held in the enterprise, make-up of these assets and the risk involved in investing funds. It can also provide competitive advantage through a lower cost of funds and a flexible ability to raise capital to support a business strategy. Companies prefer cash budgets to control cash flows. Plagiarism Prevention 5. A corporate financial strategy determines how a business survives. This stage includes efficient management of near-cash in order to produce the highest return consistent with a low risk. cost of acquiring the capital. AT&T (AT&T Wireless), Sprint (Sprint PCs), J.C. Penny (Eckerd Drugs) and Staples use this strategy. 1. b. Ownership capital may be raised by issue of (a) equity shares, or (b) preference shares. (d) Should the firm employ trade credits, if so, to what extent? Implementation of projects under the expansion and diversifications strategies results in increase in capital expenditures. If cash inflows and outflows were perfectly synchronized and could be forecasted with certainty, a company would need no cash balances at all. It is referred to as the management of current assets. There are three main components of a organization's financial strategy: financing, investment and dividends. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. According to Thomas Wheelen and David Hunger, “Financial strategy examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action. (ii) What are the financial implications of the proposed liquidation of a certain part of the organisation? The process of planning capital expenditure adopted by all the organizations involves three major steps: i. Perhaps the most valuable benefit you receive as a financial consultant is an intrinsic one: The knowledge your financial expertise can positively impact an organization's bottom line and, more importantly, the people who work there. Thus, appropriate dividend’s strategy enables the firm to reduce the cost of capital, minimise risk, and enhance the shareholders’ value. Normally some sort Decision Support System (DSS) are created in Excel spreadsheets to prepare projected financial statements. i. (f) Trading on Equity – The increase in debentures has further increased the earnings per share of the shareholders. This practice is called ‘factoring’. ii. The cost of debt is generally lower than the cost of equity due to tax advantage. Financial structure refers to the mix of debt and equity that a company uses to finance its operations. The surplus or deficit of cash can be managed through float of cash represented by incoming collections, payment made sooner than necessary, scattered deposit balances and excessive and unrewarding balances in checking accounts. Although care has been taken in publishing this study material, yet the possibility of errors, omissions and/or * Source: Creative Destruction. This level is the optimum level of debt. Finance is the fundamental resource for starting and conducting of a business. First, base the firm’s worth on the selling price of a similar company per unit of its capacity, if similar transaction happened recently. These include institutional shareholders, bankers, suppliers and employees, the community and the customers. 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