Financial Strategy and

Planning
By, Ashok Bantwa
Chapter 1
Strategic Approach to Financial
Management
Strategic Approach to Financial
Management
Strategic Planning
Economic environment of business
Strategic financial management
Thinking Strategically:
The Three Big Strategic Questions
1.Whats the companys present situation?
2. Where does the company need to go from here?
3. How should it get there?
Strategy
A strategy is Managements action plan to
Grow the business
Attract and please customers
Compete successfully
Conduct operations
Achieve target levels of organizational performance

Strategic Planning
The main objective of strategic planning is to
create a viable link between the organizations
objectives and resources and its environmental
opportunities
Strategic Planning
Five competitive forces for formulating and
implementing business strategy
Threat of new entrants
Threat of substitute products or services
Bargaining power of buyers
Bargaining power of supplier
Rivalry among the competitors
Strategic Planning Process
Define Mission
Set Objectives
Analyze Exiting Strategies
Define Strategic Issues
Define new and Revised
Strategies
Determine Critical Success
factors
Prepare Plans
Implement Plans
Internal
Appraisal
(Strength and
Weakness)
External
Appraisal
(Opportunities
and Threats )
Monitor
Economic Environment of Business
The factors that influence the economic
environment of business are studied under the
following three heads,
International Factors
Factors influencing at national level
Factors influencing at organization level
Strategic Financial Management
Strategic financial planning involves financial
planning, financial forecasting, provision of
finance and formulation of finance policies which
should lead the firms survival and success.
Strategic Financial Management
Strategic financial planning involves financial
planning, financial forecasting, provision of
finance and formulation of finance policies which
should lead the firms survival and success.
Strategic Financial Management
Strategic financial planning should enable the
firm to,
Judicious allocation of funds
Capitalization of relative strengths
Mitigations of weaknesses
Reduction in financing costs
Effective use of funds
Timely estimation of fund requirements
Identification of business and financial risk etc.
Strategic Financial Management
Five main objectives of finance function:
1. Forecasting
Demand and sales volume
Cash flows
Prices
Inflation rates
Labor union behavior
Technology changes
Inventory requirements


Strategic Financial Management
Five main objectives of finance function:
2. Organizing
Financial relation
Liaison with financial institutions and clients

3. Planning
Investment planning
Manpower planning
Development planning
Marketing Strategies

Strategic Financial Management
Five main objectives of finance function:
4. Coordination
Linking finance function with other areas
Linking with national budget and five year plans
Linking with labor union policies
Liaison with media
5. Control
Financial charges
Achievement of desired objectives
Overall monitoring of the system
Equilibrium in the capital


Financial Forecasting
Financial Forecasting
Meaning of forecast
Meaning and techniques of forecasting
Benefits of financial forecasting

Meaning of Forecast
A forecast is a prediction of what is going to
happen as a result of given set of circumstances.
Forecasting is essential for planning
Forecasting is needed to prepare the budget
Meaning of Forecast
While forecasting both micro and macro
economic factors (like inflation, monsoon, price,
competition, technology etc.) should be taken
into consideration
Forecasting aims at reducing the area of
uncertainty that surround management
decisions related to costs, profit, pricing, capital
investment and so forth
While forecasting about future, the past data
must be analyzed.
Meaning and techniques of financial
forecasting
In financial forecasting future estimates are made
through the preparation of statements like
projected income statement, projected balance
sheet , projected cash flow statement, cash
budget etc.
Techniques of financial forecasting
Days sales method:
Used to forecast the sales by calculating number of
days sales and establishing its relation with balance
sheet items to arrive at forecasted balance sheet
Percentage of sales method:
based on the premise that most Balance Sheet and
Income Statement Accounts vary with sales
Financial requirement is forecasted on the basis of
forecast of sales
Balance sheet items are forecasted as specific
percentage of sale
Techniques of financial forecasting
Simple linear regression method:
Forecast is made by identifying one variable as an
independent variable (Sales) and other variables
(Balance sheet items ) as dependent variables.
Multiple linear regression method:
This method is applicable when behavior of one
variable is dependent on more than one factor.

Techniques of financial forecasting
Projected fund flow statement:
It is statement of sources and application of funds
analyzing the changes taking place between two
balance sheet dates.
Projected cash flow statement:
Projected cash flow statement focus on the cash
inflows and outflows of various items represented in
income statement and balance sheet.
Projected income statement and balance sheet

Benefits of Financial Forecasting
Provides basic information for setting up of
objectives of the firm and for preparation of its
financial plan
Acts as a control device for firms financial discipline
Provides necessary information for decision making
of all functions in an organization
Monitors the optimum utilization of firms financial
resources
It projects funds requirement and utilization in
advance

Financial Forecasting techniques
External Fund Requirement (EFR)


Where
A/S = Total Assets (Fixed+Current) / Sales
L/S = Current Liabilities and provisions / Sales
S = Sales of current year
S1 = Projected sales of the next year
S = Expected increase in sales over the current year
M = Net profit margin
D = Dividend pay out ratio




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Financial Forecasting techniques
Internal Growth Rate (IGR)
Internal growth rate is the maximum growth rate a
firm can achieve without going for external financing.


Where
ROA = Return on Assets (PAT / Total Assets)
b = Retention Ratio (1 Dividend Payout Ratio)


) ( 1 b ROA
b ROA
IGR


=
Financial Forecasting techniques
Sustainable Growth Rate (SGR)
Sustainable growth rate is the maximum growth rate
that can be achieved by using internal accruals as well
as external debt without increasing financial leverage.


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Financial Forecasting techniques
Sustainable Growth Rate (SGR)




Where :
b = Retention Ratio
NP/S = Net Profit Margin
D/Eq = Debt to Equity Ratio
A/S = Assets to sales Ratio
S = Annual Sales

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Financial Planning Process
Steps Financial Planning Process
Clearly Define Mission and Goal:
Top management should decide organizations
mission, goal and objectives
Determination of financial objectives:
While determining financial objectives firm must
consider its mission, goal and objectives
Classified as short term and long term objectives



Steps Financial Planning Process
Formulation of financial policies:
A company can frame following financial policies to
achieve its financial objectives
To decide the standard level of debt equity ratio
and current asset ratio
Level of minimum cash balance to be maintained
Minimum and maximum level of inventory
Equity to be raised by issue of equity shares
Divisions in which profitability center is to be
implemented



Steps Financial Planning Process
Designing financial procedures:
Helps financial manager in day to day functioning by
following predetermined procedures.
Search for opportunities:
Search for opportunities which are compatible with
firms objectives
Identifying possible course of action:
Identify the possible course of action which are
needed to achieve the objectives

Steps Financial Planning Process
Screening of alternatives:
Each alternative need to b screened with respect to
resources required, expected return and risk involved
Assembling of information:
The cost benefit trade off must be kept in view while
gathering the information
Evaluation of alternatives and reaching decision
Implementation monitoring and control

Decision Making and Problem Solving
Process
Recognize
Problem
Collect
Information
Identify
Causes
Specify
Problem
Allocate
priorities
State Aims
Examine
Resources
Search For
Alternative
Course of
Action
Evaluate
Alternative
Courses of
Actions
Access
possible
adverse
consequenc
es
Select Best
Course of
Action
Control
Results
Implement
Decision
Problem Analysis
Decision Making
Financial Sector Reforms
Financial Sector Reforms
Framing guiding policies in structuring financial
system of country
Framing policies, rules and regulations for having
thorough check on financial intermediaries and
their liquidity
Framing policies and check points for primary and
secondary securities market
Maintaining the solvency and liquidity of financial
intermediaries by fixing SLR and CRR

Financial Sector Reforms
Liking the growth of financial sector and growth
of economy
Development of financial instruments the need of
economy
Regulating the foreign exchange market
Fixation of roles and responsibilities of apex
bodies like RBI, SEBI, IRDA etc.
Development of screen based trading of
securities etc.
Agency Theory of Employment
Agency theory models a situation in which
principal (Owner) delegates the decision making
authority to an agent (Managers) who receives
reward in return for performing some activities of
principal.
Conflict between the interest of owners and
managers results in agency problem.
Shareholders can maximize their wealth by giving
appropriate incentives to the managers and by
proper monitoring of managers
Agency Theory of Employment
Agency Costs:
Management is considered as an agent of
shareholders and if it does not act in the best interest
of shareholders it leads to following agency costs
Expenditure to structure the organization in such a
way so as to minimize the dishonesty of managers
Expenditure to monitor the managers actions by
doing internal audits
Expenditure to protect the owners from the
mischief of managers
Agency Theory of Employment
Constituents of agency theory:
Value maximization
Shareholders seek to maximize their wealth , whereas
management put its own interest above that of
principal
Management risk
Managements errors in decision making give rise to
management risk
Monitoring
Control mechanism designed by the principal to
monitor the actions of agent
Agency Theory of Employment
Constituents of agency theory:
Motivation through incentives
Appropriate incentive contracts can motivate
mangers to act in best interest of shareholders
For e.g. performance based payment
Limited Liability Partnership (LLP)
Limited Liability Partnership
Limited liability is the key attribute of limited
company incorporated under companies act
1956.
The LLP is a separate legal person liable to third
parties independent of other partners
Combines the features of company and
partnership firm
It is a body corporate incorporated under the LLP
act
Law relating to partnership is generally not
applicable to LLP
Limited Liability Partnership
Change in partners does not affect the existence,
rights and liabilities of LLP
A written agreement is entered into between the
partners of LLP
Partners are not liable for the acts of LLP / Liability of
partners is limited
LLP can own and hold the property, employ people
and enter into contract in its own name
An LLP has members but no directors and
shareholders
Has complete flexibility as to its internal structure


Limited Liability Partnership
Benefits of LLP
No limit on the maximum number of members
Boon to the members of professions which do not
allow formation of limited company
Partners get the benefits of limited liability
Its existence is not affected by the entry and exit of
members
Flexibility in terms of internal structure
Less formal requirement than a company
No double taxation as in case of companies
Corporate Governance
Corporate Governance
Corporate governance is a set of systems or
processes to ensure that a company is managed
to suit the best interest of all of its stakeholders
Concerned with maintaining high level of
transparency while running the business
It is system of making the management
accountable to the shareholders for effective
management of company
Corporate Governance
Good corporate governance means,
Maximizing long term shareholders value
Making the managers accountable to the owners
High level of transparency
Compliance with all rules and regulation and
guidelines