SBA Week 10-12

• Financial Strategy

  A finance strategy combines financial planning with strategic planning. The outcome is a functional roadmap that assesses current resources, costs and budget and aligns them with the company's mission and goals. It sets a plan to align with enterprise goals to grow and innovate, despite changing and often unpredictable business conditions.
• Steps to Create Financial Strategy

  1. Decide what you want your money to do for you

  2. Track your spending

  3. Organize your expenses into categories

  4. Make a budget and stick to it

  5. Set your goals

  6. Talk a financial advisor
• Broad Areas of Financial Strategy

  • Evaluate financial performance
  • Financial Forecasting
  • Capital Structure
• Evaluate financial performance


  The financial position of a company at a given time can be evaluated by such typical financial statements as income statements, balance sheets and cash flow statements. These statements can be analyzed by using some quantitative measures such as financial ratios.
• Financial Forecasting


  Financial forecasting is estimating a company's future financial position after examining its historical performance and evaluating the potential impact of current and evolving macroeconomic trends on the company's operations. It involves an analysis of the company's past performances, such as sales, expenses, cash flows, and more, to deduce any possible trends and patterns. Financial forecasting also entails the consideration of any contingent events that may have a significant impact on the company's finances.
• Capital Structure


  Capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth.
• Components of Financial Strategy


  • Financing Decision
  • Investment Decision
  • Dividend Decision
  • Working Capital Management
  • Cash Flow Management
• Financing Decision


  • External - Equity capital (equity shares, preference shares), Borrowed capital (debentures, term loans, public deposits, other loans and credits)
  • Internal - Retention of profits, Provision of depreciation on fixed assets
• Strategic decisions in Financing Decision

  • What sources of long-term funds should be tapped and in what proportion?
  • To what extent should long-term debt be resorted?
  • Should the firm take recourse to lease financing?
  • Should the firm employ trade credits, if so, to what extent?
• Factors to consider in Financing Decision

  • Capital structure - Desirable mix of debt and equity
  • Debt-equity ratio - Balanced
  • Cost of capital - Weighted average cost of debt and equity
  • Lease financing - Evaluate alternatives
  • Leverage decisions - Advantage in running a business favorably
• Investment Decision


  Financial investment refers to putting money into securities, i.e., shares or debentures, real estate, mortgages, etc. An investment operation is one which upon thorough analysis promises safety of principal and a satisfactory return. Investment is identified with safety.
• Factors to consider in Investment Decision

  • Hurdle rate - Minimum rate of return or cut-off rate
  • Capital rationing - Limits on planned investment based on available cash
  • Risk factor - Highly risky or low risky
• Factors to consider in formulating Investment Strategy

  • Amount of investment
  • Objective of investment portfolio
  • Selection of investment—types of securities, selection of industries, selection of companies
  • Timing of purchase
  • Identification of industries with growth potential
• Dividend Decision


  The dividend decision of the firm is of crucial importance for the finance manager. It determines the amount of profit to be distributed among shareholders and the amount of profit to be retained in the business for financing its long-term growth. The objective of the dividend policy is to maximize the value of the firm to its shareholders.

  
• Working Capital Management


  Working capital is required for the day-to-day working of the company. It is referred to as the management of current assets. Management of working capital is very important because it can maximize the shareholder's wealth if managed efficiently. The sources of working capital include trade credit, bank loans, bill discounting, overdrafts, etc. Strategic decisions in this regard are essentially influenced by trade-offs between liquidity and profitability.
• Cash Flow Management


  Cash flow management involves managing liquiditys, minimizing costs, and minimizing taxes for multinational firms operating in multiple countries. Strategic decisions are crucial due to varying monetary, political, and financial aspects. The finance department must coordinate monetary flows in and out of financial markets to ensure stakeholders receive their required rates of return.
• How to measure the effectiveness of a Cash flow management strategy

  • Cash Flow Statements—Monitoring cash flow statements
  • Cash Flow Forecast Accuracy—Compare forecasted and actual cash flow
  • Current Ratio—Current assets divided by current liabilities
  • Days Sales Outstanding (DSO)—Indicates collection times
  • Days Payable Outstanding (DPO)—Indicates ability to pay trade creditors
  • Inventory Turnover—Indicates sales and inventory levels
  • Cash Conversion Cycle (CCC)—Evaluates duration a firm will lose cash
  • Profit Margins—Affect cash flow if receivables and payables are well-managed
  • Net Working Capital—Positive working capital allows funding operations and investments
• Managing Growth and Risks

  Growth is costly due to capital consumption, requiring careful management. Capital budgeting is essential for finance students, and risk assessment is crucial for strategic decisions to avoid unexpected situations.
• Main sources of risk and uncertainty in pursuing a growth strategy

  • Market Risk—Customer preferences, demand, competition, or external factors
  • Product Risk—Potential for product or service to not be as effective or desirable as anticipated
  • Financial Risk—Revenue not covering costs or investments
  • Operational Risk—Potential disruption or strain of internal processes or resources
  • Strategic risk—Possibility that a growth strategy will conflict with business goals or mission
• Supply chain management


  Efficiently coordinating the flow of goods from the initial production stage to the final delivery to customers. It involves planning, sourcing materials, manufacturing products, and managing logistics to ensure smooth operations and timely delivery.
• Key Components of Supply Chain Management


  • Planning
  • Sources
  • Manufacturing
  • Logistics
• Key reasons why supply chain management is important


  • Cost Efficiency
  • Enhanced Customer Service
  • Risk Mitigation
  • Inventory Management
  • Competitive Advantage
  • Innovation and Collaboration
• Demand management


  The process of forecasting, planning, and influencing customer demand for products or services to ensure that the supply chain can efficiently meet that demand
• Supply Management


  Also known as procurement. It refers to the act of identifying, acquiring, and managing resources and suppliers that are essential to the operations of an organization.
• Types of Supply Management


  • Direct Procurement
  • Indirect Procurement
  • Goods Procurement
  • Services Procurement
• Importance of Supply Management


  • Controls cost
  • Allocates resources efficiently
  • Manages risk
  • Gathers information for strategic business decisions
• 9 Steps in the Supply Management Process


  • Identify goods and services that a company requires
  • Submit purchase requisition
  • Evaluate and choose vendors
  • Negotiate price and contract terms
  • Create a purchase order
  • Receive and examine delivered goods
  • Perform three-way matching
  • Approve invoice and make payment
  • Maintain records
• What do supply management professionals do?


  • Purchase goods and services
  • Formulate supplier-related strategies
  • Optimize procurement processes
  • Consider external influences
• Differences between supply management and supply chain management

  Supply chain management describes the production flow of goods and services, beginning from the sourcing of raw materials to the delivery of the final product to the consumer. Supply management represents the procurement part of the supply chain management processes. It's a subset of supply chain management systems.
• Sales and Operations Planning (S&OP)


  A process that helps businesses coordinate their sales and production activities. It involves forecasting future sales, aligning them with production capabilities, and adjusting plans accordingly.
• Benefits of Sales and Operations Planning (S&OP)


  • Improved Forecasting Accuracy
  • Enhanced Efficiency
  • Optimized Resource Allocation
  • Risk Reduction
  • Improved Customer Service
  • Strategic Decision Making
  • Financial Benefits
• Product portfolio management


  The strategic process of managing a company's collection of products or services to maximize overall profitability and achieve business objectives.
• Key components of product portfolio management in supply chain management


  • Product Life Cycle Management
  • Market Analysis and Segmentation
  • Resource Allocation
  • Risk Management
  • Strategic Planning
  • Performance Monitoring and Analysis
• Importance of Product Portfolio to business


  • Innovation
  • Tax benefits
  • Aligns projects with the business strategy
  • Visualize the entire portfolio
  • Effective allocation of resources
  • Data for the key members of the management
  • Cash flow management
  • Synergy within the internal team
  • Proper selection of the target market
• Goals of product portfolio management


  • Maximize Profitability
  • Optimize Resource Allocation
  • Manage Risk
  • Enhance Competitiveness
  • Support Strategic Goals
  • Improve Market Positioning
  • Drive Innovation
  • Enhance Customer Value
• Challenges of Product Portfolio Management include: It is difficult to sell new resource allocation plans, Overall goals of product portfolio management differ within an organization
• Product Manager vs. Product Portfolio Manager


  Product Manager – usually responsible for a single specific product, its features, product roadmap, and broader strategy. Product Portfolio Manager – responsible for an organization's portfolio of products, their inter-relationships, and the portfolio's role in the market.
• BCG Matrix or Boston Consulting Group


  Designed to help with long-term strategic planning. Also known as the Growth/Share Matrix. The Matrix is divided into 4 quadrants: Dogs, Question marks, Stars, Cash cows.
• Digital supply chain


  Typically used when discussing how the development and implementation of advanced digital technologies can drive improvements to traditional supply chains.
• Differences between Traditional and Digital Supply Chains


  • Automation and Efficiency
  • Flexibility and Adaptability
  • Collaboration and Connectivity
  • Data Analytics and Decision-Making
  • Customer Experience