STRATEGIC FINANCIAL MANAGEMENT

Chapter. 1: Introduction to Strategy and Financial Management

TY BBA (SEM – 5)
Introduction:
Strategic planning is long-range in scope and has its focus on the organization as a whole. The
concept is based on an objective and comprehensive assessment of the present situation of the
organization and the setting up of targets to be achieved in the context of an intelligent and
knowledgeable anticipation of changes in the environment. The strategic financial planning
involves financial planning financial forecasting provision of finance and formulation of
finance policies which should lead the firm's survival and success. The responsibility of a
Finance manager is providing a basis and information for strategic positioning of the firm in
the industry. The firm's strategic financial planning should able to meet the challenges and
competition and it would lead to firm's failure or success.
Meaning of Strategic Financial Management:
The expression strategic financial management' refers to an approach, which being focused
on long-term financial health, offers a solution to this short- termism. Given that the
maximization of short-run accounting profits is inappropriate, the best starting point is with
the question of what constitutes an appropriate financial objective.

The strategic financial planning should enable the firm to judicious allocation of funds,
capitalization of relative strengths, mitigation of weaknesses, early identification of shifts in
environment, deployed, timely estimation of funds requirement, identification of business and
financial risk etc.

The strategic financial planning is needed to counter the uncertain and imperfect market
conditions and highly competitive business environment. While framing financial strategy,
the shareholders should be considered as one of the constituents of a group of stakeholders i
shareholders, debenture holders, banks, financial institutions, government, managers,
employees, suppliers, customers etc. The strategic planning should concentrate on
multidimensional objectives like profitability, expansion growth, survival, leadership,
business success, positioning of the firm, reaching global
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Chapter. 1: Introduction to Strategy and Financial Management
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markets, brand positioning etc. The financial policy requires the deployment of firm’s
resources for achieving the corporate strategic objectives. The financial policy should align
with the company's strategic planning. It allows the firm in overcoming its weaknesses,
enable to maximize the utilization of its competencies and mould the prospective business
opportunities and threats to the advantage of the firm Therefore, the Finance manager should
take the investment and finance decisions in consonant to the corporate strategy.
In accordance with the classical management theory, the financial function of an enterprise has
five main objectives of forecasting, organizing, planning, coordination and control. Each of
these objectives has its own range of related themes.
 Forecasting
Demand and sales volume/revenues Cash
flows Prices
Inflation rates
Labour union behaviour
Technology changes
Inventory requirements
 Organizing
Financial relation
Liaison with financial institutions and clients
Accounting system
 Planning Investment
planning Manpower
planning
Development process
Marketing strategies
 Coordination
Linking finance function with other areas
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
Linking with national budget and five-year plans - Linking with labour Union policies.
Liaison with media
 Control
Financial charges
Achievement of desired objectives
Overall monitoring of the system
Equilibrium in the capital.
Meaning of Strategy: A course of action including the specification of resources required, to
achieve a specific objective. Financial strategy is the aspect of strategy which falls within the
scope of financial management, which will include decisions on investment, financing and
dividends.
Definition of Strategic Financial Management:
1. “Strategic financial management can be defined as “being the application to strategic
decisions of financial techniques in order to help in achieving the decision-maker's
objectives.”
2. Strategic Financial Management can be defined as “the identification of the possible
strategies capable of maximizing an entity's net present value, the allocation of scarce
capital resources among the competing opportunities and the implementation and
monitoring of the chosen strategy so as to achieve stated objectives”.

 Strategic financial management integrates the financial management function into

business strategy and every other part of an organization’s operation. Applying strategic
financial management knowledge and skills improves an organization's effectiveness
and efficiency. In today's highly competitive business environment, both private and
government organizations are increasingly putting more emphasis in this area to
achieve their objectives.
Strategy + Finance + Management The fundamentals of business
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
 Strategic Financial Management assesses the complex decision-making necessary at the
higher levels of management, including evaluating and setting up reward systems for
subordinates and other personnel, evaluating expansion opportunities, mergers and
acquisitions, spin-offs and sales of existing assets, and making decisions on complex
investment opportunities and managing risk. It helps to develop the financial know-
how, necessary for senior management to skilfully guide any organization toward
success.

3. Strategic financial management is defined as the application of financial techniques to

strategic decisions in order to help achieve the decision- makers objectives. Strategic
decisions are those which affect the whole organization, take into account factors in
the external environment and refer to the longer-term (five years or more) direction of
an organization. Strategic financial management requires the existence of objectives
and acknowledges that financial techniques are an integral part of policy making and
control:

Significance/ Advantages of Strategic Financial Management:

Strategic financial management is important because its study enables the finance manager
to:
1. Understand the limitations of traditional accounting models in an increasingly
dynamic and fast-changing world.
2. Contribute more effectively to corporate strategy by taking a more proactive and
forward-looking approach.
3. React to conditions of rapid change through enhanced awareness, anticipation and
adaptation.
4. Understand and use alternative expressions of profit that start with a recognition of
the impact on cashflow of the various stakeholders in a company.
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
5. Understand the different relationships between profits, expansion and cashflow model
in the traditional accounting and financial management models.

Strategic Planning:
Meaning of Strategic Planning:
Strategy is defined as "where the organization wants to go to fulfil its purpose and achieve it
ton provides the framework for guiding choices which determine the organisations nation and
direction and these choices relate to the organisation's products or services, market, key
capabilities, growth, return of capital and allocation of resources.
Definition of Strategic Planning:
1. According to Scott, "long range business planning is a systematic approach to
decision-making about issues, which are fundamental and of crucial importance to its
continuing long-term effectiveness".
2. According to Alfred Chandler, strategic planning is "concerned with the
determination of the basic long-term goals and objectives of an enterprise and the
adoption of courses of action and allocation resources necessary for carrying out these
goals".

A strategy is, therefore, a declaration of intent. It defines what the organization wants to become
in the longer sperm. The overall aim of strategy at corporate level will be to match or fit the
organization to its environment in the most advantageous way possible Strategies form the
basis for strategic management and the formulation of strategic plans Strategic planning is a
systematic, analytical approach which reviews the business as a whole in relation to its
environment with the object of the following:
1. Developing an integrated, coordinated and consistent view of the route the company
wishes to follow, and
2. Facilitating the adaptation of the organization to environmental change.
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
The aim of strategic planning is to create a viable link between the organization's resources
and its environmental opportunities. Whatever the industry, there are five competitive forces
central to formulating and implementing business strategy.
a. The threat of new entrants.
b. The threat of substitute products or services. ANTZ
c. The rivalry amongst existing organizations within the industry
d. The bargaining power of suppliers.
e. The bargaining power of consumers.

The relative strength of each competitive force tends to be a function of industry structure
Le., its underlying economic and technological characteristics. This can change overtime,
with the result that the relative strength of competitive forces will also change, hence the
industry's profitability. The basic way an enterprise might seek to achieve above average
returns in the long-term via sustainable competitive advantage.

Process of Strategic Planning Process:

A systematic approach to formalizing strategic plans consists of the following steps:
1. Define the organization's mission and its overall purpose.
2. Set objectives and definitions of what the organization must achieve to fulfil its
mission
3. Conduct environmental scans by internal appraisals of the strengths and weaknesses
of the organization and external appraisals of the opportunities and threats which face
it (SWOT analysis).
4. Analyse existing strategies and determine their relevance in the light of the
environmental scan. This may include gap analysis to establish the extent to which
environmental factors might lead to gaps between what is being achieved and what
could be achieved if changes in existing strategies were made. In a corporation with a
number of
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
distinct businesses, an analysis of this portfolio of businesses can take place to establish
strategies for the future of each business.

Figure: STRATEGIC PLANNING PROCESS

Define Mission

Internal External
appraisal appraisal(Opportuniti
Set Objectives
(Strengths and es and threats)
weaknesses)
Analyze
existing
strategies
Define Strategic
Issues

Develop new
or revised
strategies
Determine
critical success
factors
Prepare Plans

Implement Plans Monitor

5. Define strategic issues in the light of the environmental scan, the gap analysis and,
where appropriate, the portfolio analysis. This may include such questions as the
following:
a. How are we going to maintain growth in a declining market for our most
profitable product?
b. In the face of aggressive competition, how are we going to maintain our
competitive advantage and market leadership?
c. What action are we going to take as a result of the portfolio analysis of our
strategic business units?
d. To what extent do we need to diversify into new products and markets and in
which directions should we go?
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
e. What proportion of our resources should be allocated to research and
development?
f. What are we going to do about our aging machine tools?
g. What can we do about our overheads?
h. How are we going to finance our projected growth?
i. How are we going to ensure that we have the skilled workforce we need in the
future?
6. Develop new or revised strategies and amend objectives in the light of the analysis
of strategic issues.
7. Decide on the critical success factors related to the achievement of objectives and
the implementation of strategy
8. Prepare operational, resource and project plans designed to achieve the strategies
and meet the critical success factor criteria.
9. Implement the plans.
10. Monitor results against the plans and feedback information which can be used to
modify strategies and plans.

Financial Planning:
Meaning of Financial Planning:
Planning includes attempting to make optimal decisions, projecting the consequences of these
decisions for the firm in the form of a financial plan and then comparing future performance
against that plan.
Definition of Financial Planning:
1. According to William King, "Planning is the process of thinking through and
making explicit the strategy, actions, and relationships necessary to accomplish an
overall objective".
2. "The financial plan of a corporation has two-fold aspects; it refers not only to the
capital structure of the corporation but also to the financial policies which the
corporation has adopted or intends to adopt".

In a well-organized business, each Function department should arrange its activities to

maxima its contributions towards the attainment of corporate
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
goals. The finance function should focus its attention in financial aspects of management des
financial management is primarily concerned with the investment and financing decisions.
The Financial management of a concern should fit into its strategic planning financial
objectives of the firm should enable the firm to achieve its overall objectives. The investment
decisions create the cashflow, which is central to the success of the firm, the finance
decisions influence the cost of capital. The investment decisions are associated with business
risk where as finance decisions are associated with financial risk The financial decisions
should enable the risk return trade off, to maximize the value of firm.

Financial Planning Process:

The financial planning process involves the following steps:
1. Clearly defined Mission and Goal: At the outset, the top management should realize
and recognize the importance of setting the organizational mission goal and objectives
which should be clearly defined and communicated.
2. Determination of Financial Objectives: In developing the financial objectives, a
firm must consider purpose, mission, goal and overall objectives of the firm. The
financial objectives can again be transformed into strategic planning. The financial
objectives can be classified into
(a) Long Term Objectives, and (b) Short Term Objectives. The long-term financial
objectives may relate to earning in excess over the targeted return on capital
employed, increase in EPS and market value of share, increase in market share of its
product, achieve targeted growth rate in sales, maximization of value for shareholders
etc. The short-term financial objectives relate to profitability, liquidity, working
capital management, current ratio, operational efficiency etc.
3. Formulation of Financial Policies: The next step in financial planning and decision-
making process a both long-term and short-term financial
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
objectives. For example, the company can frame is financial policies like:
a. Debt-equity ratio and current ratio of the firm may be fixed at 3:2 and 2: I
respectively.
b. A minimum cash balance has to be maintained at Rs. 1,00,000 always.
c. The minimum and maximum levels are to be fixed for all items of raw material
and consumable.
d. The equity to be raised only by issue of equity shares.
e. Profitability centre concept to be implemented for all divisions in the
organization.
f. The inter-divisional transfers to be priced at pre-determined transfer prices etc.
4. Designing Financial Procedures: The financial procedures helps the Finance
manager in day-to-day functioning, by following the pre- determined procedures. The
financial decisions are implemented to achieve the organizational goals and financial
objectives. The financial procedures outline the cashflow control system, setting up of
standards of performance, continuous evaluation process, capital budgeting
procedures, capital expenditure authorization procedures, financial forecasting
techniques to be used, preparation standard set of ratios, using of budgetary control
system etc.
5. Search for Opportunities: This involves a continuous search for opportunities which
are compatible with the firm's objectives. The earlier opportunity is identified the
greater should be the potential returns before competitors and imitators react
6. Identifying Possible Course of Action: This requires the development of business
strategies from which individual decisions emanate. The available courses of action
should be identified keeping in view the marketing, financial and legal restrictions or
other forces not within the control of decision maker. For example, the additional
funds
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
requirement for expansion of the plant can be met by raising of finances from various
sources.
7. Screening of Alternatives: Each course of action is subjected to preliminary
screening process in order to assess its feasibility considering the resources required
expected returns and risks involved. Readily available information must be used to
ascertain whether the course of action is compatible with existing business and
corporate objectives and likely returns can compensate for the risks involved.
8. Assembling of Information: The Finance manager must be able to recognize the
information needs and sources of information relevant to the decision. The cost-
benefit trade-off must be kept in view in information gathering. To obtain more
reliable information, the costs may be heavy in data gathering. The relevant and
reliable information ensures the correct decision making and confidence in the
decision outcome.
9. Evaluation of Alternatives and Reaching a Decision: This step will involve the
evaluation of different alternatives and their possible outcomes. This involves
comparing the options by using the relevant data in such a way as to identify the best
possible course of action that can enable in achieving the corporate objectives in the
light of prevailing circumstances.
10. Implementation, Monitoring and Control: After the course of decision is selected,
attempts to be made to implement the decision to achieve the desired results. The
progress of action should be continuously monitored by comparing the actual results
with the desired results. The progress should be monitored with feedback reports,
control reports, post audits, performance audits, progress reports etc. Any deviations
from planned course of action should be rectified by making supplementary decisions.
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
Financial Forecasting:
Meaning of Forecast:
A forecast is a prediction of what is going to happen at a result of a given set of
circumstances dictionary meaning of “forecast” prediction, provision against future,
calculation of p events, foresight, prevision. In business sense it is defined as ‘the calculation
of probable events. When estimates of future conditions are made on a systematic basis the
process is referred to as forecasting and the figure or statement obtained is known as forecast.
Forecast is a prediction of what is going to happen as a result of a given set of circumstances.
The growing competition, rapid change in circumstances and the trend towards automation et
demand that decisions in business are not to be based purely on guess work, rather on careful
analysis of data concerning the future course of events.

Forecasting aims at reducing the areas of uncertainty that surround management decision
forecasting, both macro and micro-economic factors like price levels, inflationary trends,
monsoons international industry trends, governmental changes, cost of finance, competition,
company forecast is a mere assessment of future events. A forecast includes projection of
variables both controllable and noncontrollable that are used in development of budgets. A
budget is a plan. whereas a forecast is a prediction of future events and conditions

Forecasts are needed in order to prepare budgets. In forecasting events that will the pat future,
a forecaster must rely on information concerning events that have occurred in the pat in order
to prepare a forecast, the forecaster must analyse past data and must base the forecast on the
result of the analysis. The object of business forecasting is not only to determine the definite
statistical data, which will enable the firm to take advantage of future conditions to a greater
extent than it could do without them. There always must be some range of error allowed for in
the forecast. While forecasting one
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
should note that it is impossible to forecast the future precisely. Forecasting is an initial step
in financial planning process.
It starts with predicting the future events that will have significant impact on the firm's
business and its success or failure. It is an estimation of future events in advance and
forecasts the future funds requirements and its utilization. The forecasts will be converted
into plans for action and presentation of plans in the form of financial statements and put
them for action. In other words, forecasts will lead to setting up of goals of firm and
translating the goals into operational plans for action. The finance function involves the both
in setting up of goals and to see that goals are achieved through financial planning decision
making and control.
Meaning of Financial Forecasting:
Financial forecasting provides the basic information on which systematic planning is based on
Sometimes the financial forecasting is used as a control device to set the way for firm's future
course of action. For strategic planning, financial forecasting is a prerequisite. In financial
forecasting the future estimates are made through preparation of statements like projected
income statement, projected balance sheet, projected cashflow and funds flow statements,
cash budget, preparation of projected financial statements with the help of ratios etc. Financial
forecasting helps making decisions like capital investment, annual production level,
operational efficiency required, requirement of working capital, assessment of cashflow,
raising of long-term funds, estimation of funds requirement of business, estimated growth in
sales etc.

Definition of Financial Forecasting:

1. “Financial forecasting is that process in which the future financial condition of the
firm is shown on the basis of past accounts, funds flow statements, financial ratios and
economic conditions of the firm and industry.”
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
 The projection of future plan of management in terms of finance is financial
forecasting. Financial forecasting shows financial planning activities of a firm for
specific period of time. For example, the principal driver of the forecasting process is
generally the sales forecast. Since most Balance Sheet and Income Statement accounts
are related to sales, the forecasting process can help the firm assess the increase in
current and fixed assets which will be needed to support the forecasted sales level.
Similarly, the external financing which will be needed to pay for the forecasted
increase in assets can be determined.
2. Financial forecasting describes the process by which firms think about and prepare for
the future. The forecasting process provides the means for a firm to express its goals
and priorities, and to ensure that they are Internally consistent. It also assists the firm
in identifying the asset requirements and needs for external financing.

Benefits of Financial Forecasting:

The financial forecasts help the Finance manager in the following ways:
a. It provides basic and necessary information for setting up of objectives of firm and for
preparation of its financial plans.
b. It acts as a control device for firm's financial discipline.
c. It provides necessary information for decision making of all functions in an
organization.
d. It monitors the optimum utilization of firm's resources.
e. It projects the funds requirement and utilization of funds in advance,
f. It alarms the management when the events of the concern going out of control.
g. It enables the preparation and updating of financial plans according to the changes
economic environment and business situations.
h. It provides the information needed for expansion plans of business and future growth
needs of the organization.
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
Techniques of Financial Forecasting:
Some of the important techniques that are employed in financial forecasting is given below:
1. Days Sales Method: It is a traditional technique used to forecast the sales by
calculating the number of days sales and establishing its relation with the balance
sheet items to arrive at the forecasted balance sheet. This technique is useful for
forecasting funds requirement of a firm.
2. Percentage of Sales Method: It is another commonly used method in estimating
financial requirements of the firm basing on forecast of sales Any change in sales is
likely to have impact on various individual items of assets and liabilities of the balance
sheet of a firm. This will help in forecasting financial needs of the firm by
establishing its relation with the changes in levels of activity, Proper understanding of
the relationship of sales level changes with the balance sheet items is necessary before
any financial forecast is made
3. Simple Linear Regression Method: Simple linear regression is concerned with
bivariate distributions that is distributions of two variables. Simple regression analysis
provides estimates of values of the estimation procedure is the regression line. For
financial forecasting purpose, sales is taken as an independent variable and then
values of each item of asset (dependent on sales) are forecasted. Under this method,
every time only one item of asset level can be determined. Then all forecasted figures
are then put into the projected balance sheet to know the financial needs of the firm in
future.
4. Multiple Regression Method: Multiple regression analysis is further application and
extension of the simple regression method for multiple variables. This method is
applied when behaviour of variable is dependent on more than one factor. In this
method of financial forecasting, it is assumed that sales are a function of several
variables. But in case of simple regression method only one variable can be
considered each time, with the increase in the number of independent
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Chapter. 1: Introduction to Strategy and Financial Management
TY BBA (SEM – 5)
variables Computations may be easily made with the help of computer. The method
used forecasting depend on the requirements and accuracy needed in forecasting
5. Projected Funds Flow Statement: The funds flow statement presents the details of
financial resources that are available during the accounting period and the ways in
which those resources are applied in the business. It is a statement of sources and
application of funds analysing the present the data relating to procurement of further
funds from various sources and their Possible application in fixed assets or repayment
of debts or increase in current assets or decrease in current liabilities etc. The funds
flow statement establish relationship between sources in application of funds and its
impact on working capital. It is a powerful tool extensively used in financial
forecasting.
6. Projected Cashflow Statement: It is a detailed projected statement of income
realized in cash and focus on the cash inflow and outflow of various items represented
in the income statement and balance sheet. The projected cashflow statement shows
the cashflows arising from the operating activities, investing activities and financing
activities. A projected cashflow statement is used in forecasting the financial
requirements of the firm.
7. Projected Income Statement and Balance Sheet: The projected income statement is
prepared on the basis of forecast of sales and anticipated expenses for the period
under estimation. The projected funds and acquisition or disposal of fixed assets and
estimation working capital items with reference to the estimated sales