Module 1 - Strategic Evaluation Flashcards
What is the primary objective of a for-profit organisation? How can this be increased?
The primary objective of a for-profit organisation is to maximise the wealth of the shareholders.
Shareholder wealth can be increased by the payment of dividends.
Shareholder wealth can be increased by an increase in share price, creating a capital gain.
How can increases in shareholder wealth be achieved?
The support of and cooperation of the wider stakeholder group.
Motivated employees
Customers who are willing to buy from the business
Suppliers who are willing to supply to the business
Dividends and capital growth are the result of value-adding decisions and their execution.
How can business objectives be expressed in financial terms?
Dividends and capital growth are the result of value adding decisons and their execution.
These can often be expressed in financial terms such as: Return on capital employed Return on equity Gearing ratios Liquidity Ratios
What are the objectives of not-for-profit organisations?
Not-for-profit organisations exist to create a high volume of high-quality product
or service.
They still have financial objectives.
They need to create value for money (VFM)
What is Value for Money (VFM)?
A VFM framework categorises objectives to create a complete and meaningful list of targets that will provide value for money.
The VFM framework consists of three aspects: economy, efficiency and effectiveness.
Economy - the cost of inputs
Efficiency - the ratio of inputs to outputs
Effectiveness - the quality of outputs
What is the rational planning model?
The rational planning model is a common strategic planning framework.
It breaks the thought process of planning into 3 stages:
- Where are we now?
- Where do we want to be?
- How shall we bridge the gap between where
we are and where we want to be?
What is SWOT analysis?
An answer to the “where are we now?” question in the rational planning model?
S - strengths, give an organisation an advantage, internal.
W - weaknesses, deficiencies of the organisation, internal.
O - opportunities, environmental factors that a business could exploit to its advantage.
T - threats, environmental factors that could drag a business backwards.
What is the SAF framework?
An answer to the “where do we want to be?” question in the rational planning framework. It has 3 parts: suitability, acceptability and feasibility.
Suitable – A strategic fit that furthers the organisation’s goals.
Acceptable – To all stakeholders, often with particular
emphasis on shareholders and their desire for an appropriate
balance of risk and return.
Feasible – Possible. For example having sufficient time, skills
and money
What is Mendelow’s Stakeholder Map?
An answer to the “how shall we get there?” question of the rational planning model.
Mendelow’s stakeholder map seeks to categorise and prioritise stakeholders according to the power they wield (high or low) and the interest they have in the decision (high or low). Key players – those with high power and interest – should be given priority over others.
What is Financial Strategy?
Financial strategy is a functional strategy that should assist the organisation in meeting its overall objectives.
- Long term: maximising shareholder wealth
- Short term: not running out of cash as long-term strategies are executed
What are the three key decisions to be made in long-term finance strategy?
The financing decision - where should we get our money from?
The investment decision - what should we do with the money once we have it?
The dividend decision - should we provide a return to shareholders or reinvest our earnings?
These decisions are bound together by the cash flow of the business.
These decisions are underpinned by the balance of risk and return.
Without finance, investment cannot be undertaken. Without returns from investments, dividends cannot be paid. The three key decisions are inextricably related.
What is hedging?
Hedging is a strategy deliberately undertaken to reduce or eliminate risk.
What are the key considerations of short-term financial strategy?
Liquidity and cash-flow management. If these are not managed effectively then the business may become insolvent before its long term plans can be realised.
There needs to be sufficient (but not excessive) cash and liquid assets to pay the immediate liabilities of the organisation and to service the providers of finance.
