STRATEGIC MANAGEMENT

FINANCIAL STRATEGY FORMULATION

The financial strategies of an organization are related to several accounting

concepts which are considered important to strategy implementation .
These are:

1.Sources of funds

2.Usage of funds

3.Budget statements

4.Evaluating the worth of a business

So, strategists need to formulate strategies in these areas so that they are
implemented.
1.Acquiring capital to implement strategies/sources of funds:

Successful strategy implementation requires additional capital.

The two basic sources of capital for an organization are debt and
equity. Determining appropriate mix of debt and equity in capital
structure is vital to successful strategy implementation . An
enterprise should have enough debt in its capital structure to
boost its return on investment . In low earning periods, too much
debt in the capital structure of an organization can endanger
stockholders’ return and effect companies survival.
The major factors regarding which strategies have to be made includes :

• Capital structure

• Procurement of capital and working capital borrowings

• Reserves and surplus as sources of funds

• Relationship with lenders, banks and financial institutions

2. Projected financial statements/budgets:

Projected ( pro forma) financial statements:

• Is a central strategy- implementation technique

• It allows organization to examine the expected results of various actions and

approaches

• Can be used to forecast the impact of various implementation decisions

• All financial institutions require a projected financial statements whenever a

business seeks capital.
Types of financial budgets

• Cash budgets

• Operating budgets

• Sales budgets

• Profit budgets

• Factory budgets

• Capital budgets

• Expense budgets
Limitations of financial budgets

• Budgetary programs can become so detailed

• Over budgeting or under budgeting can cause problems

• Financial budgets can become substitute for objectives

• Budgets can hide inefficiencies

• Budgets are sometimes used as instruments of tyranny

3.Management / Usage of Funds

Important factors regarding which plans and policies are made:

i. Capital Investment

ii. Fixed Asset Acquisition

iii. Current Asset

iv. Loans and Advances

v. Dividend Decisions

vi. Relationship with shareholders

Major factors regarding management of
funds are:

i. System of finance

ii. Accounting and budgeting

iii. Management control system

iv. Cash, credit and control system

v. Cost control and reduction

vi. Tax planning and advantages

Drawbacks in formulation of plans and policies:

i. Conflict between the priorities of management and

shareholders

ii. If not clear, inefficient use of funds

iii. Leads to less optimum usage of resources

4.Evaluating the worth of a business

Evaluating the worth of a business is central to strategy implementation because integrative, intensive,
and diversification strategies are often implemented by acquiring other firms . It is necessary to
establish the financial worth or cash value of a business to successfully implement strategies .

For determining a business's worth can be grouped into 3 main approaches :

• To determine the net worth or stockholders equity

Net worth = common stock + additional paid-in capital + retained earnings .

After calculation , add or subtract an appropriate amount of goodwill and overvalued or undervalued
assets .

• Future benefits its owners may derive through net profits

A conservative rule of thumb is to establish a business worth as five times the firms current annual
profit.
• Letting the market determine a business worth

It involves 3 methods :

A. Base the firm’s worth on the selling price of a similar company

B. Price earnings ratio method

Price earning method = market price of the firms common stock / annual
earnings per share *firms average net income for the past five years

C . Outstanding shares method

Outstanding shares method = no of shares outstanding * market price per share+

premium
Production Strategy Formulation

• The strategy for production is related to the production system ,Operational planning and
control and Research and development

• The strategy adopted can affect the nature of product/service , the markets to be served
and the manner in which the markets are to be served

Production system

• Concerned with the capacity, location, layout, product or service design and such factors

• They are significant as they deal with vital issues affecting the capability of an organization

• The decisions regarding production system are long term in nature

Operations Planning and Control

Operations planning and control aim is for implementation of strategy, to see

how efficiently resources are utilized and in what manner the day to day
operations can be managed in the light of long-term objectives.

The following are the main points of operations planning and controlling:

• It is concerned with aggregate production planning , materials supply,

inventory, cost.

• Quality management and maintenance of plant equipment are done under

this strategies related to operations Planning and control.

• It focuses on making strategies for implementation effective resources

management for utilizing for day to day projects.
THANK YOU