Pondicherry University

Programme: MBA
Course: Strategic Financial Management

Faculty: POORNIMA SREERAGHAVAN

Session 1 - August 14, 2018

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Why SFM?
• Corporate planning
• Existence and running of a business enterprise Corporate
planning
• Formulation and attainment of objectives

• Concerns Strategic
• Huge capital expenditure planning
Finance
• Locked capital
• Operations related commitments
Hence
• Not-for-profit concerns? the need

Decision making under

uncertainty and risk

2
Understanding SFM
Strategy Finance

Strategic
Concept of Financial Financial
planning Capitalization
strategy planning modeling
process

Strategic Financial Management

Strategic financial management refers to specific planning of the usage and
management of a company's financial resources to attain its objectives as a
business concern and return maximum value to shareholders

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Strategy
• Origin: From Greek “strategia”
• Vector-like a

• Applicability Requirements

Area of strategy Systematic approach

Macro / micro level Rigorous analysis

Core and sub issue Informed judgements during decision making

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Strategic Planning Process
Inputs

Organization
profile Environment scan
Managerial External * Determining the strategic alternatives
orientation
* Evaluation of strategic alternatives
Purpose and Internal * Choice of best alternative
Objectives

• [ Planning → Implementation → Control ] with Feedback

• Consistency
• Contingency planning

5
Strategy vs. Policies
Strategy
• Decision: How should resources be
best deployed and utilized
• Aim is to maximize achieving firm’s
objectives
• Focus on decision on plan of action
Policy
• Course of action chosen for
fulfilment of set objective
• Guide that governs and controls
managerial actions
• Focus on decision regarding
executing the plan of action

Similarities

Basis for Give direction Have an overall

Means towards Provide
operational for meeting impact on plan
the end framework
plans objectives of action

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Strategy vs. Tactics
Strategy
• Top management level
• Devising the plan of action and
fixing parameters
• Continuous process; Decision
making is both continuous and
intermittent
• Long, medium and short term;
flexible time horizon
• Information required
• May be subject to bias
Tactics
• Lower management levels
• Derived from the plan of action
devised in the strategic plan and
works within the parameters set.
• Continuous and periodic
• Short term; Fixed time horizon;
Periodic
• Information is prerequisite
• Not susceptible to bias as it
operates on fixed agenda
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Capitalization - 1
• Quantitative assessment of a firm’s capital structure
• Capitalization = Share capital + free reserves + debentures + long-term loans

• Cost theory:
• Capitalization = Cost of acquisition + Cost of establishing + Cost of working
of fixed assets the company capital req.
• Problems not revealed (1) Earnings fluctuation (2) Idle/obsolete stocks

• Earnings theory: Worth of firm determined by earnings capacity

• Capitalization = Expected earnings / Rate of return
• Problem: Difficult to estimate earnings of new organizations

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Capitalization - 2
• Impact of capitalization on the business enterprise:
Liquidity Adaptability Sustainability

• Aim: To have a fairly capitalized situation – neither over nor under capitalization
Over capitalization: Under capitalization:
• More capital than required • Undervaluing assets
• Earnings inadequate to make its securities sell • High rate of return on
at par value investments

• Market Capitalization
• Current Stock Price x Shares Outstanding

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Over capitalization
E+D A
• Firm has more debt + equity Over issue of capital Inadequate depreciation
than its assets are worth C Too much debt Excess payment for
a acquiring goodwill
• Implications: u Higher rate of High taxation rate
• More interest and dividend s interest  Less earnings
payments e
Liberal dividend Under estimation of
• Profits strained s policy capitalization rate
• May affect sustainability High expenses and inflation

R
• Current liabilities < Current assets Equity shares
e Reduce value/number
• Funds utilization inadequate m Preference
e shares Redeem preference shares
d Long term
debt Reduce debt/interest
y

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Under capitalization
E+D A
• Firm has excess of true assets Desire of control and Under estimation of
value over stocks + bonds C trading on equity. capital requirements
outstanding a Conservative Under estimation of
• Implications: u dividend policy initial and future
• Cash flow & access to credit s earnings
hampered e Under estimation of High efficiency
• Public issue of stock not easy s funds requirement
• May lead to bankruptcy High earnings  High
taxation
R Fresh issue of shares
• Current liabilities > Current assets e
Issue bonus shares
• Working capital problems m
Increase par value of shares
e
d Share split  Reducing dividend/share
y Dividend payable in stock

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Financial planning
Why? Utilize resources better
• Assessment of fund requirement
Eliminate waste • From where? How much? When?
Manage complexities

• Financial planning process - Walker and Baughn

Forecast
Set objectives requirements

Formulate Formulate
policies procedures

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Financial planning - Characteristics
Basic requirements Specific requirements
• Simplicity • Contingency planning
• Flexibility • Recognition of exceptions
• Foresight • Conservative in estimation
• Practicality • Objective view towards profitability,
• Objectivity measure of costs and risks
• Uniformity • Factoring requirements to maintain
solvency
• Amenable to
modifications/comparisons • Planning the schedule

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Financial modeling
• Theoretical construct of a project/process/transaction Forecasting
• Deals with Identifying key drivers and a set of logical and
quantitative relationships with them
Sensitivity

• Types based on objectives and goals:

• Transaction – acquisitions/divestments/basic accounting Scenarios
• Investment – land/buildings/heavy equipment/other assets
• Corporate finance – capital structure/corporate structure
• Project financing – feasibility/loan repayment/scheduling Simulation
• Joint venture – ROI at various periods of time
• Bids and tenders – cost analysis/pricing
Verification
• Stocks and bonds – technical analysis

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Modeling: Issues and limitations
• Models may not represent actual situations comprehensively
• All problems cannot be represented mathematically
• Inaccurate assumptions → Inaccurate assessment → inaccurate conclusions

• Cost/time/resources
• Whether we should or not to invest in modeling
• Value addition?

• Bias → Types and Extent

• Technical errors
• Validity w.r.t. Inputs and Time, Consistency

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 Financial modeling process

•Model suitability •Template •Test method/ •Evaluation

documentation
Testing
Planning

Designing & building

Model execution &

•Clarity •Demarcate procedure •Feedback
•Resources inputs, •Frequency •Documentation
•Specifications calculation & •Timing
output areas •Sensitivity
•Knowledge
•Add comments/ •Testing levels –
headings unit testing /
•Use colours integration
•Cross-verification testing / systems
•Red flags testing / final
testing
• &  testing

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Assignment
• What are the positives and negatives of strategic planning?
• Write a brief note on the major areas which are strategized in a business
enterprise.
• Given the context of introduction of a new product in an existing market by a
company, explain the marketing strategy in a line or two. Also, differentiate
between policy decisions and tactical decisions by giving two examples each.
• Write short notes on over-trading and under-trading.
• Explain environmental scanning in the context of the strategic planning process
• Differentiate between financial planning and financial modeling.

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