Lecture Strategic Finance-1

8/11/2019 Lecture Strategic Finance-1

1/27

Strategic

FinanceSheikh Khurram Fazal

SZABIST Spring 2014

SheikhKhurramFazal 1

LectureSession01


2/27

Definingthe

Concepts



3/27

Strategy:Managements game plan for operating,strengthening firms competitive position, satisfyingcustomers & achieving objectives.

Finance:

It includes all sources & resources that enable youto procure more resources.

OR

It is a science of managing resources.

OR

A science of maximizing wealth by utilizing availableresources.


DefiningFinance&Strategy


4/27

Touchingthe

conceptof

Strategy



5/27

Distinct Qualities of a Strategy1) Linked with External Environment.

2) Focuses on longterm horizon or perspective.

3) Aimed to gain a competitive advantage.SheikhKhurramFazal 5

StrategyFormulation&QualitiesVision

Mission

LongtermObjectives

Strategy

Whatyou

want

to

be

Whatisyourcurrentstate

Timeperiodof3to5years

Whattodo,Whentodo,Howtodo


6/27

Analyzingthe

conceptof

Finance



7/27

CommonMisnomer

Financeis

afield

of

Accounting



8/27


ComparingFinancewithAccounting

Accounting Finance

ConcernedwithRecordingor

BookKeeping.

Recall:GeneralJournalEntries,Income

Statement,BalanceSheet,etc.

Concernedwith

Maximization

of

Wealth.

Accountantsprepare

accounting

reportsbasedonAccruals.Recall:Revenuesaredespitenonreceiptof

Cash,etc.

FinancialManagers& Analysts

focusonCashFlows.

DealsprimarilywithPast. DealsprimarilywithFuture.

Followsstandardprocedures,

principles, guidelines& rules.Recall: GAAP,DoubleEntryAccounting,etc.

Representation&calculationsdo

nothaveprefixedpatterns.


9/27

Ifnot

Accounting,

thenwhich

field

of

study???



10/27

Understandingthe

Rootsof

Finance



11/27

Accounting:

Is a process of identifying, analyzing, recording &reporting financial information for general purpose

preparing financial statements.

Management:

Working with & through people alongwith other

organizational resources for achieving organizational goal& objectives.

Economics:The science that studies how people, firms, nations & theglobal economy decide to consume available scarceresources for maximizing their satisfaction.


FindingtheSimilarities


12/27

Engineer:whoproposesanewplant,shapestheinvestmentpolicyofthefirm.

MarketingAnalyst:Providesinputsintheprocessofforecastingandplanning

Purchase

Manager:influences

the

level

of

investment

ininventories

SalesManager:hasasayinthedeterminationofthereceivablespolicy

DepartmentalManagers:ingeneral,areimportantlinksinthefinancecontrolsystemofthefirm


AllManagersareFinanceManagers


13/27

Economicsbeing

Broaderfield

than

Finance



14/27


WhyEconomicsissuperlativetoFinance

Finance Economics

Concentrates onMaximization

of

Wealth.

ConcentratesonMaximization of

Benefit.Recall:UtilityorBenefitfromdrinkingaglassofwater,StudyingatUniversityrather

takinganEmployment,etc.

Influenced

more

towards

Quantitative figures&numerical

calculations.

Considers

both

Quantitative &

Qualitativeaspects.Recall:ImplicitCosts,GameTheoriesetc.

Scopeis

mainly limited

to

financial decisionsofindividuals

&firms.

Dealswithdecisionsof

individuals,firms,

nations &

the

globaleconomyinitswholeness.Recall:Fiscal&MonetaryPolicies,GDP,

Inflation,InterestRates,TaxRates,

ExchangeRates,

etc.


15/27

MainFocus

of

StrategicFinance...



16/27

FocusofStrategicFinance


Capital Budgeting

Decisions

Capital Structure

Decisions

Dividend

Decisions

Working Capital

Decisions

Return

Risk

Market Value of

the Firm

MainlyLinked

with

ExternalEnvironment

FinancialManagement


17/27

Understanding

Goalof

the

Firm

...



18/27


WealthMaximizationistheGoal

Maximization of Shareholders Wealth occurs

when Value Creation occurs.

Value Creation occurs when we Maximize the

Share Price of current Shareholders.

Takes account of:current and future profits and

EPS; the timing, duration, and risk of profits

and EPS; dividend policy; and all other relevantfactors.


19/27


CorporateWorldExamples

CadburySchweppes:

governing

objective

is

growthinshareownervalue

CreditSuisse

Group:

achieve

high

customer

satisfaction,maximizeshareholdervalueandbeanemployerofchoice

DowChemicalCompany:maximizelongtermshareholdervalue

ExxonMobil:longterm,sustainableshareholdervalue


20/27


1) Issuing Common Stock to invest in Shares, Bonds

etc.:

Share Proportion Change & Control on BODShare Proportion Change & Profit Distribution

2) Dilution of EPS due to additional Common Stock:

Decrease in EPS & MPS Reduces.

3) Acquiring Loan or Issuing Bods:

Exposure to Interest Rate Risk, Default Risk etc. & MPS

Reduces.

WhynotEarningsMaximization


21/27


4) Retaining the Earnings for ReInvestment:

Certain Shareholders require Dividends & Demand of Share& MPS Reduces.

5) Timing/ Delay in Dividends:

Receiving a dividend at beginning of the year has higher

value than at the end of the year (Time Value of Money).

6) Duration of Earnings in Future:

For how long such returns are available on Bonds &

Securities.

For how many more years same earnings are available.



22/27


7) Cash Flow basis: Earnings maximization ignores Cash Flow basis & exposedto Default Risk.

8) Social Responsibility: Sacrificing certain portion of earnings for environment &society is not considered.

Organization Going Concern & Sustainability risk is exposed.

9) Qualitative Factors: (e.g.)

Long

term impact on Sales Prices due to current price

increase/ decrease.

Expenditure of R&D for product development.



23/27

Understandingthe

FirmsIssue

...



24/27


TheModernCorporation

ThereexistsaSEPARATIONbetweenownersandmanagers.

ModernCorporation

Shareholders Management

Managementactsasanagentforthe

owners(shareholders)

of

the

firm,

to

act

onownersbehalf.

ISSUE:Lack

of

Perfect

alignment

between

interests.

SOLUTION:ContinuousMonitoring.


25/27


AgencyTheory

Agency Theory is a branch of economics relating to

the behavior of principals and their agents.

Principals must provide incentives so that

management acts in the principals best interests and

thenmonitorresults.

Incentives include, stock options, perquisites, and

bonuses.


26/27


StrategicFinancialManagementOrganization

Boardof

Directors

President/ChiefExecutiveOfficer

VicePresident

Operations

VicePresident

Finance

VicePresident

Marketing

ControllerCostAccounting

CostManagement

DataProcessing

GeneralLedger

GovernmentReporting

InternalControl

PreparingFin.Statements

PreparingBudgets

PreparingForecasts

TreasurerCapitalBudgeting

CashManagement

Credit

ManagementDividendDisbursement

Fin.Analysis/Planning

PensionManagement

Insurance/RiskManagement

TaxAnalysis/Planning


27/27

THANKYOU!!!


Documents

Lecture Strategic Finance-1