Unit 1:

Strategic Financial Management

INTRODUCTION

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Contents

● Introduction to Strategic Financial Management,

● Meaning,
● Functions of Strategic Financial Management,
● Constituents of Strategic Financial Management,
● Financial planning,
● Strategic Capital allocation and
● Strategies at different hierarchy levels-
○ Corporate strategy,
○ Business Unit Strategy,
○ Functional level Strategy.

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INTRODUCTION
● Financial management is concerned with the procurement of required
funds from the most efficient sources and employing them in an optimum
way such that the business organization’s objectives/goals are achieved.

● The main objectives of business firms/Financial management are:

○ Profit maximization.
○ Wealth Maximization.

● There are arguments in favour and against (criticisms) each of these

financial management objectives. However, they have been discussed in
the financial Management basic units.

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Profit Maximization

● Primary objective of any economic activity.

● To cover and meet costs and expenses (Fixed, variable etc.)
● To provide funds for the growth/development and expansion of
business activities.
● Serves as a protection against economic uncertainties.
● Accumulated profits enable businesses to face several risks.
● To fulfil the social goals of the business firms and contribute
socio-economic welfare.

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Wealth Maximization
●

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● Given the number of shares that a shareholder holds in a company, the

higher the Current Market Price (CMP) per share, the greater the
shareholder’s wealth. Therefore, the company should always focus
more on maximizing the CMP of its shares.

● However, wealth maximization being the most appropriate objective of

a business firm, there is always a possibility for a conflict of interest
between the shareholder’s interests and the managerial interests.

● This problem arises mostly when the managers act in such a way that
maximises managerial utility but not the wealth of the shareholders or
the firm.

● Another problem that the managers will face is the allocation of funds
due to the limited capital availability. Whether the allocation of funds
should be done for company’s growth and sustainability or to
increase investors returns.
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SO, WHEN DOES THE PROBLEM

ARISE???

WHEN THE MANAGERS START

ACTING ACCORDING TO THEIR
OWN BEST INTERESTS, WHICH ARE
NOT ALWAYS THE SAME AS THE
INTERESTS OF SHAREHOLDERS.
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Problem- How to trade off among competing

interests???

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INTEREST GROUPS OF A BUSINESS FIRM

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● A company cannot create value unless it meets customer expectations, provides

satisfactory employment conditions, cultivates mutually viable relationship with
its vendors and treats the community fairly.

● These interest groups always try their best to grab the maximum possible returns
from the business that they try to sustain together.

● Such games are played with utmost carefulness, with fewer controversies and
with a sustainable urge for long-term growth so that all the stakeholders continue
to benefit in more or less the same proportions.

● BUT THE BIG QUESTION IS, WILL THERE

ALWAYS BE A WIN-WIN SITUATION ???

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HOW DO BUSINESSES BALANCE BOTH THE

SIDES???

WHAT DO THEY NEED TO HAVE

???
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BUSINESSES NEED TO HAVE THE FOLLOWING

THREE FUNDAMENTAL ESSENTIAL
ELEMENTS:
● A clear and realistic strategy,

● The Financial resources, controls and systems to see it through and

● The right management team and processes to make it happen.

● Therefore, it can be summarized as:

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Strategy

● Strategy is a general direction in which a firm plans to move to attain

its goal.

● Strategy is defined as the long-term direction and scope of an

organization to achieve competitive advantage through the
configuration of resources within a changing environment for the
fulfillment of stakeholders’ aspirations and expectations.

● Michael Porter “Strategy is a broad formula for how a business is

going to compete”.

● Strategy involves matching firms’ strengths with the opportunities

present in the external environment

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How are Strategies formulated by the companies???
Based on the strategy formulation concept advanced by Kenneth R.
Andrews

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Strategic Financial Management

● Strategic financial management is defined as the application of
financial management techniques to strategic decisions in order to
help achieve the decision-maker’s objectives.

● In simple terms, Strategic financial management is managing the

finances of a business to meet its strategic goals.

● SFM is linked with accounting, but it has a wider scope than

accounting.

● SFM combines financial accounting (backward-looking) + Financial

management (forward-looking).

● it also encompasses the implementation and monitoring of the chosen

strategy so as to achieve the agreed objectives.
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Functions of Strategic Financial Management

● Strategic Financial Planning

● Continuous search for best investment opportunities

● Selection of best profitable opportunities

● Determination of optimal mix of funds for the opportunities

● Establishment of systems for internal control

● Analysis of results for future decision

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Constituents of Strategic Financial Management

The key decisions falling within the scope of financial strategy

● Investing Decisions

● Financing Decisions

● Dividend Decisions

● Portfolio Decisions

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Investing Decisions
● Determination of the total amount of assets to be held in the firm. A firm
should pick where to invest in order to gain the highest conceivable returns.

● This decision relates to the careful selection of assets in which funds will be
invested by the firms. The firm puts its funds in procuring fixed assets and
current assets.

● Investing decisions can be classified as long-term and short-term

investment decisions.

● long-term decisions, also known as capital budgeting decisions, may be

defined as the firm's decision to invest its funds in long-term assets/ capital
assets in anticipation of an expected flow of benefits over a number of years.

● Short-term decisions, also known as working capital management, may be

defined as the firm's decision to invest its funds in current assets such as cash
and equivalents, receivablesExcellence
and inventories.
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Financing Decisions

● After the investment decisions, the firm has to decide the best means
of financing these commitments.

● It is also concerned with the best overall mix of financing for the firm.

● Selecting the sources of funds which will make the optimum capital
structure.

● Debt capital and Equity capital.

● The finance manager has to strike a balance between various sources

so that the overall profitability of the firm improves.

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Dividend Decisions

● This decision relates to making a decision whether all the profits of

the firm are to be distributed among the shareholders of the firm or to
retain all the profits in the business.

● It is also concerned with the quantum of profits i.e., How much to

distribute as dividends and how much to transfer to the reserves and
surplus of the firm.

● More dividend > CMP of the share increases > Shareholders wealth
maximised.

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Portfolio Decisions
● In a multi-business firm, allocation of resources across various
businesses is a key strategic decision.

● Portfolio decision tools have been developed to guide the process of

strategic planning and resource allocation.

● There are several portfolio planning tools such as the BCG Matrix,
the GE’s spotlight matrix and the McKinsey matrix.

● Portfolio decisions also facilitates decision makers in making

informed multiple selections from a set of alternatives with the help of
mathematical models that account for relevant constraints, preferences
and uncertainties.

● The decisions involve the evaluation of investments based on their

contribution to the aggregate performance of the entire corporation.
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Financial Planning
● Financial planning is the process of determining how a
business manages itself financially to ensure it achieves its
goals and objectives for both the short-term and long-term.

● In simple terms, financial planning is the process of meeting the

firm’s goals through proper management of finances.

● It is a systematic approach whereby the financial planner helps

the organizations to maximize its existing financial resources by
utilizing financial tools to achieve its financial goals.

● Sound planning considers every aspect/activities of a business'

operations and the impact each aspect has on the overall
financial position of the company.

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3 major components of financial planning

● Financial Resources (FR)

● Financial Tools (FT)

● Financial Goals (FG)

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Financial Planning answers three questions…

Where you financially are

now???

What do you need in

the future???

What you must do to

reach your goals???

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Outcomes of Financial Planning

Financial
Financial Decision-Maki Financial Performance
Objectives ng Measures Evaluation

● Financial objectives are to be decided at the very outset, consistent

with the corporate mission and corporate objectives.

● Financial decision-making helps to analyse the corporate problems

and decide the course of action to be taken by it.

● Financial measures like ratio analysis, cash-flow statement analysis

are used to evaluate the performance of the companies.

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Strategies at different hierarchy levels (3 Levels)

● Corporate Strategy

● Business Unit Strategy

● Functional Level Strategy

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(i) Corporate Strategy

● Selection of businesses in which a company should compete with the

development and coordination of that of portfolio of businesses.

● At the corporate level strategy, management must consider which

businesses they should be in in the first place.

● It is about selecting an optimal set of businesses and determining how

they should be integrated into a corporate whole: a portfolio.

● This level of strategy is only necessary when the company operates in

two or more business areas through different business units with
different business-level strategies that need to be aligned to form an
internally consistent corporate-level strategy.

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(ii) Business Unit Strategy

● A strategic business unit, popularly known as SBU, is a

fully-functional unit of a business that has its own vision and
direction.

● Typically, a strategic business unit operates as a separate/independent

unit, but it is also an important part of the company. It reports to the
headquarters about its operational status.

● At SBU’s, the strategic issues are about practical coordination of

operating units with other business units of the company.

● Developing and sustaining a competitive advantage for the products

and services that are produced.

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(iii) Functional Level Strategy

● Functional-level strategy is concerned with different functioning
divisions or departments of the organisation.

● Functional-level strategies in Marketing, Human Resources,

Production, finance, operations and R&D involve the development
and coordination of resources through which strategies can be
executed effectively and efficiently.

● Functional units of an organisation are involved in higher-level

strategies by providing input to business unit level and corporate level
strategy.

● Once the higher-level strategy is developed, the functional units

translate them into discrete action plans that each division or
department must accomplish for the strategy to succeed.
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