Corporate Financial Management, Essays (university) of Business Accounting

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Accounting for

Decision

Makers

Assignment 2

ABSTRACT

Overview of the role of Corporate Financial Management in business planning and strategy

Student ID: 21361779

MS70080E

Table of content

• Introduction
• Business strategy & strategic planning
  • Stages and role of strategic planning in modern organization ..........................................................
    • Strategic position ..................................................................................................................................................
    • Strategic choices ...................................................................................................................................................
    • Strategy in action ..................................................................................................................................................
  • Success factors of strategic planning and Financial decision making .................................................
  • Examples of strategic planning .......................................................................................................
    • MTD Walker CML group strategy formulation .....................................................................................................
    • EVRAZ Plc strategy formulation ............................................................................................................................
• Corporate Financial Management
  • Nature, meaning and purpose of the financial management. ...........................................................
  • Role of financial management in business planning and strategy .....................................................
    • Components of financial strategy .........................................................................................................................
  • Elements of strategic financial management and Its role in planning and decision making ...............
    • Planning, budgeting and the forecasting ..............................................................................................................
    • Budgeting as a planning tool.................................................................................................................................
    • Budgeting as a controlling tool ...........................................................................................................................
    • Risk Management ...............................................................................................................................................
    • Establishing financial policies and control environment ....................................................................................
    • Analyzing and reviewing the cost, revenue and financial result .........................................................................
    • Cash flow and working capital management – ...................................................................................................
    • Evaluation of the investments ............................................................................................................................
• Conclusion
• References
• Figure 1.0 – three pillars of the organization strategy .................................................................................................. TABLE OF FIGURES
• Figure 2.0 – The exploring strategy model ....................................................................................................................
• Figure 3.0 – key success factors in business strategy ....................................................................................................
• Figure 4.0 - Components of financial strategy

Business strategy & strategic planning Strategy is the direction and scope of an organization, which achieve advantages in a changing environment through its configuration of resources and competencies with the aim of fulfilling stakeholder’s expectations. (Gerry Johnson, 2009) Strategy planning is one of the key management element how an organization is reaching towards its goals and it describes the way of executing its long-term targets. Therefore, it applies to all aspects of an organization and it is vital for the long-term direction of sales and marketing, investment and financial decision making, supply chain ,human resources and research and development, ect. Major part of business planning consists with financial strategy which includes the financial outcome planning, revenue and cost planning, capital and cashflow planning and risk management. Stages and role of strategic planning in modern organization According to Johnson (et al, 2011, pp. 14,15) “The Strategic position of an organization(Context): assesing strategic choices for the future (Content): and managing strategy in action (Process)” define the key roles of the strategic planing to be followed to accomplish the organization objectives. Strategic position In this stage organization conducts external and internal factor analysis through the PESTAL analysis, five forces analysis etc and understand the strategic position of the organization. Strategic choices Organization identifies the strategy to be formulated to achieve the organizational goal and finally, evaluates the chosen process to execute the strategy. Strategy in action Organization converts the chosen strategies in to the action.

Figure 2.0 – The exploring strategy model (Johnson, et al., 2011, p. 15) However, In the performance measurement process of the modern organizations, individual goals set for the evaluations are derived from strategic planning process. (Pirtea, et al., 2009)

Examples of strategic planning MTD Walker CML group strategy formulation MTD Walker CML group is a public limited company listed in the Sri Lanka’s stock exchange, which observes the actions of the Sri Lankan government activities which lead to decrease in initiating the public funded infrastructure projects due to the fiscal reforms. Then the Company took a decision to partnering with the government to implement the infrastructure projects in order to secure the continues projects and revenue streams in the future. (MTD Walkers PLC, 2017) EVRAZ Plc strategy formulation EVRAZ Plc. is a Russian mining and manufacturing company listed in London stock exchange, which identified the increasing competition in rail product segment and the low demand for the construction products in steel industry. It expanded product portfolio with value added products and penetrated new geographical markets to improve the profitability. (EVRAZ plc, 2017) Corporate Financial Management The study and practice of making money denominated decisions is called finance. It encompasses the analysis of the issuance of, the distribution of, and the purchase of financial contracts written against the real assets. Traditional roles in financial management include record keeping, preparation of financial statements and managing cash resources of the firm. In now a day’s financial management is concerned with all financial aspects of the firm. Therefore, the scope of financial management goes beyond the record maintaining and financial statement preparation by assigning overall responsibility for acquiring funds needed by a firm, directing these funds into assets in the manner that will maximize the value of the firm for its stake holders. (Damodaran, 1997, p. 3)

Nature, meaning and purpose of the financial management. The ultimate objective of the organization is to satisfy the stakeholder ’s expectations. Therefore, financial management facilitates to make the decisions to align with above and lead to execute the corporate strategies by planning and controlling the firm’s financial resources. The decisions making is associated with investment decisions, financial decisions, dividend decisions. The way of raising funds, allocation of them among the assets and distributing the earned return to shareholders are respectively defined under above mentioned key types of decisions. (Pandey, 2015, p. 7) Role of financial management in business planning and strategy Financial strategy is focused the financial aspects of strategic decisions directly link with maintaining and improving the financial stability and enhancing the financial performance. On the other hand, developed financial strategy should be suited to each stage of the organization with the adoption of all changes coming from the business environment. Changes of business risk and financial risk is needed to be considered in deciding the financial strategies. Appropriate Financial strategy directly facilitates to complement corporate strategy and add value to the organization. Components of financial strategy Financial Strategy has two components:  Raising the funds needed by an organization in the most appropriate manner-Funding Strategy  Managing the employment of those funds within the organization- Investment Strategy (Bender, 2014, p. 4)

Elements of strategic financial management and Its role in planning and decision making maximum efficient use of the company’s financial resource. Planning, budgeting and the forecasting, risk management, analyzing and reviewing the financial result, cash flow/ working capital management and evaluation of the investments are being considered as the key elements of the organizational financial strategy. Planning, budgeting and the forecasting Budgeting is an essential financial planning and controlling tool of the company’s cash inflows and out flows derived from the business activities. Budgeting process is in line with the projected business activities guided by short term and long term organizational objectives. (Groot & Selto, 2013, p. 143) Money, human capital and time etc.; are the scarce resource to all the organizations and for the efficient and effective use of the resources, planning is required. Planning alone is not adequate and controls is essential to ensure the plans are properly implemented. A budget is a tool using to plan and control the usage of scarce resources, integrating with the company’s objectives and how management plans to acquire and utilize the resources to accomplish the set objectives. Budgeting process involves with following three steps.

1. Forecasting the income and expenditure.
2. Analyzing and reviewing prepared budget for decision making.
3. Using to evaluate the business performance. Budgeting as a planning tool Budget plans the resources deploying among the all part of the organization may be into different sub units, geographical regions, product and market segments and projects. Setting up the budget helps to determine the potential issues to be occurred and prepare for them in advance. Resources allocation may be within the existing resources and to be acquitted based on the necessity towards achieving the organizational objectives.

Budgeting as a controlling tool Budget prepared which is adhering to the organizational goals guides for the operations by controlling the resources to attain the budget targets. Planned and actual performance can be analyzed for learning, corrective actions, performance measurement and reward decisions. (Groot & Selto, 2013, p. 144) Risk Management Risk management is the process of identification, analyzing, transferring and mitigating the risk occurring due to changes in internal and external factors affecting to the business. Further the risk management illustrates how to change the strategy to trade-off the risk and return to enhance the value of the organization. Establishing financial policies and control environment Establishing the financial policies is important part of corporate financial management to ensure the clarity, accountability and accuracy of all activities in the operation. Implementation of Internal controls is crucial for effectiveness and efficiency of operations, reliability of the financial reporting and compliance with applicable laws and regulations to realize the stated goals of the organization. Analyzing and reviewing the cost, revenue and financial result Analyzing and reviewing the company’s financial elements are important for getting the knowledge about the company’s financial performance and the position. The analysis of financial statements provides the significant information regarding how well company is performing and based on that making the decisions towards achieving organizational goals. Cash flow and working capital management – Effective working capital management allows the firm to meet its short term maturing obligations while avoiding the excessive investment in short term assets that affect to decrease the profitability. Evaluation of the investments Before investing the company’s fund, it is required to evaluate whether proposed investment would yield benefits in the future based on the net cash flows associated with the relevant investment. As capital budgeting decisions are derived from the corporate and business strategies and therefore it directly contributes to the stakeholder’s value creation.

Johnson, G., Whittington, R. & Scholes, K., 2011. Exploring Strategy. Ninth ed. Harlow(Essex): Pearson Education. MTD Walkers PLC, 2017. MTD Walkers PLC Annual Report 2016/17. [Online] Available at: http://www.walkerscml.com/wp-content/uploads/2015/10/MTD-Walkers-Annual- Report-2016-2017-1.pdf [Accessed 06 05 2018]. Pandey, I. M., 2015. Financial Management. 11th Edition ed. New Delhi: Vikas Publishing House. Pirtea, M., Nicolescu, C. & Botoc, C., 2009. THE ROLE OF STRATEGIC PLANNING. Annales Universitatis Apulensis Series Oeconomica, Issue 11(2).