BANKU AUGSTSKOLA

School of Business and Finance

Piyush Oswal
The student of the Master Study Programme “Business Administration”
(190167/1MVa)

Company’s Financial Strategy

Financial Management Report

Advisor: Pr. Inese Mavlutova

Riga, 2019
 ABSTRACT

In this report, key components of a company’s financial strategy are discussed. The aim of
the report is to gain knowledge for further implementation. Coca Cola company is selected,
and their strategy is studied. The report contains a discussion about why there is a need for a
financing strategy and the information about what is required for a successful financing
strategy (Prerequisites for a successful financing strategy). This contains ideas about what
you need to put in place in your organisation in order to be able to plan a successful financing
strategy.
This report contains 5 chapters, 14 pages, 1 figure, 8 tables and 10 references.

Keywords: Financing, Strategy, Coca-Cola, Revenue, Budget

 TABLE OF CONTENTS

ABSTRACT..............................................................................................................................2

TABLE OF CONTENTS.........................................................................................................3

1. INTRODUCTION................................................................................................................4

1.1 Financial Objective..............................................................................................................5

1.2 Stakeholders.........................................................................................................................5

1.3 Financial Targets..................................................................................................................6

2. COCA-COLA’s FINANCIAL STRATEGY......................................................................7

2.1 Financial Risk Management.................................................................................................7

2.2 Foreign Exchange Risk........................................................................................................7

2.3 Interest Rate Risk.................................................................................................................8

2.4 Commodity Pricing Risk......................................................................................................8

2.5 Credit Risk...........................................................................................................................8

2.6 Liquidity Risk.......................................................................................................................9

3. STRATEGIC FINANCIAL MANAGEMENT...............................................................10

3.1 Key Points..........................................................................................................................10

3.2 The Elements of Financial Management Strategy.............................................................10

4. EXAMPLES OF STRATEGIES BASED ON INDUSTRIES........................................12

5. COCA-COLA INDICATORS AND CALCULATIONS................................................13

6. CONCLUSION...................................................................................................................17

REFERENCES.......................................................................................................................18
1. INTRODUCTION

Financial Management is concerned with the acquisition, financing and management of

assets. It is the process of managing the financial resources of the company. It also includes
accounting and financial reporting, budgeting, collecting accounts receivable, risk
management, and insurance for a business, in alignment with the set financial strategy. 
In brief, it consists of the use of financial information, skills, and methods to make the best
use of an organization's resources. A well-developed financial strategy can help the
businessman to: 
 Effectively manage the company’s assets. 
 Invest wisely 
 Support operations 
 Provide means for future growth 
 Make decisions on how best to finance the company. 
 Meet the needs of customers & employees 
 Compensate shareholders for their risk 
In order to meet the corporate strategy objective, the financial director is responsible for
covering a wide array of functions. The financial management operations that the manager
must supervise include:  
 Raising enough capital for the assets needed by your business 
 Earning adequate profit consistently and predictably 
 Managing cash flow from profit 
 Minimizing threats of fraud and other losses 
 Minimizing the income tax burden on your business and its owners 
 Forecasting the cash needs of your business 
 Keeping your financial condition in good shape and out of trouble 
 Putting a value on your business when the time comes
1.1 Financial Objective

For a profit-making entity the main strategic objective is to optimise the wealth of the
proprietors. In other words, the objective is assumed to be to maximise shareholder wealth.
Shareholder wealth may be measured by the return that shareholders receive from their
investment, represented partly by the dividend received each year and partly by the capital
gain from the increase in the value of the shares over that period. The value of the shares
should increase when the entity is expected to make additional profits that will be paid out as
dividends or reinvested for future growth.

1.2 Stakeholders

The various stakeholder groups may have different interests in the activities of an entity, and
may seek to influence objectives of the entity. The stakeholders include:
● Shareholders – maximisation of wealth from their investment.
● Fund lenders – receipt of interest and capital repayments by the due date.
● Customers – a continuous trading relationship with suppliers, reflecting product/service
quality and price.
● Suppliers – to ensure that they are paid in full by the due date.
● Employees – to maximise rewards paid to them in salaries and benefits, and continuity of
employment.
● Government – may have the broad objectives of sustained economic growth and
maintaining levels of employment. Faced with such a broad range of stakeholders, managers
are likely to find they cannot simultaneously maximise the wealth of their shareholders and
keep all the other stakeholders content. In practice, the main strategic objective may be
interpreted as achieving the maximum profit possible consistent with balancing the needs of
the various stakeholders in the entity. Such a policy may imply achieving a satisfactory return
for shareholders, whilst establishing competitive terms and conditions of service for the
employees and avoiding polluting the environment. Economists, and many accountants,
believe that cash flow is the main criterion to judge an entity’s performance. Cash is a fact,
whereas profit can be manipulated by accounting policies. Entities have in fact gone out of
business because of a lack of funds, even though they were profitable. Shareholder wealth is
based on the present value of future cash flows. Managers in practice may have broader
objectives – perhaps undertaking any financing, investment, or dividend decision that will
achieve satisfactory returns rather than those that may optimise returns.

1.3 Financial Targets

Subsidiary objectives (or financial targets) may be employed. These include:

● Increasing earnings per share. For example, to increase eps by 5% per annum.
● Borrowing levels. For example, to maintain a gearing ratio below 30%.
● Increasing cash flows and dividends. For example, to increase operating cash flow and
dividend per share year-on-year by at least 4%, which is 2.5% above the current rate of
inflation.
● Profit retention. For example, distributable profits must always be two times higher than
the annual dividend.

Figure 1 Strategic Structure of the Company

2. COCA-COLA’s FINANCIAL STRATEGY

The Group’s funding strategy in the debt capital markets is built around the following
principles:
 To raise financing via our wholly owned Dutch financing subsidiary Coca-Cola HBC
Finance B.V., except in the case of subsidiaries with joint control, or countries where
certain legal or tax restrictions or advantages apply, in which case financing at lower
levels in the organisation may be considered
 To maintain our presence and profile in the international capital markets and where
possible to broaden our investor base
 To maintain a well-balanced redemption profile
 To use our European Medium-Term Note programme as well as our Global
Commercial Paper programme as the main basis for our financing.

2.1 Financial Risk Management

The Group activities expose it to a variety of financial risks including currency risk, interest
rate risk, credit risk and liquidity risk. The overall risk management programme focuses on
the unpredictability of financial markets and seeks to minimise potential adverse effects on
the Group’s financial performance.
They regularly use derivative products like forwards, options and futures but these are solely
used for the purpose of hedging underlying exposures to foreign currency exchange rate risk,
interest rate risk and commodities’ pricing volatility. None of these financial instruments are
leveraged, used for trading purposes or taken as speculative positions.

2.2 Foreign Exchange Risk

Given the Group’s operating activities, we are exposed to a significant amount of foreign
currency risk. Our foreign currency exposures arise from adverse changes in exchange rates
between the euro, the US dollar and the currencies in our non-euro countries. Transaction
exposures arise mainly from raw materials purchased in currencies such as the US dollar or
euro which can lead to higher cost of sales in the functional currency of the country.
Translation exposures arise as many of our operations have functional currencies other than
the euro, and any change in the functional currency against the euro impacts our consolidated
income statement and balance sheet when results are translated into euro.
Our treasury policy requires the hedging of rolling 12-month forecasted transactional
exposures within defined minimum (25%) and maximum (80%) coverage levels. Where
available, we use derivative financial instruments to reduce our net exposure to currency
fluctuations.

2.3 Interest Rate Risk

The Group is exposed to market risk arising from changing interest rates, primarily in the
euro zone. Periodically we evaluate the desired mixture of fixed and floating rate liabilities
and modify the interest payments based on the desired mixture of debt. We also use interest
rate swaps to manage our interest rate cost.

2.4 Commodity Pricing Risk

The Group is exposed to market risks arising from the fluctuations in the prices of key raw
materials. For a number of raw materials, where there are available tools to actively manage
price risks, the relevant provisions are included in the Treasury Policy. Treasury and
Procurement Departments are jointly responsible for applying the relevant policies.
Based on the Treasury Policy, hedging activities are conducted for a 36 rolling month’s
horizon. Treasury Policy dictates minimum and maximum coverage levels per time bucket,
with a ‘layered approached’ (gradually lower hedge percentage for longer tenors) being
applied. Different minimum and maximum hedge levels are applicable for each underlying
commodity. Hedging activities are conducted through financial derivatives – where available
– or through relevant provisions in the physical supplies contracts.

2.5 Credit Risk

Credit risk is controlled by a restrictive policy as to the choice of potential counter parties for
treasury transactions. Our credit risk is managed by establishing approved counterparty and
country limits, detailing the maximum exposure that we are prepared to accept with respect to
individual counterparties or countries. The limits are reviewed and monitored on a regular
basis.
2.6 Liquidity Risk

Our general policy is to retain a minimum amount of liquidity reserves in the form of cash on
our balance sheet while maintaining the balance of our liquidity reserves in the form of
unused committed facilities, to ensure that we have cost-effective access to sufficient
financial resources to meet our funding requirements. These include the day-to-day funding
of our operations as well as the financing of our capital expenditure program.
In order to mitigate the possibility of liquidity constraints, we endeavour to maintain a
minimum of €250 million of financial headroom. Financial headroom refers to the excess
committed financing available, after considering cash flows from operating activities,
dividends, interest expense, tax expense, acquisitions, capital expenditure requirements and
short-term debt.
3. STRATEGIC FINANCIAL MANAGEMENT

Strategic financial management means not only managing a company's finances but
managing them with the intention to succeed—that is, to attain the company's goals and
objectives and maximize shareholder value over time. However, before a company can
manage itself strategically, it first needs to define its objectives precisely, identify and
quantify its available and potential resources, and devise a specific plan to use its finances
and other capital resources toward achieving its goals.
The term "strategic" refers to financial management practices that are focused on long-term
success, as opposed to "tactical" management decisions, which relate to short-term
positioning. If a company is being strategic instead of tactical, then it makes financial
decisions based on what it thinks would achieve results ultimately—that is, in the future;
which implies that to realize those results, a firm sometimes must tolerate losses in the
present.

3.1 Key Points

 Strategic financial management is about creating profit for the business.

 A financial plan that is strategic focuses on long-term gain.
 Strategic financial planning varies by company, industry, and sector.

3.2 The Elements of Financial Management Strategy

A company will apply strategic financial management throughout its organizational

operations, which involves designing elements that will maximize the firm's financial
resources and using them efficiently. Here a firm needs to be creative, as there is no one-size-
fits-all approach to strategic management, and each company will devise elements that reflect
its own particular needs and goals. However, some of the more common elements of strategic
financial management could include the following.
Planning
 Define objectives precisely.
 Identify and quantify available and potential resources.
 Write a specific business financial plan.
Budgeting
 Help the company function with financial efficiency, and reduced waste.
 Identify areas that incur the most operating costs or exceed the budgeted cost.
 Ensure enough liquidity to cover operating expenses without tapping external
resources.
 Uncover areas where a firm may invest earnings to achieve goals more effectively.
Managing and Assessing Risk
 Identify, analyse, and mitigate uncertainty in investment decisions.
 Evaluate the potential for financial exposure; examine capital expenditures (CapEx)
and workplace policies.
 Employ risk metrics such as standard deviation, and value-at-risk (VaR) strategies.
Establishing Ongoing Procedures
 Collect and analyse data.
 Make financial decisions that are consistent.
 Track and analyse variance—that is, differences between budgeted and actual results.
 Identify problems and take appropriate corrective actions.
4. EXAMPLES OF STRATEGIES BASED ON INDUSTRIES

Just as financial management strategies will vary from company to company, they also can
differ according to industry and sector.
Firms that operate in fast-growing industries—like information technology or technical
services—would want to choose strategies that cite their goals for growth and specify
movement in a positive direction. Their objectives, for example, might include launching a
new product or increasing gross revenue within the next 12 months.
On the other hand, companies in slow-growing industries—like sugar manufacturing or coal-
power production—could choose objectives that focus on protecting their assets and
managing expenses, such as reducing administrative costs by a certain percentage.
5. COCA-COLA INDICATORS AND CALCULATIONS

US$ in millions
12 months ended Dec 31, 2019 Dec 31, 2018
Net operating revenues 37,266 31,856
Cost of goods sold (14,619) (11,770)
Gross profit 22,647 20,086
Selling, general and administrative expenses (12,103) (10,307)
Other operating charges (458) (1,079)
Operating income 10,086 8,700
Interest income 563 682
Interest expense (946) (919)
Equity income, net 1,049 1,008
Other income (loss), net 34 (1,121)
Income from continuing operations before income taxes 10,786 8,350
Income taxes from continuing operations (1,801) (1,623)
Net income from continuing operations 8,985 6,727
Income (loss) from discontinued operations, net of income — (251)
taxes
Consolidated net income 8,985 6,476
Net income attributable to noncontrolling interests (65) (42)
Net income attributable to shareowners of The Coca-Cola 8,920 6,434
Company
Table 1 Coca Cola Income Statement

US$ in millions
12 months ended Dec 31, 2019 Dec 31, 2018
Consolidated net income 8,985 6,476
Net foreign currency translation adjustments 74 (2,035)
Net gains (losses) on derivatives (54) (7)
Net change in unrealized gains (losses) on available-for-sale 18 (34)
securities
Net change in pension and other benefit liabilities (159) 29
Other comprehensive income (loss) (121) (2,047)
Comprehensive income 8,864 4,429
Comprehensive (income) loss attributable to noncontrolling (110) (95)
interests
Comprehensive income attributable to shareowners of The 8,754 4,334
Coca-Cola Company
Table 2 Statement of Comprehensive Income
US$ in millions
  Dec 31, 2019 Dec 31, 2018
Cash and cash equivalents 6,480 8,926
Short-term investments 1,467 2,025
Cash, cash equivalents and short-term investments 7,947 10,951
Marketable securities 3,228 5,013
Trade accounts receivable, less allowances 3,971 3,396
Inventories 3,379 2,766
Prepaid expenses and other assets 1,886 1,962
Assets held for sale — —
Assets held for sale, discontinued operations — 6,546
Current assets 20,411 30,634
Equity method investments 19,025 19,407
Other investments 854 867
Other assets 6,075 4,139
Deferred income tax assets 2,412 2,667
Property, plant and equipment, net 10,838 8,232
Trademarks with indefinite lives 9,266 6,682
Bottlers’ franchise rights with indefinite lives 109 51
Goodwill 16,764 10,263
Other intangible assets 627 274
Intangible assets, including goodwill 26,766 17,270
Noncurrent assets 65,970 52,582
Total assets 86,381 83,216
Table 3 Assets

US$ in millions
  Dec 31, 2019 Dec 31, 2018
Accounts payable 3,804 2,498
Accrued marketing expenses 2,059 1,787
Other accrued expenses 3,835 3,352
Accrued compensation 1,021 894
Deferred tax liabilities — —
Accrued sales, payroll and other taxes 442 315
Container deposits 151 86
Accounts payable and accrued expenses 11,312 8,932
Loans and notes payable 10,994 13,194
Current maturities of long-term debt 4,253 4,997
Accrued income taxes 414 378
Liabilities held for sale — —
Liabilities held for sale, discontinued operations — 1,722
Current liabilities 26,973 29,223
Long-term debt, excluding current maturities 27,516 25,364
Other liabilities 8,510 7,638
Deferred income tax liabilities 2,284 1,933
Noncurrent liabilities 38,310 34,935
Total liabilities 65,283 64,158
Common stock, $0.25 par value 1,760 1,760
Capital surplus 17,154 16,520
Reinvested earnings 65,855 63,234
Accumulated other comprehensive loss (13,544) (12,814)
Treasury stock, at cost (52,244) (51,719)
Equity attributable to shareowners of The Coca-Cola 18,981 16,981
Company
Equity attributable to noncontrolling interests 2,117 2,077
Total equity 21,098 19,058
Total liabilities and equity 86,381 83,216
Table 4 Liabilities and Equity

  Dec 31, 2019 Dec 31, 2018

Debt Ratios

Debt to equity 2.25 2.56

Debt to equity (including operating lease liability) 2.33 2.56
Debt to capital 0.69 0.72
Debt to capital (including operating lease liability) 0.70 0.72
Debt to assets 0.50 0.52
Debt to assets (including operating lease liability) 0.51 0.52
Financial leverage 4.55 4.90
Coverage Ratios

Interest coverage 12.40 10.09

Fixed charge coverage 9.47 10.09
Table 5 Long Term Debt and Solvency ratio

  Dec 31, 2019 Dec 31, 2018

Return on Sales

Gross profit margin 60.77% 63.05%

Operating profit margin 27.06% 27.31%
Net profit margin 23.94% 20.20%
Return on Investment

Return on equity (ROE) 46.99% 37.89%

Return on assets (ROA) 10.33% 7.73%

Table 6 Profitability Ratio

  Dec 31, 2019 Dec 31, 2018

Current ratio 0.76 1.05
Quick ratio 0.56 0.66
Cash ratio 0.41 0.55
Table 7 Liquidity Ratio

  Dec 31, 2019 Dec 31, 2018

Net fixed asset turnover 3.44 3.87
Net fixed asset turnover (including operating lease, right- 3.05 3.87
of-use asset)
Total asset turnover 0.43 0.38
Equity turnover 1.96 1.88
Table 8 Long-Term Investment Activity Ratio
6. CONCLUSION

We believe that the above forms the basis of an organisational financing strategy which is
reasonable and achievable. A six-monthly meeting of senior staff will review its
implementation and to make adjustments where necessary. Overall responsibility will lie with
the Director who has full authority to take all reasonable steps to ensure the success of the
strategy.
Financing short-term needs is essentially a financing of current assets using short-term
financial resources. Current assets, however, are usually funded in part through long-term
financial resources that can fund a permanent as well as transitional part of current assets.
Different sources are used to finance current assets. It is mainly the trade credit, which is
a natural source of financing of the customer by the supplier. It represents the customer's
liabilities arising from the delay payments to suppliers for the receipt of the goods. Short-
term bank loans are loans whose lenders are banks. Loans are provided in various forms.
Knowledge of forms and parameters of short-term bank loans is a prerequisite for the
effective management and the use of bank loans to the fulfilment of the objectives of the
company.  Part of the short-term financial resources are a variety of obligations, which form
a source from their creation to the time of their payment. Optimal composition of short-term
financial resources contributes to ensure the ability to pay as one of the fundamental
objectives of the company in its financial management.
The financial analysis of Coca Cola company comparing the data from 2018-2019 suggests a
better running of the company. The company has managed to keep the long-term debt ratio
consistent as they have managed to pay the loans without obligation. The net income
increased by 33% which was a record in the financial decade of coca cola.
Also, the Inventory ratio has managed to improve which shows the better selling of the
products in shorter time. This is since Coca Cola decided to emphasise on their already
released products and not trying to promote anything new in the market. This resulted in
increase of net profit and cash reserves. So overall, an improvement of financial year on all
fronts for such a major household.
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 "Business Finance and Financial Management". UpFina. Retrieved 2015-11-04

 https://investors.coca-colacompany.com/financial-information/income-statement