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FMG 4132 (E)

Introduction to Financial Strategy


Prepared by:
Mrs. Saseela Balagobei,
Senior Lecturer,
University of Jaffna

Introduction
All businesses need to have the following
three fundamental essential elements:
A clear and realistic strategy;
The financial resources, control and
systems to see it through; and
The right management team and
processes to make it happen
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Strategy
A companys strategy consists of the competitive
moves, internal operating approaches, and action
plans devised by management to produce
successful performance.
Strategy is managements game plan for
running the business.
Managers need strategies to guide HOW the
organizations business will be conducted and
HOW performance targets will be achieved.

Strategy
A method or plan chosen to bring
about a desired future, such as
achievement of a goal or solution to a
problem.
(businessdictionary.com)

Strategy
"Strategy is the direction and scope
of an organization over the longterm: which achieves advantage for
the organization through its
configuration of resources within a
challenging environment, to meet
the needs of markets and to fulfill
stakeholder expectations".
(Johnson and Scholes)
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Levels of Strategy

Levels of Strategy

Corporate-level Strategy
The set of strategic alternatives that an
organization chooses from as it manages its
operations simultaneously across several
industries and several markets.
2. Business-level Strategy
How the organization conducts business in a
particular industry.
3. Functional-level Strategy
Strategy developed for specific functional areas
such as marketing, finance, and so forth.
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1.

Levels of StrategyMaking
Corporate
Strategy

Business
Strategies

Functional
Strategies
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Financial strategy
A financial strategy is an important aspect of any
business.
Financial strategies should be discussed and shared
with company shareholders, executives and
employees, so everyone is on the same page
financially.
Definition:
Aspect of the strategy which falls within the
scope of financial management , which include
decisions on investment, financing and dividends.
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Importance of Financial
strategy

From which sources should funds be raised?


Should proposed investments be undertaken?
How large a dividend should be paid?
How should working capital be controlled?

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Key Decisions

Financial Decisions
This deals with the mode of financing or
mix of equity capital and debt capital.
If is possible to alter the total value of
the company by alteration in the
capital structure of the company, then
an optimal financial mix would exist
where the market value of the
company is maximized.
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Key Decisions

Investment Decisions
This involves the profitable utilization of
a firms funds especially in long-term
projects. Because the future benefits
associated with such projects are not
known with certainty, investment
decisions necessarily involve risk.
The projects are evaluated in relation to
their expected return and risk.
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Key Decisions

Dividend Decisions
Dividend decision determines the division
of earnings between payments to
shareholders and reinvestment in the
company.
Retained earnings are one of the most
significant sources of funds for financing
corporate growth, dividends constitute
the cash flows that accrue to
shareholders.

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Although both growth and dividends


are desirable, these goals are in conflict
with each other.
A higher dividend rate means less
retained earnings and consequently,
slower rate of growth in future earnings
and share prices.
The finance manager must provide
reasonable answer to this conflict.
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Internal constraints on
financial strategy
Borrowing

introduces the financial risk


The need to maintain good investor
relations and provide a satisfactory
return on investment
A shortage of key skills.
Limited production capacity.
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External constraints on
financial strategy
Limited access to sources of finance
Government influence
Regulatory bodies
Major economic influences
Accounting concepts.

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Performance and progress


indicators

Financial indicators
Profitability
Cash generation

Non financial indicators


Market share
Customer satisfaction
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Performance and progress


indicators Public sector

Public sector entities are often appraised


according to the value for money
value for money - Performance of an
activity
Maximising benefits for
the lowest costs and three elements
1. Economy
2. Effectiveness
3. Efficiency
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