Chapter No.

1
The Nature and Scope Of Strategic
Financial Management
 Strategic Financial Management
Strategic financial management refers to both,
financial implications of various business
strategies, and strategic management of finance.

It is an approach to management that relates

financial techniques, tools and methodologies to
strategic decisions making to have a long-term
futuristic perspective of financial well being of
the firm to facilitate growth, sustenance and
competitive edge consistently.
 Strategic Financial Management

An approach to management that applies financial

techniques to strategic decision making.

Definition: “the application of financial techniques

to strategic decisions in order to help achieve the
decision-maker's objectives”

Strategy: a carefully devised plan of action to

achieve a goal, or the art of developing or carrying
out such a plan.
 Strategic Financial Decisions
Strategic Financial Decisions Deals with:
1. Investment decisions
 Long Term Investment Decisions
 Short Term Investment Decision
2. Financing Decisions
 Best means of financing- Debt Equity Ratio
3. Liquidity Decisions
Organization maintain adequate cash reserves or
kind such that the operations run smoothly
4. Dividend Decisions
 Disbursement of Dividend to Share holder and
Retained Earnings
5. Profitability Decisions
 Strategic Financial Decisions
Strategic Financial Management also Deals with:
1. Valuation of the firm

2. Strategic Risk Management

3. Strategic investments analysis and capital budgeting

4. Corporate restructuring and financial aspects

5. Strategic financial evaluation

6. Strategic capital restructuring

7. Strategic international financial management

8. Strategic financial engineering and architecture

9. Strategic market expansion planning

10.Strategic compensation planning

11.Strategic innovation expenditure

12.Other business challenges

 Investment Decisions
The investment decision relates to the selection of
assets in which funds will be invested by a firm. The
assets which can be acquired fall into two broad
groups: (a) long-term assets (Capital Budgeting) (b)
short-term or current assets (Working Capital
Management).
(a) Long Term Investment Decisions
Capital budgeting is probably the most crucial
financial decision of a firm. It relates to the selection
of an asset or investment proposal or course of action
whose benefits are likely to be available in future over
the lifetime of the project.
 Investment Decisions
(b) Short Term Investment Decision
Working Capital Management is concerned with the
management of current assets. It is an important
and integral part of financial management as short-
term survival is a prerequisite for long-term
success.

Fixed Part of working capital –managed from long

term funds
Fluctuating Part of Working Capital –managed from
short term funds
 Financing Decisions
The second major decision involved in financial
management is the financing decision. The concern of
the financing decision is with the financing-mix or capital
structure or leverage. There are two aspects of the
financing decision.

First, the theory of capital structure which shows the

theoretical relationship between the employment of debt
and the return to the shareholders. The second aspect of
the financing decision is the determination of an
appropriate capital structure, given the facts of a
particular case. Thus, the financing decision covers two
interrelated aspects: (1) the capital structure theory, and
(2) the capital structure decision.
 Dividend Decisions
Two alternatives are available in dealing with the
profits of a firm.

(1) They can be distributed to the shareholders in the

form of dividends or
(2) They can be retained in the business itself.
It depends on the dividend-pay out ratio, that is,
what proportion of net profits should be paid out to
the share holders.
It depends upon the preference of the shareholders
and investment opportunities available within the
firm
 Profitability Management

The source of revenue has to be pre-decided to obtain

profits in future.

It is closely related to investment decisions as revenue

generation will be from operations, investments and
divestments.
Working Capital Decision
Gross working capital (GWC)
GWC refers to the firm’s total investment in current
assets.

Current assets are the assets which can be converted

into cash within an accounting year (or operating
cycle) and include cash, short-term securities,
debtors, (accounts receivable or book debts) bills
receivable and stock (inventory).

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Concepts of Working Capital
Net working capital (NWC).
NWC refers to the difference between current
assets and current liabilities.

Current liabilities (CL) are those claims of

outsiders which are expected to mature for
payment within an accounting year and include
creditors (accounts payable), bills payable, and
outstanding expenses.

NWC can be positive or negative.

Positive NWC = CA > CL
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Negative NWC = CA < CL
Concepts of Working Capital
GWC focuses on
◦ Optimization of current investment
◦ Financing of current assets

NWC focuses on
◦ Liquidity position of the firm
◦ Judicious mix of short-term and long-tern
financing

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 Operating Cycle
Operating cycle is the time duration required to
convert sales, after the conversion of resources
into inventories, into cash. The operating cycle of
a manufacturing company involves three phases:

◦ Acquisition of resources such as raw material, labour,

power and fuel etc.
◦ Manufacture of the product which includes conversion
of raw material into work-in-progress into finished
goods.
◦ Sale of the product either for cash or on credit. Credit
sales create account receivable for collection.
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 Working Capital Management
Receivables Management

Investment in receivable
 volume of credit sales
 collection period
Credit policy
 credit standards
 credit terms
 collection efforts
Cash Management
Functions of Financial Manager

1. Financial Forecasting and

Planning
2. Acquisition of funds
3. Investment of funds
4. Helping in Valuation Decisions
5. Maintaining Adequate
Liquidity
 Financial Policy

Criteria describing a corporation's choices

regarding its debt/equity mix, currencies of
denomination, maturity structure, method of
financing investment projects, and hedging
decisions with a goal of maximizing the value
of the firm to some set of stockholders.
 Strategic Planning

Strategic planning is an organization's process of

defining its strategy, or direction, and making
decisions on allocating its resources to pursue this
strategy, including its capital and people.

Various business analysis techniques can be used in

strategic planning, including SWOT analysis
(Strengths, Weaknesses, Opportunities, and Threats ),
PEST analysis (Political, Economic, Social, and
Technological), STEER analysis (Socio-cultural,
Technological, Economic, Ecological, and Regulatory
factors), and EPISTEL (Environment, Political,
Informatic, Social, Technological, Economic and Legal).
 Strategic Financial Planning

A Financial Plan is statement of what is to be

done in a future time.

Most decisions have long lead times, which

means they take a long time to implement.
In an uncertain world, this requires that
decisions be made far in advance of their
implementation
 Strategic Financial Planning
It formulates the method by which financial goals
are to be achieved.
There are two dimensions:
1. A Time Frame
◦ Short run is probably anything less than a year.
◦ Long run is anything over that; usually taken to be a
two-year to five-year period.
2. A Level of Aggregation
◦ Each division and operational unit should have a
plan.
◦ As the capital-budgeting analyses of each of the
firm’s divisions are added up, the firm aggregates
these small projects as a big project.
 Strategic Financial Planning
Scenario Analysis
Each division might be asked to prepare three different
plans for the near term future:

1. A Worst Case- This plan would require making the

worst possible assumptions about the companies
products and the state of the economy
2. A Normal Case- This plan would require making the
most likely assumptions about the company and the
economy
3. A Best Case- Each divisions would be required to work
out a case based on optimistic assumptions. It could
involve new products and expansion.
 Components of Financial Strategy
Start-Up Costs
A new business venture, even those started by existing
companies, has start-up costs. An existing manufacturer
looking to release a new line of product has costs that may
include new fabricating equipment, new packaging and a
marketing plan. Include your start-up costs in your financial
strategy.

Competitive Analysis
Your competition affects how you make money and how you
spend money. The products and marketing activities of your
competition should be included in your financial strategy. An
analysis of how the competition will affect revenue needs to
be included in your planning.
Components of Financial Strategy
Ongoing Costs
These include labor, materials, equipment maintenance,
shipping and facilities costs, such as lease and utilities.
Break down your ongoing cost projections into monthly
numbers to include as part of your financial strategy.

Revenue
In order to create an effective financial strategy, you
need to forecast revenue over the length of the project.
A comprehensive revenue forecast is necessary when
determining how much will be available to pay your
ongoing costs, and how much will remain as profit.