Financial Strategy Flashcards
key decisions which fall within the scope of financial strategy.
- Financial decision - equity mix
- Investment decision - utilization of fund
- Portfolio management decision
- Dividend decision
Linkage / Interface between financial policy and strategic management
Intro : Starting and end point of an organisation is money
- Dividend policy
- Capital structure
- Internal and external sources of funds
- Investment and fund allocation
- 3 types of investment proposals: New product , extension of existing product , cost reduction
What makes an organization sustainable? State the specific steps
Sustainable growth
- Long - term development
- Enterprise growth speed close to sustainable growth ratio
- Future stakeholders to be considered
Sustainable growth models assume business wants to :
- maintain target capital structure without issuing new equity
- target dividend payment ratio
- increase sales as rapidly as market allows
- asset to beginning of period equity ratio remains constant
- asset and sales cannot grow at a higher rate than rate of increase in retained earnings and additional debt that RE can support
Sustainable growth model - additional equity to be raised or reduce rate of expansion to a level that can be sustained without increase in financial leverage
What are Strategy at different levels of hierarchy called?
- Corporate strategy
- Business strategy
- Functional strategy
How financial goals can be balanced vis-à-vis sustainable growth?
- How should resources be distributed
- e.g.
- types of stable growth strategies
- growth speed
- Right distribution of resources - current and future stakeholders
- Illustration : fuel industry - conserve fuel - demarketing
- stable growth strategy - incremental growth , profit , and pause strategy
- enterprise growth speed close to sustainable growth ratio
Process of strategic decision making
- Objective
- 3 essential elements
- Maximisation of shareholder’s wealth is the objective
- Allocation of capital for various investment oppurtunities
- 3 essential elements:
a. Clear and realistic STRATEGY
b. FINANCIAL resources, controls , systems for execution of strategy
c. Right MGMT team and processes
STRATEGY+FINANCE+MANAGEMENT = Fundamentals of business
What is financial planning
1.Backbone of business planning and corporate planning
2.Defines feasible areas
3.Use of financial tools to meet financial goals
Financial Resources + Fin. tools = Fin. Goals
4.individual - meet life goals
5.Outcomes of fin planning - fin. obj, fin decision making . fin measures for evaluating corp. performance
6.Fin. plan to be done in begg.
7.Fin measures - Analysis of ratios , CFS - depends on company
What is strategy? What is strategic financial management?
Strategy - Long term direction , scope of organisation , provides competitive advantage
SFM - Application of financial techniques to strategic decisions to help achieve decision maker’s objectives
- combines fin accounting (backward looking - report) with with fin mgmt (forward looking , dynamic)
- identification of strategies , allocation of scare res, implementing and monitoring strategy
Functions / steps in SFM
1.Continuous search for bet inv opp
2.selection of best profitable opp
3.determine optimal mix of funds
4,estb. int controls
5.analyse results for future decision making
Corporate level strategy should be able to answer these 3 questions
- Suitability - accomplishment of common obj of co.
- feasibility - kind and number of resources
- acceptability - stakeholder satisfaction - financial and non - financial
What is SBU and what is included in business unit level strategy
Strategic business unit - profit centre that can be planned independently
strategy includes - coordination and competitve adv
What makes an organisation financially sustainable
- > 1 source of income
- > 1 way of generating income
- regular planning
- adequate fin syst
- .fin autonomy
- value clarity
- good public image
what is sustainable growth rate (SGR) , formula
Measure of how much a firm can grow without borrowing more money
SGR= ROE*( 1- Dividend payment ratio)
Variables considered in sustainable growth
- net profit margin on new and existing revenue
- asset turnover ratio
- ratio of sales to total assets
- assets to beggining of period equity ratio
- retention rate
What makes an organisation sustainable
- clear strategic decision
- scan environment for opp
- involve local community
- int controls
- financial and admin infrastructure
- acquire , retain and manage competent staff
- demonstrate effectiveness and impactin order to leverage more resources
