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Chapter 1 - Financial Policy and Corporate Strategy

Chapter 1 - Financial Policy and Corporate Strategy

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Published by sungate007

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Categories:Types, Business/Law
Published by: sungate007 on Aug 20, 2010
Copyright:Attribution Non-commercial


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COPYRIGHT : J B GUPTACopyright : J B GUPTA 6B/AC-III Shalimar Bagh Delhi 110088 9818493132www.jbguptaclasses.comdrjaibhagwan@gmail.com
Financial ManagementCorporate StrategyStrategic Financial ManagementFeatures of SFMBasic PremisesFinancial Policy & Corporate StrategyStrategic Decision Making FrameworkBalancing the Financial Goals Vis-À-Vis Sustainable Growth
FINANCIAL MANAGEMENTFINANCIAL MANAGEMENTFINANCIAL MANAGEMENTFINANCIAL MANAGEMENTFinancial Management is the process of financial-decisions. There are threetypes of financial decisions.
Financing Decisions : such decisions involve estimating the requirementof funds, deciding about leverage, evaluating various sources of financeand finally raising the finance in such a way that the cost of capital isminimum and the risk is at optimum level.
Investment Decisions : such decisions involve investments in workingcapital and fixed assets and evaluating the projects under consideration.The management should be guided by getting the maximum return bykeeping the risk at optimum level.
Dividend Decisions : such decisions involve the consideration of profit,liquidity, shareholder requirements, tax aspect and need of the funds forreinvestment purposes. The management has to decide about retaining thefunds for further investment plans without compromising the variousincome requirements of innumerable shareholders.The aim of a company is to create value for its shareholders. Although the otherstake holders are also important, the shareholder is the most importantstakeholder. The overall objective of the financial Management is to apply thefinancial management policies and principles for maximizing the wealth of theshareholders in the long run. This can be achieved by maximizing the EPS andkeeping the risk at optimum levels.
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The shareholders expect a rate of return based on the risk they perceive. Bymaximizing their wealth we mean providing better than the return they expect.How can a company earn more than the return the shareholders and other stakeholders expect in a hard-core competitive arena? The answer is that this can beachieved by creating a sustainable competitive advantage through exploiting themarket imperfections tapping the opportunities and identifying the possiblethreats in advance. Also all the market players do not have same expectationsand risk perception and it is here the financial Management blooms i.e. theycreate value for shareholders through appropriate level of trading on equity.Corporate StrategyCorporate StrategyCorporate StrategyCorporate StrategyValue creation is at the heart of corporate strategy. Strategies are means to ends. Corporate Strategy is supposed to be the meansby which an organization achieves and sustains success. It is about enabling anorganization to achieve and sustain superior overall performance and returns. Itinvolves the activities of (i) defining and refining the corporate vision, missionand objectives, (ii) problem identification, (iii) alternatives generation, and (iv)evaluation /selection. It is a core responsibility of the top management includingCEO, CFO and the Directors.There are three levels of corporate strategy:(i)
Corporate level,(ii)
Business level, and(iii)
Functional level.Corporate (Top) level managers decide what businesses to invest. Decisionsregarding the sources of funds and their allocation are also taken at this level.This level strategy focuses on two dimensions (a) Growth (b) liquidity. Growthdimension refers to growth in sales, growth in assets and growth of growthopportunities. The top level managers would need to plan what types of growthstrategies suit their market orientation. They will need to effectively choose theoptimal growth strategy from the various alternatives like expansion into existingbusinesses, diversification into new businesses, modes of growth, internaldevelopment, acquiring firms, and collaborative ventures. Liquidity refers to levelof cash flows required to the business efficiently.Business level strategy lays down the ways in which a company would seek toattain competitive advantage through effective positioning. Forming a successfulbusiness strategy involves creating a first-rate competitive strategy. It concernsstrategic decisions about choice of products, quality of products, meeting needsof customers, gaining advantage over competitors, exploiting or creating newopportunities etc. The strategy needs to be frequently reviewed againstprevailing external and internal environment
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Functional level strategies are those strategies that are initiated by supportcenters of an organization like human Relations department, IT department. Tobe competitively superior to other firms, functional level managers strategize toattain superior efficiency, superior quality, superior customer responsiveness,and superior innovation.STRATEGIC FINANCIAL MANAGEMENTSTRATEGIC FINANCIAL MANAGEMENTSTRATEGIC FINANCIAL MANAGEMENTSTRATEGIC FINANCIAL MANAGEMENTStrategic financial management aims at creating value through finance bycreating and supporting the overall business strategy. It integrates the financialmanagement function into corporate strategy. Strategic Financial managementaims to design a financial strategy that will complement the corporate strategy.In other words, the financial strategy adds value to the overall corporatestrategy. It is a set of long-term - plans, decisions and actions for achieving thefinancial objectives of the firm in the face of adverse situations and hard-corecompetition. It aims at rigorous application of financial management principles asthe business conditions are becoming tougher day by day on account of toughcompetition which is threatening the existence of the firms. Strategic FinancialManagement is a portfolio of long-term financing and investments policies of thefirm so that the wealth of the shareholders is maximized, to whom themanagement are ultimately responsible.Strategic Financial Management brings together financial management andstrategic management and provides the financial criterion for all managementdecisions. It aims at the identification of the possible strategies capable ofmaximizing an organization's net present value, the allocation of scarce capitalresources among the competing opportunities, and the implementation andmonitoring of the chosen strategy so as to achieve stated objectives.Features of SFMFeatures of SFMFeatures of SFMFeatures of SFM:(i) Strategic decisionsStrategic decisionsStrategic decisionsStrategic decisions: SFM people take the strategic decisions. Such decisionsaffect the profitability, liquidity and the growth of the organization for years tocome and hence build or erode the value of the firm. The SFM should knowwhere the value comes from in their organization. A few examples of suchdecisions are as follows:(a) Deciding the goals and objectives of the firm. This decision should be basedon Vision of the company. Vision is not a decision. It is a dream of the leader(s)of the organization. (b) Decisions regarding resource allocations among thecompeting opportunities i.e. capital expenditure decisions.(c) Decisions having major resource implications. For example, the decisionsregarding computerization / outsourcing some functions of the organization.(d) Decisions regarding 'stretching' an organization’s resources and competencesto (i) achieving the advantage of the opportunities or (ii) face the threats.

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