INTRODUCTION TO

STRATEGIC FINANCIAL
MANAGEMENT
Introduction

 STRATEGIC FINANCIAL MANAGEMENT is

the allocation of scarce resources to
identified possible strategies among
competing opportunities and taking
necessary actions to monitor the progress
of the chosen opportunity so as to
achieve set objectives.
Introduction
Strategic Financial Management is
 the identification of the possible strategies
capable of maximizing an organization’s net
present value;
 the allocation of scarce capital resources

between competing opportunities; and

 the implementation and monitoring of the
chosen strategy so as to achieve stated
objectives.
Strategy and Strategic
 Strategy - This is the process of planning something
or carrying out a plan in a skillful way.
 Strategic – this is done as part of a plan that is
meant to achieve a particular purpose.
 Strategic Financial Management – those aspects of
the overall strategic plan of an organization that
concern the financial managers.
The Scope of Strategic Financial
Management
 Decisions regarding investments in the assets of
the company: The most appropriate level and mix
of the assets. (acquisition of assets)
 Decisions regarding how such investment should
be financed: the optimum level and mix of funding
requirements for the assets. (cost of asset
acquisition)
The Scope of Strategic Financial
Management
 These two main decision will focus on providing
answers to the following questions:
 Should a new factory be built for the purpose of
producing (and selling ) a new product or should a
company already involved in the production of such a
product be acquired?
 Should an organization make a particular component
in-house or should it buy it from outside?
 In financing the investments, should the company rely
solely on funds from owners or should it mix these funds
with those from lenders?
The Scope of Strategic Financial
Management
 These two main decision will focus on providing
answers to the following questions:
 Ifa mix of funds is the option taken, what proportion of
each source should be used?
 How should the funds be made available and at what
cost?
 Should dividends be paid now or should earnings be
re-invested and dividends paid later?
The Scope of Strategic Financial
Management
 These two main decision will focus on providing
answers to the following questions:
 Ifthe organization decides to pay dividend, what
proportion of the available earnings should be paid
and what proportion should be retained for future
expansion and growth?
 Should the organization be paying a fixed Peso amount
or a fixed percentage of earnings every year?
 What should be the appropriate level of stocks to hold
at any point in time?
The Scope of Strategic Financial
Management
 These two main decision will focus on providing
answers to the following questions:
 Should the company extend credit to customers and
how much should be given to each customer?
 Should the company take advantage of cash discount if
offered by suppliers?
 Which type of banks’ facility arrangement should be
put in place – term loan, overdraft or both?
Implication of the word “strategic” in
Strategic Financial Management
 The word “strategic”, to financial
management, means that decisions to
accept or reject proposals have to be
based on strategic or LONG-TERM
factors.
Other related activities in which
financial managers are involved

 Financial managers match each aspect of

the business plan with the financial
resources available and ensure that each
plan, in financial terms, falls within the
total funds available.
 A production plan, for instance, must not
only be perfect with the overall strategic
plan but must also be financially feasible.
Other related activities in which
financial managers are involved

 Financial managers, along with other

managers, are involved in monitoring and
controlling the activities of the
organization.
 Actual resources used are compared with
planned resources, deviations are
highlighted, and appropriate corrective
actions are taken in each case.
Other related activities in which
financial managers are involved

 Financial managers concern themselves

with the events in the legal, political, and
socio-economic environment, since it may
affect the organization’s cash flow.
STEPS IN STRATEGIC FINANCIAL
DECISION-MAKING
1. Determine the objectives of the organization
2. Identify all possible courses of action
3. Collect, collate and record data in respect of
each alternative course of action
4. Analyze, summarize and present data in a
form suitable for decision making.
5. Arrive at a decision, taking into account
quantitative, non-quantitative, social, cultural,
normative psychological factors etc.
STEPS IN STRATEGIC FINANCIAL
DECISION-MAKING
6. Execute the decision, through pragmatic and
coordinated action, to actualize the plan.
7. Highlight the differences between planned/
target results and actual results.
8. Take necessary corrective action(s) that will
improve performance or lead to the
adjustment of the original plan.
AXIOMS OF FINANCIAL
MANAGEMENT
Axiom 1: The risk-return trade-off

 We won’t take additional risk unless we

expect to be compensated with
additional return. Almost all financial
decisions involve some sort of risk-return
trade off.
Axiom 2: The time value of money

 A PESO received today is worth more

than a PESO received in the future.
Axiom 3: Cash, Not Profit, is King

 In measuring value, we will use cash flows

rather than accounting profits because it
is only cash flows that the firm receives
and is able to reinvest.
Axiom 4: Incremental cash flows

 It is only what changes that counts. In

making business decisions, we will only
concern ourselves with what happens as a
result of that decision.
Axiom 5: The Curse of Competitive
Markets
 Why it is hard to find exceptionally profitable
projects?
 In competitive markets, extremely large profits

cannot exist for very long because of

competition moving in to exploit those large
profits. As a result, profitable projects can
only be found if the market is made less
competitive, either through product
differentiation or by achieving a cost
advantage.
Axiom 6: Efficient capital markets

 The markets are quick and the prices are

right.
Axiom 7: The agency problem

 Managers won’t work for the owners

unless it is in their best interest.
 The agency problem is a result of the
separation between the decision makers
and the owners of the firm. As a result,
managers may make decisions that are
not in line with the goal of maximization
of shareholder wealth.
Axiom 8:
Taxes affect business decisions
 When we evaluate new investment/business
proposals, we will see income taxes playing a
significant role.
 When the company is analyzing the possible
acquisition of a plant or equipment, the returns
from the investment should be measured on an
after-tax basis. Otherwise, the company will
not truly be evaluating the real value of cash
flows generated by the new business /
investment.
Axiom 9: All risks are not equal

 All risks are not equal since some risks can

be diversified away and some cannot.
 The process of diversification can reduce

risk, and as a result, measuring a project’s

or an asset’s risk is very difficult.
Axiom 10: Ethical dilemmas are
everywhere in Finance
 Ethical behavior is important in financial
management, just as it is important in
everything we do.
 Unfortunately, precisely how we define
what is and what is not ethical behavior is
sometimes difficult. Nevertheless, we
should not give up the quest.