Chapter One : Financial policy and corporate strategy Flashcards
What are the Advanced role of CFO?
A. Risk management
B. Supply chain
C. Mergers, acquisition and corporate restructuring
D. Environmental, social and governance financing
————- is the spring board for wealth creation
Capital investment
Fundamental essential elements of business?
l. Strategy _ clear, realistic
II.financial _ resources, controls and systems
Ill. Management - right → team and process to make it happen
Fundamentals of business
Strategy + finance + management
Meaning of strategic financial management
It combines the backward- looking , report focused discipline of financial accounting with more - dynamic, forward looking subject of financial management
Functions of SFM
CSDEA
1. Continual Search for best investment opportunities
2. Selection of the best profitable opportunities
3. Determination of optimal mix of funds for the opportunities
4. Establishment of systems for Internal controls
5. Analysis of results for future decision making
What are the strategy at different hierarchy levels
Corporate Level, Business Unit Level and Functional or Departmental Level
Scope of Financial Strategy
- Financing Decisions
- Investment Decisions
- Dividend Decisions
- Portfolio Decisions
What basic questions corporate level strategy should answer
Suitability, Feasibility and Acceptability
Business Unit Level Strategy
Profit Centre - planned independently
strategic issue - about practical coordination of operating units and developing and sustaining a competitive advantage
Functional Level Strategy
Level of operating divisions and departments
Strategic Issues - related to functional business processes and value chain.
What is Financial Planning ?
It is the backbone of Business planning and corporate planning
Helps in defining the feasible area of operation for all types of activities and thereby defines the overall planning framework.
It is a systematic approach whereby the financial planner helps the customer to maximise his existing financial resources by utilising financial tools to achieve his financial goals
Components of Financial Planning
FR + FT + FG
Important dimensions of a strategic plan
- Sources of finance
- Capital Structure
Sources of short term finances
OD, CC, Bill discounting, bank loan and trade credit
Public deposit for a fixed time period - major source of short and medium term finance
Debt ratio norms
Public sector - 1:1
private sector - 2:1
For capital Intensive industries the proportion of debt to equity
is much higher
Investment proposals mooted by different business units - divided into
- addition of new product
- increase the level of existing products thru either an increase in capacity in the existing plant or setting up of another plant for meeting additional capacity requirement
- cost reduction and effective utilisation of resources
Dividend Policy decision deals
with the extent of earnings to be distributed as dividend and the extent of earnings to be retained for future expansion scheme of the firm.
What makes an organisation financially sustainable
- have more than one source of income
- have more than one way of generating income
- do strategic, action and financial planning regularly
- have adequate financial systems
- have a good public image
- be Clear about its values
- have financial autonomy
Sustainable Growth Rate
Concept by Robert C Higgins
it is a measure of how Much a firm can grow without borrowing more money.
SGR =
ROE x (1-Dividend Payment Ratio)
Sustainable growth models assume that business wants to
- maintain a target capital structure without issuing new equity
- maintain a target dividend payment ratio
- increase sales as rapidly as market conditions allow
Twin cornerstones in achieving sustainable growth
Growth strategy and growth capability
Very weak of sustainability requires that
overall stock of capital assets should remain constant
Weak version of sustainability refers
To preservation of critical resources to ensure support for all over a long time horizon
Strong concept of sustainability is
concerned with the preservation of resources under the primacy of ecosystem functioning
What makes an organisation sustainable?
- Have a clear strategic direction
- be able to scan its environment or context to identify opportunities for its work
- be able to attract, manage and retain competent staff
- have an adequate administrative and financial infrastructure
- be able to demonstrate its effectiveness and impact in order to leverage further resources
- get community support for and involvement in its work
Two Sources of Growth
increased volume and inflation
Mitsubishi Corporation (MC) - New strategic Direction
- abolished midterm management plan
- NSD - consists of basic concepts on management policy together with business and market strategies
