Strategic Financial Management

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 Strategic Financial Management
Strategic financial management refers to both,
financial implications or aspects 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 Management
Strategic Financial Management
refers to both, financial implications or
aspects of various business
strategies, and strategic management
of finances.
 Strategic Financial Decisions
Strategic Financial Management Deals with:
1. Investment decisions
 Long Term Investment Decisions
 Short Term Investment Decision
1. Financing Decisions
 Best means of financing- Debt Equity Ratio
1. Liquidity Decisions
 Organization maintain adequate cash reserves or
kind such that the operations run smoothly
1. 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 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.
Capital Budgeting decisions
Use Pay Back period, NPV, IRR, etc. for evaluation
 Investment Decisions
(b)Short Term Investment Decision
Working Capital Management : 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 investment
decision is broadly concerned with the asset-mix or the
composition of the assets of a firm. 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
 Profitability
Management
The source of revenue has to be
pre-decided to obtain profits in
future.
It isclosely 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
13 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
 Working Capital Management
Inventory Management
Stocks of manufactured products and
the material that make up the product.
Components:
raw materials
work-in-process
finished goods
stores and spares (supplies)
 Working Capital Management
Cash Management
Cash management is concerned with the
managing of:
–cash flows into and out of the firm,
–cash flows within the firm, and
–cash balances held by the firm at a point of
time by financing deficit or investing surplus
cash
Functions of Financial
Manager
1. Financial Forecasting and
Planning
2. Acquisition of funds
3. Investment of funds
4. Helpingin Valuation Decisions
5. Maintain Proper 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.
Hedging: A strategy designed to reduce investment risk
using call options, put options, short-selling, or futures
contracts. Its purpose is to reduce the volatility of a
portfolio by reducing the risk of loss.
 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 planning
Strategic planning is the formal consideration of an
organization's future course.
All strategic planning deals with at least one of three key
questions:
"What do we do?"
"For whom do we do it?" "How do we excel?"
In business strategic planning, some authors phrase the
third question as "How can we beat or avoid competition?".
(Bradford and Duncan, page 1). But this approach is more
about defeating competitors than about excelling.
 Strategic planning
In many organizations, this is viewed as a process for
determining where an organization is going over the next
year or - more typically - 3 to 5 years (long term), although
some extend their vision to 20 years.
In order to determine where it is going, the organization needs
to know exactly where it stands, then determine where it wants
to go and how it will get there. The resulting document is called
the "strategic plan."
It is also true that strategic planning may be a tool for effectively
plotting the direction of a company; however, strategic planning itself
cannot foretell exactly how the market will evolve and what issues will
surface in the coming days in order to plan your organizational
strategy. Therefore, strategic innovation and tinkering with the
'strategic plan' have to be a cornerstone strategy for an organization
to survive the turbulent business climate.
Characteristics of Strategic planning
Successful Strategic planning constitutes
the following features. It should:
1.Exhibit impacts in daily routine
2.Facilitate dynamic, forward and backward thinking
process
3.Counters repetitive patterns of mistakes, especially
human tendencies
4.Remain clear and simple
5.Ensure planning is complete only when it is properly
implemented
6.Designate a core planning team with a level of autonomy
7.Constitute collective leadership and involvement of key
stakeholders in decision making
 Mission and Vision
Mission: Defines the fundamental purpose
of an organization or an enterprise,
succinctly describing why it exists and what
it does to achieve its Vision
A Vision statement outlines what the
organization wants to be, or how it wants
the world in which it operates to be. It
concentrates on the future. It is a source of
inspiration. It provides clear decision-
making criteria.
 Finance
Functions
Investment or Long Term Asset Mix
Decision
Financing or Capital Mix Decision
Dividend or Profit Allocation
Decision Liquidity or Short Term
Asset Mix
Decision

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 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.
 Objectives and Goals
Goal: The Financial Goal of the firm
should be shareholder’s wealth
maximization, as reflected in the market
value of the firm’s share.
Firms’ primary objective is maximizing the
welfare of owners, but, in operational terms,
they focus on the satisfaction of its
customers through the production of goods
and services needed by them
 Objectives Of Financial Management
The term objective is used to in the sense of a
goal or decision criteria for the three decisions
involved in financial management
The goal of the financial manager is to maximise
the owners/shareholders wealth as reflected in
share prices rather than profit/EPS maximisation
because the latter ignores the timing of returns,
does not directly consider cash flows and
ignores risk.
As key determinants of share price, both return and risk
must be assessed by the financial manager when
evaluating decision alternatives. The EVA is a popular
measure to determine whether an investment positively
contributes to the owners wealth.
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 Objectives Of Financial Management

However, the wealth maximizing action of

the finance managers should be
consistent with the preservation of the
wealth of stakeholders, that is, groups
such as employees, customers, suppliers,
creditors, owners and others who have a
direct link to the firm.

1-34
 Finance Manager’s Role
 Raising of Funds
 Allocation of Funds
 Profit Planning
 Understanding Capital Markets

Financial Goals
 Profit maximization (profit after tax)
 Maximizing Earnings per Share
 Shareholder’s Wealth
35 Maximization
 Profit Maximization
Maximizing the Rupee Income of Firm
Resources are efficiently utilized
Appropriate measure of firm performance
Serves interest of society also

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Objections to Profit
Maximization
It is Vague
It Ignores the Timing of Returns It
Ignores Risk
Assumes Perfect Competition
In new business environment profit
maximization is regarded as
Unrealistic Difficult Inappropriate Immoral.

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 Maximizing
Ignores timingEPS
and risk of the expected
benefit
Market value is not a function of EPS. Hence
maximizing EPS will not result in highest
price for company's shares
Maximizing EPS implies that the firm should
make no dividend payment so long as
funds can be invested at positive rate of
return—such a policy may not always work
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 Shareholders’ Wealth
Maximization
Maximizes the net present value of a
course of action to shareholders.
Accounts for the timing and risk of the
expected benefits.
Benefits are measured in terms of cash
flows.
Fundamental objective—maximize the
market value of the firm’s shares.
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 Risk-return Trade-off
Risk and expected return move in tandem;
the greater the risk, the greater the
expected return.
Financial decisions of the firm are guided
by the risk-return trade-off.
The return and risk relationship:
Return = Risk-
free rate + Risk premium
Risk-free rate is a compensation for time
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and risk premium for risk.
Managers Versus Shareholders’ Goals
A company has stakeholders such as employees, debt-
holders, consumers, suppliers, government and society.

Managers may perceive their role as reconciling conflicting

objectives of stakeholders. This stakeholders’ view of
managers’ role may compromise with the objective of SWM.

Managers may pursue their own personal goals at the cost

of shareholders, or may play safe and create satisfactory
wealth for shareholders than the maximum.

Managers may avoid taking high investment and financing

risks that may otherwise be needed to maximize
shareholders’ wealth. Such “satisfying” behaviour of
managers will frustrate the objective of SWM as a normative
41guide.
 Financial Goals and Firm’s Mission
and Objectives
Firms’ primary objective is maximizing the welfare
of owners, but, in operational terms, they focus on
the satisfaction of its customers through the
production of goods and services needed by them
Firms state their vision, mission and values in broad terms
Wealth maximization is more appropriately a decision
criterion, rather than an objective or a goal.
Goals or objectives are missions or basic purposes of a
firm’s existence

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 Financial Goals and Firm’s Mission and
Objectives
The shareholders’ wealth maximization is
the second-level criterion
ensuring that the decision
meets the minimum standard
of the economic
performance.
In the final decision-making, the judgement
of management plays the
crucial role. The wealth
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maximization criterion would
What Will the Planning Process Accomplish?

Interactions
The plan must make explicit the linkages between investment
proposals and the firm’s financing choices.
Options
The plan provides an opportunity for the firm to weigh its
various options.
Feasibility- The different plans must fit into the overall
corporation objective of maximizing shareholder
wealth
Avoiding Surprises
One of the purpose of financial planning is to avoid surprise.
Strategic Planning
Process
 Strategic Planning
Strategic Planning relates to planning
in advance for a long
period of time.
This facilitates predicting the future
and devising a course of action well
in advance.
It deals with future course
of action consistent with the
business environment changes.
 Financial Planning Model:
The Ingredients
1. Sales forecast
2. Proforma statements
3. Asset requirements
4. Financial requirements
5. Economic assumptions
 1. Sales Forecast
 All financial plans require a sales
forecast.
 Perfect foreknowledge is impossible
since sales depend on the uncertain future
state of the economy.
 Businesses that specialize in
macroeconomic and industry projects can
be help in estimating sales.

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 2. Pro Forma Statements
 The financial plan will have a forecast
balance sheet, a forecast income
statement, and a forecast sources-and-
uses-of-cash statement.
 These are called pro forma statements
or pro formas.

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 3. Asset Requirements
 The financial plan will describe
projected capital spending.
 In addition it will the discuss the
proposed uses of net working capital.

3-50
 4. Financial Requirements
 The plan will include a section on
financing arrangements.
 Dividend policy and capital structure
policy should be addressed.
 If new funds are to be raised, the plan
should consider what kinds of securities
must be sold and what methods of
issuance are most appropriate.
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 6. Economic Assumptions

The plan must explicitly state the

economic environment in which the firm
expects to reside over the life of the
plan.
Interest rate forecasts are part of the
plan.

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 CORPORATE RESTRUCTURING

• Corporate restructuring includes

mergers and acquisitions
takeovers,
amalgamation, (M&As),
leveraged buy-outs, buyback of spin-
shares,
capital reorganisation etc. offs,
•M&As are the most popular means of
corporate restructuring or business
combinations.

Financial Management, Ninth Edition © I M Pandey

161 Vikas Publishing House Pvt. Ltd.
 FORMS OF COMBINATIONS
Merger or Amalgamation
A merger is a combination of two or more
companies into one company. It may be in the
form of one or more companies being merged into
an existing company or a new company may be
formed to merge two or more existing companies.
■Absorption
A combination of two or more companies into an
existing company is known as absorption.
■Consolidation
A consolidation is a combination of two or
more companies into a new company.
 Types of Business Combinations

Merger or Amalgamation
Merger or amalgamation may take two forms:
• Absorption is a combination of two or more
companies into an existing company.
• Consolidation is a combination of two or more
companies into a new company.

Financial Management, Ninth Edition © I M

55 Pandey Vikas Publishing House Pvt.
Ltd.
• Section 76 of the Corporation Code of the
Philippines provides that there is Merger when
two or more corporations may merge into a
single corporation which shall be one of the
constituent corporations.
•            
• In a merger, a corporation absorbs another
corporation and remains in existence while the
other is dissolved. It signifies the absorption of
one corporation by another which retains its
name and corporate identity with the added
capital, franchises and powers of a merged
corporation (Aquino, The Philippine Corporate
Law Compendium, 2014 Edition).
• Consolidation is also defined in 
Section 76 of the Corporation Code of the Philip
pines
 as two or more corporations may consolidate
into a new single corporation which shall be
the consolidated corporation.
•             In consolidation, a new corporation is
created, and the consolidating corporations
are extinguished (Aquino, The Philippine
Corporate Law Compendium, 2014 Edition).
• For merger or consolidation to take effect, the
approval of the 
Securities and Exchange Commission (SEC) is
required as stated in Section 79 of the of the
Corporation Code of the Philippines. Further,
the merger or consolidation shall be effective
only upon issuance of a Certificate of Merger
or Consolidation by SEC if the Commission is
satisfied that the merger or consolidation of
the corporations concerned is not inconsistent
with the provisions of the Corporation Code of
the Philippines and any existing laws thereof.
Sec. 80. Effects or merger or consolidation. – The merger or
consolidation shall have the following effects:

• The constituent corporations shall become a

single corporation which, in case of merger,
shall be the surviving corporation designated
in the plan of merger; and, in case of
consolidation, shall be the consolidated
corporation designated in the plan of
consolidation;
• The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
• The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and powers and shall be subject to
all the duties and liabilities of a corporation
organized under this Code;
• The surviving or the consolidated corporation
shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of
each of the constituent corporations; and all
property, real or personal, and all receivables
due on whatever account, including
subscriptions to shares and other choses in
action, and all and every other interest of, or
belonging to, or due to each constituent
corporation, shall be deemed transferred to
and vested in such surviving or consolidated
corporation without further act or deed; and
• The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and
obligations of each of the constituent corporations in
the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or
obligations; and any pending claim, action or
proceeding brought by or against any of such
constituent corporations may be prosecuted by or
against the surviving or consolidated corporation. The
rights of creditors or liens upon the property of any of
such constituent corporations shall not be impaired
by such merger or consolidation.
• In a merger, there is no liquidation or
distribution of assets to the stockholders
because the assets and liabilities of the
absorbed corporation are transferred to and
assumed by the surviving corporation.
• What is the remedy of a Stockholder if he/she
does not agree to the plan of merger or
consolidation?
•             Article 81 of the Corporation Code of the
Philippines provides for appraisal right of a
stockholder or the right to dissent and demand
payment of the fair value of his shares in case of
merger or consolidation. However, in order to
exercise this right, the stockholder dissenting must be
present in the stockholders’ meeting in which the
plan of merger was taken up.
• Effect on Employees
•             In case of merger, the employees of the
absorbed corporations are assumed by the
surviving corporation.
• In case of consolidation, the employees of the
constituent corporations become the
employees of the new corporation.
• A merger refers to the joining of two or more
entities into an existing entity or to form a new
entity. On the other hand,
an acquisition refers to the purchase of
securities or assets, through contract or other
means, for the purpose of
obtaining control by: (a) One entity of the
whole or part of another; (b) Two or more
entities over another; or (c) One or more
entities over one or more entities.
• An entity refers to any person, natural or
juridical, sole proprietorship, partnership,
combination or association in any form,
whether incorporated or not, domestic or
foreign, including those owned or controlled
by the government, engaged directly or
indirectly in any economic activity.
 Sps Ong v. BPI Family Savings Bank Inc, G.R. No.
208638, 24 January 2018 - (Topic: Focused on Effects
of Merger)
• FACTS: Petitioners are engaged in the business of printing
under the name and style "MELBROS PRINTING CENTER". In
view of petitioners' business expansion plans and the
assurances made by BSA's managers, they applied for the
credit facilities offered by the latter. Sometime in April 1997,
they executed a real estate mortgage (REM) over their
property covered by a TCT in favor of BSA as security for a
P15,000,000.00 term loan and P5,000,000.00 credit line or a
total of P20,000,000.00. With regard to the term loan, only
Pl0,444,271.49 was released by BSA (the amount needed by
the petitioners to pay out their loan with Ayala life assurance,
the balance was credited to their account with BSA). With
regard to the P5,000,000.00 credit line, only P3,000,000.00
was released.
• BSA promised to release the remaining P2,000,000.00
conditioned upon the payment of the P3,000,000.00
initially released to petitioners. Petitioners acceded
to the condition and paid the P3,000,000.00 in full.
However, BSA still refused to release the
P2,000,000.00. Petitioners then refused to pay the
amortizations due on their term loan. Later on, BPI
Family Savings Bank (BPI) merged with BSA, thus,
acquired all the latter's rights and assumed its
obligations. BPI filed a petition for extrajudicial
foreclosure of the REM for petitioners' default in the
payment of their term loan.
ISSUE: WON BPI can foreclose the mortgage on the land of
herein petitioners.

• NO.
• Applying the pertinent provisions of the Corporation Code, BPI
did not only acquire all the rights, privileges and assets of BSA
but likewise acquired the liabilities and obligations of the latter
as if BPI itself incurred it. Moreover, Section l(e) of the Articles
of Merger dated November 21, 2001 provides that all liabilities
and obligations of BSA shall be transferred to and become the
liabilities and obligations of BPI in the same manner as if it had
itself incurred such liabilities or obligations. Pursuant to such
merger and consolidation, BPI' s right to foreclose the
mortgage on petitioner's property depends on the status of
the contract and the corresponding obligations of the parties
originally involved, that is, the agreement between its
predecessor BSA and petitioner.
• THANK YOU AND
KEEP SAFE!