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Financial strategy

  • Procurement of fund or source of funds
  • Disbursement of funds or Management of funds or usage of funds
  • Development of projected financial statements or budgets,
  • Evaluation the worth of a business.

Strategists need to formulate strategies in these areas so that they strategist will be able to implement strategy in the proper ways


Sources of Funds

Sources of Funds Acquiring Capital to Implement Strategies 

Following are the sources of funds:

  • Debt
  • Equity
  • Sale of assets
  • Net profit from operation

Successful strategy implementation often requires additional capital. 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; and relationship with lenders, banks and financial institutions. Strategies related to the sources of funds are important since they determine how financial resources will be made available for the implementation of strategies. Organizations have a range of alternatives regarding the sources of funds. While one company may rely on external borrowings, another may follow a policy of internal financing.

Importance of Projected Financial Statements or Budgets

Projected statement or pro-forma balance sheet or estimated financial statement are one and same thing. Projected financial statement is central for understanding financial need of the company. Every financial institutions require a projected financial statement whenever a business seeks capital.

A pro-forma income statement and balance sheet allows an organization to compute projected financial ratios. Various ratio based on balance sheet and statement of profit. These ratios are used as tools to analyze need of finance. These ratios help to understand even desired sales and cost to be maintained for desire profit.

Financial budgets can be prepared and viewed as the planned allocation of a firm’s resources based on forecasts of the future.

There are several types of financial budgets used by different organizations. Some common types of budgets include cash budgets, operating budgets, sales budgets, profit budgets, factory budgets, capital budgets, expense budgets, divisional budgets, variable budgets, flexible budgets and fixed budgets. When an organization is experiencing financial difficulties, budgets are especially important in guiding strategy implementation.


Utilisation of Funds

The management of funds can play an important role in strategy implementation as it aims at the conservation and optimum utilization of funds.

Basic objectives of financial strategy is to manage fund .Financial strategy focus on

  1. How to use funds
  2. Investing decisions – acquisition of fixed assets
  3. Long term investment
  4. Short term investment
  5. Working capital investment- investment in current assets
  6. Loans and advances
  7. Dividend decision

Systematic financial management helps company to make a planning for finance, accounting, budgeting, management control system, cash, credit and risk management, cost control and reduction, tax planning etc.

Evaluating the Worth of a Business

Evaluating the worth of a business is the most important for strategy implementation. Without proper valuation of worth of business it is not possible to acquire or retrench business.

Various approaches for determining a business’s worth can be grouped into three main approaches:

  1. Net worth approach
  2. Profit approach future profits
  3. Other market determinants

There are three methods under other market determinants

  1. Selling price of a similar company
  2. Price-earnings ratio method
  3. Outstanding shares method
  1. Net Worth Approach

The first approach in evaluating the worth of a business is determining its net worth or stockholders’ equity. Net worth represents the sum of common stock, additional paid-in capital, and retained earnings. After calculating worth of business, add or subtract an appropriate amount for goodwill and overvalued or undervalued assets. This total provides a reasonable estimate of a firm’s monetary value.

  1. Profit Approach (Future Profits)

The second approach to measure the value of a firm is based on belief that the worth of any business is based largely on the future benefits. Owners of the company derive the value of business through net profits they are expected to earn. A conservative thumb rule is five times of the firm’s current annual profit. Means value of the business will be the five time of current profits. For establishing current year profits a five year average profit level could also be used.

  1.  Other Market Determinants – Let the Market Determine the Worth

The third approach is Other Market Determinants – Let the Market Determine the Worth. There are three methods under market determinants

  1. Selling price of similar company
  2. Price-earnings ratio method.
  3. Outstanding shares method.
  1. Selling price of a similar company: A potential problem, however, is that sometimes comparable figures are not easy to locate.
  2. Price-earnings ratio method: To use this method, divide the market price of the firm’s common stock by the annual earnings per share and multiply this number by the firm’s average net income for the past five years.
  3. Outstanding shares method: To use this method, simply multiply the number   of shares outstanding by the market price per share and add a premium. The premium is simply a per-share amount that a person or firm is willing to pay to control (acquire) the other company.

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