STRATEGIC FINANCIAL MANAGEMENT UNIT

NO 4
• Meaning of SFM – A finance manager works in a
challenging environment, which changes
continuously after 1991. The economy has opened
up and global resources are being tapped, the
opportunities also are limitless. There are also
risks involved in business decisions. The activities
were unheard of even a few years ago e.g.
• 1) With the deregulation of interest rates, there
are continuously interest rate movements.
• 2) Rupee has become freely convertible in
current account.
• 3) Optimum debt equity mix is possible, so as
to increase the share holders wealth.
• 4) There is a regime of free pricing, fixing and
optimum price has become a challenging task.
• 5) Maintaining market price of the share is
crucial.
• 6) Ensuring management control is vital, more
so in the light of foreign equity participation
( which is backed by huge resources) making
the firm concerned an easy take over target.
• STRATEGY - It is a game plan, the
management uses to stake out a market
position, conduct its operations compete
successfully to achieve companies objectives.
• By strategy we mean companies current
business approaches, future plans to
strengthen its competitiveness.
• The company’s strategy is aimed at providing a
product or service i.e. different from what
competitors are offering. This should give the
company’s competitive advantage which rivals
can not match.
• There are five tasks of Strategic Management.
• 1) Forming a strategic vision of where the
organization is headed so as to provide long
term direction.
• 2) Setting objectives.
• 3) Crafting a strategy to achieve the desired
outcomes.
• 4) Implementing and executing the chosen
strategy efficiently.
• 5) Evaluating performance and initiating
corrective adjustments in vision, objectives,
strategy, new ideas, changing conditions.
• TESTS OF WINNING STRATEGY –
• 1) The goodness of fit test – A good strategy has
to be well matched to industry and competitive
conditions, market opportunities and threats,
and other aspects of the given enterprises
external environment. It also has to be tailored
• to the companies resource strength and
weaknesses, competencies, etc.
• 2) The competitive advantage test – A good
strategy leads to sustainable competitive
advantage.
• 3) The performance test – A good strategy
boosts companies performance.
 EVALUATION OF COST AND BENEFITS

• The above rotate around three measure

ingredients essential for corporate success
e.g. people, technology, and capital. A
company aiming for recognition will always
try to maintain equilibrium between these
three ingredients.
• The enterprise should increase its profits and
wealth ( return on investment), If a firm
makes profits exceeding that of cost of funds,
• they create what is known as economic value
added ( EVA) for the share holders. The market
value of the shares will also rise to a higher
equilibrium position, known as market value added
(MVA) for the mutual benefits of the firm, its
owners and share holders.
• Return on Investment (ROI) Analysis – It is defined
as the ratio of profit to investment.
• ROI = Profit after tax + Interest (1-tax) /Investment.
• The reasons given below are important for
managing business finances.
• 1) To maintain an equilibrium between the
contradictory interest or various stake holders.
• 2) To ensure a steady growth rate in a long run.
• 3) To achieve accelerated growth rate when
strategic plans start producing the desired
results.
• 4) To capture new opportunities of business
(both short term and long term).
• 5) To ensure the best application of the concept
of “enterprise resource planning and
management” so as to achieve the most
optimal use of resources.
• 6) To create a wider scope in order to fund new
ventures, new technologies, new markets and
new benchmarks to boost productivity.
• 7) To try to be as flexible as possible, and to be
very stable, to respond to internal structural
changes and to external expectation.
• 8) To use innovation in financial engineering so
as to accelerate profitability.
• ECONOMIC VALUE ADDED (EVA/RESIDUAL
INCOME) – EVA is the amount in rupees that
remains after deducting an implied interest
charge from operating income.
• The implied interest charge reflexed an
opportunity cost, and is charged on the
amount of assets in each investment Centre.
The rate of interest charge is equal to the
minimum rate of investment specified by the
top management as part of the corporate
strategic plan e.g. a division has a budgeted
income of Rs. 10 lacs and a budgeted
investment of Rs. 60 lacs. The average cost of
• capital of the firm is 12%. The budgeted residual income
is
• Divisional Income - Rs.10 lacs
• Interest charge-
• 12% on Rs. 60 lacs 7.20
• Residual income / 2.80
• Economic Value Added
• Different interest rates may be applied to different
components of investment like, fixed
• assets, inventories, receivables and cash.
• As per GAAP – generally excepted accounting
principles it is
• EVA = Conventional Divisional Profit + /- accumulated
adjustment – Cost of Capital Charge on divisional
assets.
• EVA can be calculated as under-
• EVA = Net operating profit after tax – Cost of capital X
Economic book value of capital employed in a given
firm.
• EVA = Return on capital – Cost of capital.
• MARKET VALUE ADDED (MVA) –
• It a difference between the current market
value of the firm and capital employed by the
given firm. If the market value of a company
exceeds its capital employed, it means that
MVA is positive and vise versa.
• MVA is simply the present value of all future
EVAs.
• REASONS FOR MANAGING BUSINESS
FINANCIALY –
• This means that once the project is found
technically, financially and commercially
viable, the next task is for the financial
department to use its technical and expert
knowledge to see that the business is run
efficiently and effectively.
• STRATEGY AND STRATEGIST –
• By strategy is meant a game plan, action
plan, a tactic, a policy – either long term or
short term, to achieve the set out objectives.
Strategy is very soul of any action and
activity, every executive / owner needs to be
a strategist. They have different styles and
ways of framing and implementing strategies.
• These are – aggressive and very visible,
moderate and visible etc. SFM demands that
every executive / stake holder is strategist in
a real sense. A strategist should observe FM
from a long term point of view for
sustainable success based on short term
flexible tactics. He should be both, at the
same time, a generalist and a specialist. He
must be able to combine with quick, correct
• and analytical financial techniques along with a
qualitative judgment about each and every decision
or situation e. g.
• 1) Incremental cost benefit analysis of every marginal
change in decisions or situations.
• 2) Life cycle costing of products, brands, employees,
and the enterprise for long term strategy
formulation.
• 3) To make notional costing for a true application of a
profit Centre concept is a must.
• 4) Enterprise Resource Management (not
planning) would be possible if internal bench
marking of cost performance is built up.
• 5) Achieving long term wealth maximization
through financial engineering by attempting
an innovative network mix.
• 6) Forming U curve relationship with both
vendors and dealers.
 9-S MODEL
• The strategist has to understand the most
important factors leading to what is known as
sustainable success. These factors are the
prime references for the strategist to design
his financial game plans. These factors can be
called as 9 references of SFM or 9 –S MODEL.
• 1) Sanctity – It refers to ethical economics of
business. It has to reduce cost at every stage
of the product life cycle.
• One need not incur much promotional cost
when launching a new product because once
creditability has been already established.
Initially the cost may be high but it will raise its
revenues after the break – even is achieved.
• 2) Selectivity – It refers to the most appropriate
business choices based on an enterprises core
competence. SFM should build up a flexible
core competence together with SCM.
• 3) Systems – It emphasizes the need for
supportive mechanism to make SFM a
success. It refers to technological,
accounting, information and operations
systems of an enterprise.
• 4) SCM – It refers to micro level strategic
analysis of various cost structures and cost
implications.
• 5) Sensitivity – The highest degree of sensitivity
comes from the most efficient use of strategically
important information. Sensitivity also depends
upon the ability to transform “x” information in
to “y” at a least possible cost and time
framework, so as to facilitate a quick exercise of
cost benefit analysis possible. A true strategist
should be able to convert technical data in to
commercial data, however, approximate.
• 6) Sustainability- It pertains to long term strategic
planning and enterprise achieving a high ROI
(return on investment) during boom period has to
plan for a minimum ROI during a recession
period, backed by low- cost investment.
Sustainability also includes managing new
competitors with extra cost on sustenance. A
careful combination of business strategy and
business funding strategy is important.
• 7) Superiority – It refers to the position of
leadership that an enterprise must attain in the
market place. It is therefore a very expensive
exercise. The most important portion of an
enterprise value chain will give the leadership
position. You have to continuously work on in
to see to it that your competitors do not out
smart you. This means one should maintain its
identity in competitive market at any cost.
• 8) Structural flexibility – Of an enterprise is the
sum total of the qualitative and the quantitative
adaptability and adjustability of an organization.
All great companies have shown a tremendous
flexibility when facing touch market conditions.
Human flexibility, technical and system flexibility,
financial flexibility and entrepreneurial flexibility
are a must, if a dynamic organization is to
achieve strategic advantages.
• 9) Soul – Searching – It is based on continuous
bench marking, and financial alertness, innovation
and a total exposure to new variables and
parameters. An enterprise requires an automatic,
self regulated and self motivated system of
developing new operational and financial bench
marks. The exercises of Strategic Audit, Policy
Audit and Management Audit could be very useful
for appraising the validity of these bench marks.
COMPENSATION MANAGEMENT UNIT NO 5

• Need of compensation management – It is the

total earnings of a employee (according to
various laws like payment of wages act,
minimum wages act) capable of expressed in
terms of money.
• It is also known as wage and salary
administration, remuneration management or
reward management, is concerned with
designing and implementing total compensation
• package. Traditionally, there was concept of wage
and salary administration, but today in business
field there has been a change in nomenclature
with the word compensation substituting wage
and salary.
• The meaning of compensation is counter-balance.
In case of HRM, compensation is referred to as
money and other benefits received by an
employee for providing services to his employers.
• Money and benefits received may be in
different forms, namely – base compensation
in money form and various benefits may be
associated with the given employees service
to the employer like PF, gratuity, insurance
scheme and any other payment etc.
• There has been a competition in the labour
market and tern over of the employees had
made the task of compensation planning,
• a difficult one. There has also been demands of
the employees for competitive salaries offered
by MNCs, which are resulted in to
compensation war in certain industries.
• COMPONENTS OF COMPENSATION –
• 1) Basic wages 2) Dearness allowance 3) Bonus
4) Commissions 5) Mixed plans 6) Profit sharing
payments 7) Piece rate wages 8) Fringe benefits
9) Reimbursements 10) Sickness benefits.
• Types of compensation – The employees can be
paid compensation directly or indirectly e.g. in
case of direct benefits there are monetary
factors involved and in case of indirect
compensation there are non monetary benefits
such as perks, fringe benefits etc.
• Need of compensation management – A good
compensation package is important to motivate
the employees to increase the productivity
• of their organization. Unless compensation is
provided, no one will come and work for an
organization. Compensation helps in running
an organization effectively to achieve its goals.
Salary is a part of compensation system, the
employees have psychological and other needs
to fulfill. A proper compensation scheme serves
this purpose.
• The attractive compensation will help the given
• organization to both attract and retain the
best talent. The compensation package should
be as per industry standards.
• CONTROL OVER PRODUCTIVITY – Labour
productivity – It is determined by the input /
output ratio. In case of labour it is calculated –
standard time for going actual amount of work
/ actual time taken to do the work. Labour
productivity is an important measure for
• measuring the efficiency of individual workers.
• EFFICIENCY RATING – Efficiency is related with
performance and may be computed by
comparing time taken with some standard
time allow to perform the given job.
• CONTROL OVER – Labour Turnover – It is a
common thing that the workers do change
their jobs for various reasons. Such mobility
• is quite normal and is known as labour
turnover. There can be various causes for this.
• GROUP INCENTIVE PLAN OF PAYMENT OF
WAGES – Here, a number of workers doing
the same class of work in a factory, pool
together their entire output and the total
earnings of the group are distributed amongst
all the workers of the that group in
• such a way that each workman shares in the
earnings in proportion to the amount of work
done by him.
• INCENTIVE (Bonus Schemes in compensation
package) – Earlier bonus schemes were
applied to factory workers, but gradually the
practice turned absolute. Times have
changed, and, so have the practices. Today,
there is a growing realization that no staff
• can perform well unless they are given the
incentive or a bonus scheme. In many
businesses, bonus schemes are applied to white
collar and creative workers, managers etc.
• OBJECTIVES OF BONUS SCHEME –
• 1) To increase output.
• 2) It is a reward for a good assessment.
• 3) Focus management – The focus should be
• mainly on production.
• 4) Support weak management – It is to help and
incompetent manager who is under performing.
• 5) Encourage staff to become more skilled – This
is to upgrade their skill sets.
• 6) Tighten up plant maintenance – This is when
equipments are continually breaking down, the
out put is hampered, and staff is unconcerned
• about the same.
• TYPES OF INCENTIVES – 1) Financial rewards
– A) Salary increase. B) Bonuses. C) Benefits.
D) Perquisites.
• 2) Psychological rewards – A) Promotion. B)
Increased responsibilities. C) Increased
autonomy. D) Better location. E)
Recongnision.
 DESIGN OF NEW WAGE POLICY
• 1) The wage policy should be the driving force
to award performance based remuneration to
every employee.
• 2) With the up gradation in employees
position, the quantum of contractual wage
should increased and performance based
reward should increase.
• 3) The management should have discretion in
recognizing and employee’s performance.
• 4) There should not be over lapping of jobs.
• 5) Wages should be performance based,
transparent and flexible enough to change.
• 6) Performance bonus should be based on
multiple factors like individual achievements,
companies bottom line, employees loyalty etc.
• 7) Short term and long term loans are to be
made available, at reasonable rates and based
on employees repaying capacity.
• 8) The productivity and loyalty of an
employee could be optimal. An employee can
plan his/her long term portfolio
requirements if he knows what the post
retirement benefits will be.
• 9) Employees may wish to leave the
organization for personal reasons before
retirement.
• STRATEGIC WAGE CONTROL – The company
has to adjust with changing business
conditions and varying enterprise life cycle
stages. There should be inter- industry wage
comparison and major differentials to be
adjusted.
• NEGOTIATIONS – It depends upon well
defined organizational structure, staffing
patterns etc.
• THE ESSENTIALS OF NEGOTIATIONS –
• 1) A comprehensive wage package with due
flexibility for taking care of individualistic
variations.
• 2) A stable and well defined mechanism for
individual group etc. for performance appraisal.
• 3) A good data base on earlier revisions, the
present work force and the total cost of work
force to the given company, change in external
• environment factors and strategies of
competitors.
• The ultimate result of wage negotiations should
be a win-win situation not just for the employer
and employees but also for the consumers at
large. Any wage hike must factor the following.
• 1) Increased productivity.
• 2) Drive for structural changes.
• 3) The ability to meet adverse impact of the
• market conditions.
• 4) Efforts dedicated to taking the given
organization to the next level and their after to
greater and greater heights.
• VOLUNTARY RETIREMENT SCHEME (VRS) –
• 1) Need-based benefits would create savings and
investment planning scope for the employees.
• 2) Post retirement benefits are to be viewed as
cost of employees longevity.
• 3) Option to select from available choices of
benefits should be provided so that an
employee enjoys flexibility based on changing
requirements and compulsions.
• 4) The nature, quantum and scope of such
benefits should be linked to the productivity
of the employee. This would create a
conducive atmosphere for increase in
productivity, and creativity of employee.
• 5)Employees should be given a fair and true
view of their post retirement benefits, with
the available variations and options.
• 6) An enterprise may offer an entrepreneurial
approach for utilizing the post retirement
benefits. Employees may allow their
employer to reinvest these benefits in high
growth portfolio avenues with insurance
coverage.
• REASONS FOR BECOMING UNSUCCESSFUL –
• 1) The response from the employees is often
overestimated.
• 2) The VRS is often not designed with a
detailed study of the requirements of the
employees expected to retire.
• 3) The VRS sometimes becomes so attractive
that employees who need to be retained use
• use the scheme and leave the organization for
better opportunities.
• 4) Employees are not appraised properly about
the details and repercussions of post VRS
possibilities. Hence employees do not except a
VRS even when they would want to retire early.
• 5) The timing and declaration of VRS and its
implementation is not handled strategically i.e.
by neglecting external environment factors.
• The best of VRS have failed, simply because its
timing is wrong.
• 6) Many employees feel that re-training, re-
deployment, and re-vamping of their skill
would make them employable. Therefore they
honestly feel that VRS not required.
• 7) A very complicated design of VRS or a rigid
VRS without any reasonable option also
becomes unacceptable.
• FACTORS TO BE CONSIDERED FOR FRAMING VRS
PACKAGE – 1) Number of years spent in an
enterprise.
• 2) Number of years left before normal retirement.
• 3) Last drawn salary.
• 4) Salary on retirement.
• 5) Post retirement benefits.
• 6) Loss of profits to the company if the employee
continues.
• 7) Addition to profits if the employee leaves.
• 8) To get maximum benefits under IT act 1961.
• MAIN FEATURES OF THE GUIDELINES FOR VRS
• 1) It applies to an employee who has
completed 10 year of service or completed 40
yeas of age.
• 2) The scheme of VRS has been drawn to
facilitate the overall reduction in the existing
• strength of employees. The vacancy caused by
VRS is not meant to be filled up.
• 3) The retiring employee of a company shall not
be employed in another company belonging to
the same management.
• STRATEGIES FOR IMPLEMENTATION OF VRS –
• 1) VRS should not be freely and continuously
available “exist facility” to the employees as it
would loose its seriousness.
• 2) One should not allow the competitors to
know the implementation of VRS, otherwise
they will target the best employees of the
enterprise in a competitive market scenario.
• 3) VRS is a part of major restructuring plan of
an inevitable merger exercise and must be
known to the employees well in advance, so
that their exist becomes timely and less
expensive.
• 4) Some employees may have genuine
problems and want to leave the organization
concern. A periodic frequency of VRS also
helps the organization in managing cash
flows.
• 5) VRS also may mean loosing once
advantage to its competitors.
IMPLICATIONS OF FRINGE BENEFIT TAX
• These benefits are more or less of a personal
nature. These perquisites are taxable in the
hands of the employees.
• FBT – The employees are given benefits other
than wages like a car, club membership, free
meals, credit cards, tours and travel etc.
• IMPACT OF FBT – 1) It will badly hit the
corporates in India – It is due to the fact that it
will result in to an additional expenditure
• to the companies.
• 2) Small firms may be spared – It is indicated
that organization with very few employees
could be exempted from the tax. This is based
on the assumption that small employers do not
spend large amounts on fringe benefits.
• 3) The ministry is also examining combining the
tax return for fringe benefits with the IT returns
to avoid separate filing.