Month: September 2022

Strategic planning is the process of identifying where you want your company to be in the future and then charting steps to get there. However, you can’t get where you want to go unless you have the financial resources to execute your vision. Financial planning is the process of connecting your financial operations with your big picture strategy.

Strategic financial management is about creating profit for the business and ensuring an acceptable return on investment (ROI). Financial management is accomplished through business financial plans, setting up financial controls, and financial decision-making.

Before a company can manage itself strategically, it first needs to define its objectives precisely, identify and quantify its available and potential resources, and devise a specific plan to use its finances and other capital resources toward achieving its goals.

Strategic management also involves understanding and properly controlling, allocating, and obtaining a company’s assets and liabilities, including monitoring operational financing items like expenditures, revenues, accounts receivable and payable, cash flow, and profitability.

Strategic financial management encompasses furthermore involves continuous evaluating, planning, and adjusting to keep the company focused and on track toward long-term goals. When a company is managing strategically, it deals with short-term issues on an ad hoc basis in ways that do not derail its long-term vision.

1) Managing for value

Managing for value is the one of the elements of value based management. Value based management is a management approach which ensures that the organisation is structured and managed on the basis of shareholder’s value.

Managing for value is one of the key elements of a manager’s task in an organisation for the success of a strategy. Managing for value relates to maximising the long-term cash generating capacity of an organisation. Long-term cash generating capacity refers to the ability of an organisation to earn increased funds for use in the future.

Creating value is the most important phase in value based management process. Any strategy which creates value for its stakeholders is considered successful. One of the major stakeholders of any organisation is its shareholders. The value is created for shareholders by ensuring large returns to them. The returns to the shareholders are in the form of timely dividends. Value creation is crucial because an organisation has to retain its status in a developing market. The organisation has to gain competitive advantages over other market players and it could add certain value to its business to support itself in the market.

There are various factors of value creation in an organisation, such as operations, financing and investments

a) Value creation from operations

Operations refer to functioning of the organisation. There are two aspects to operations as revenue and cost. Revenue leads increased shareholder value and cost leads to a reduction in shareholder value. Funds are generated from sales revenue, which depends on the volume of sales and the selling price. Operational cost include various costs such as production, selling and distribution costs, administration costs, overhead and other indirect costs. The management must do its best to increase revenues and decrease costs and overheads to get value creation from operations.

b) Value creation from financing

Financing cost is the cost of capital. Cost of capital is composed of two main elements; equity and debt. In external financing sources, the organisation must pay interest which would lead to a reduction in funds and ultimately a reduction in shareholder value.

The management must try to find optimal cost in different financing sources. The choosing of optimal capital cost increases the value from financing.

c) Value creation from investments

Organisations block their funds in assets. If the investment leads to a generation of funds, it creates value for the shareholder. On the other hand, if the investment is such that it reduces funds, then it leads to reduction in the value creation for the shareholder.

The increase and reduction in shareholder value can also be termed value drivers (increase) or cost drivers (reduction). These drivers and the main source of value creation for an organisation. The management must invest the organisation’s funds to optimal investment choices to get highest value from investments.

2) Financial expectations of stakeholders

All stakeholders are keen to know whether they will receive financial returns from the implementation of a strategy. They are also interested in whether they will receive regular returns such as dividends for shares held. Management has to develop and sustain stakeholder relationships while it tries to meet its objectives of maximising shareholders wealth. This can be difficult in the event of conflicting objectives among stakeholder groups. Consensus theory recognises that each organisation represents a coalition of shareholders, directors, employees, customers etc. each having different and sometimes opposing goals. Since it is difficult to meet the objectives of each group completely, political compromise results from each party settling for less than their ideal. In the case, shareholder wealth is not miximised, other stakeholder groups will also settle for less.

Organisations have various stakeholders such as suppliers, employees, bankers, shareholders, customers and community. Different stakeholders have different financial expectations from organisations. It depends on their circumstances. While implementing strategies, management should pay attention to the financial effects of the strategy on all stakeholders.

The management must consider the financial expectations of stakeholders in the financial formulation of strategy. The financial expectations of stakeholders are;

a) Suppliers and employees

These stakeholders expect timely payment from organisation and they focus on liquidity position of the organisation. Liquidity means the capability of an organisation to pay for its short-term financial obligations.

b) Bankers

Banks are the institutions which lend money or funds to organisations to enable them to accomplish their goals. They focus on organisation’s ability to repay the loan with the interest. Banks may consider the organisation’s capital gearing ratio because it provides the relationship between the debt and equity in an organisation. Moreover, the interest cover ratio also indicates the capacity of the organisation to pay interest.

c) Shareholders

Shareholders are the most important stakeholders for organisations. They expect the organisational strategy to be such that it gives them regular dividends and that organisation has sufficient funds for its long-term commitments. The shareholders of the organisation also desire capital growth in their shareholdings. If the organisation intends to reorganise its business through mergers or acquisitions, the strategy adopted or to be adopted by the organisation should safeguard the interest of the shareholders.

d) Customers

Customers expect the organisation to provide value for the money they pay. They also expect high quality goods and services. The organisation should implement the strategy which satisfies customer’s demands so that it leads to the strategic success of the organisation.

e) Community

The community expects the implemented strategy to benefit the community as a whole. The organisation’s strategy should be capable of providing employment for the community; concern should be given to controlling pollution and other potentially harmful effects on the environment; it should also take care of ethical considerations in the community such as abiding by the law and order of society.

3) Funding strategies

The organisation’s funding strategies depend on factors such as whether or not the organisations are owned privately or publicly and the goals of the organisation. The organisation’s goals provide how much funding is required. Managers develop a strategy of obtaining funds from different sources depending upon the company’s goals such as investments, new projects, acquisition, mergers or improvement in the product features.

The type of funding strategy to be implemented by organisation depends on the risk and return factors. It is a general principle that higher the risk, the higher the return. Moreover, the organisation’s plan to obtain funds through loans from outside agencies will also incur interest charges to be paid to the money lenders. So, debts create more risks.

The market growth rate and the organisation’s market share also effect the organisation’s funding strategies. The different business development phases need different funding strategies. For example if the organisation has high market share but the market has low growth rate the organisation requires less investment and organisation could control its cost better than its competitors. But if the organisation has high market share but the market has also high growth rate the organisation requires more money for investments and expenditures to retain its market rate.

Corporate Strategy

A corporate strategy is an organizational blueprint that outlines the activities to be undertaken for the achievement of its goals, all while minimizing the risks along. It is a fundamental path that assists you in launching the right projects and managing your resources wisely which acts as a foundation for achieving the Company’s strategic goals.

It helps in answering the key aspects of your business like your product portfolio, your organization structure, and design, resource allocation across departments and projects, and the pairing of risk and returns in the right proportion. These are the prime decisions for any business and are known as the “four pillars” of corporate strategy.

• In Portfolio Management you decide what products or services you want to develop and offer. A complete SWOT analysis and competitor analysis can help you determine the market response to the product and the growth potential.
• An Organizational Design will ensure the right authority, responsibility, and reporting structure is established. Identifying functions, departmentalization, resource allocation, assignment of authority, responsibility, inter-departmental coordination, and extent of the delegation are the main elements of this pillar.
• Resource Allocation, both financial and human is significant to the success of the strategies. Identifying and capturing the right set of skills of an individual and making sure there is a sufficient supply of manpower in the future is important. Ask yourself if you have high-performing assets and whether your investment is gaining returns.

Strategic trade-offs can be challenging especially when a business chooses to diversify into new areas. It could make you or break you into a disaster; hence an in-depth analysis of a business’s capabilities and endurance will help ascertain the level of risk you are willing to take.

Financing Policy refers to the decisions, choices, or regulations related to the financial system of the organization like payment system, borrowing system, lending system, etc. The policies are framed to introduce financial stability, promote market efficiency and enhance the firm’s value for its stakeholders.

Types of Financing Policy

Hedging Policy

Hedging policy involves offsetting the finance for an asset with a liability that matures on the asset’s expected life. For example, a business wants to purchase machinery having an expected life of 20 years. It can do so by financing the asset with a 20-year loan. This way, the asset and liability both will mature in the same period. The purpose of the hedging policy is to match the assets and liabilities during the relinquishing period.

Conservative Policy

An organization’s attempt to match the assets with the liabilities is not always possible. In such situations, the business uses a conservative financing policy. In this policy, the firm uses more long-term sources of finance and less short-term finance to purchase its asset. The business acquires permanent and current assets using long-term sources of finances. Only a part of short-term finance is used to finance its temporary current assets.

Aggressive Policy

Aggressive financing policy comprises of relying more on short-term sources of finance than long-term sources. It is termed an aggressive policy because it is riskier as it involves the continuous renewal of the borrowing. In this policy, the firm finances its permanent current assets using short-term sources of finance.

Highly Aggressive Policy

A highly aggressive financing policy is one where long-term sources finance the major part of the permanent asset, and short-term sources finance a minor portion. It is a common assumption that the firms which follow this policy are nearing their closure and are termed as “sick.”

Depending upon the strategy and requirements of the organization, it can adopt different types of financing policies. However, there are different aspects that businesses should consider while making decisions relating to financing policy.

Benefits of financial policies and procedures

It might seem daunting but creating financial policies and procedures manual can have many long-term benefits for your business.

For example, your manual will:

• Ensure all staff are aware of their obligations
• Help your managers and supervisors make consistent and reliable decisions
• Give employees a clear understanding of what you expect and allow
• Reduce disputes
• Add to the professionalism of your business

Creating financial policies

Policies provide an overview of certain rules that you have in your business. They should:

• Align with business goals and plans
• Reflect the culture of the business
• Be flexible
• Be easily interpreted and understood by everybody in the business

Investment Decisions

Investment decisions of the organization depend on the long-term or short-term investment requirements. The long-term investment decision involves investment in the organization’s capital assets, and the short-term investment decision involves working capital management. The firm’s financing policy considers the investment requirements and accordingly arranges for the funds. The interest rates on the long-term funds are comparatively lower than the short-term funds.

Financing Decisions

The finance manager of an organization needs to select those sources of finance that result in optimum and efficient capital structure. The duty of the finance manager is to select the right proportion of debt and equity in the overall capital mix higher debt results in higher interest liability and higher risk. By increasing the equity, permanent funds of the business will increase. Still, it will also result in higher expectations of the shareholders in the form of a higher required rate of return. The financing decisions are based on increasing the wealth of shareholders and the organization’s profitability.

Dividend Decisions

Distributing dividends is an important aspect of the business while determining the financing policy. The major concern while making dividend decisions is determining how much profits are available to distribute to the shareholders. Dividend decisions must be based on dividend stability policy and future outlook.

If the firm distributes higher dividends and there are growth opportunities for the firm, then it will have to borrow funds from the market to cater to the expansion needs.

Creating a full manual feels overwhelming, try to complete it in real-time as you work. Writing while doing helps to break it into manageable chunks and ensure you capture every step:

• Start by thinking about what you want to achieve.
• Get your employees involved.
• Write down your policies and procedures as you do each activity throughout the day.

Steps to develop effective Corporate Financial Strategy:

Corporate financial strategy is most efficacious when the strategy is maintained internally and aligned with the operations of the company. Fully combined corporate financial strategies can be developed using the following steps:

• Develop a sufficient capital structure: Capital structure is described as the means through which a company finances itself. Financing may come from long term-debt, common stock, and retained earnings. Companies can determine the best capital structure for its purposes through the use of three forms of analyses: Downside cash flow scenario modelling, peer group analysis, and bond rating analysis. Downside cash flow scenario modelling is a procedure in which a capital structure is taken from a set of downside cash flow scenarios. Peer group analysis is a process in which common capital structures and fads of peer businesses are assessed for insight into operating features. Bond rating analysis is a process in a review of the debt capacity within certain debt ratings.
• Determine the correct market valuation: Correct market valuation appraises whether the company is underrated or overvalued in the marketplace. Market valuation is described as a measure of how much the business is worth in the marketplace. It is important to review financial measures such as investor expectations for growth, margins, and investments. Compare investors’ expectations and managements’ expectations to check for discrepancy.
• Establish the best corporate financial strategy: Develop an ideal strategy for value creation that provides sufficient funding, financial balance, and a growing cash reserve.

It is well realized that corporate financial strategy is a firm-specific enterprise. Firms create their individual corporate financial strategies based on their available tools, resources, insights, goals, and objectives.

Applications:

In corporation, Chief financial officers, managers, and planning teams design their corporate financial strategies to exploit and optimize growth and shareholder value. Corporate financial strategies are considered as return driven policies. A return driven corporate strategy are a set of corporation specific guidelines for creating, maintaining, and analysing corporate strategy focused on highest, long-range wealth development. In today’s business climate, managers have more responsibility to create shareholder value, observe the performance of a business, and maintain long-term business success. Return driven corporate financial strategy prioritizes value added outcomes and directs the business with a critical eye toward return, value, and growth.

Common mechanisms of corporate financial strategies include: Value-based management, strategic planning, mergers and acquisitions, cost analysis, and capital budgets which are used by chief financial officers, managers, and planning teams to create shareholder value.

Corporate strategies and Value-Based Management:

Chief financial officers, managers, and planning teams of firms may select to base their corporate financial strategy on the philosophies of value-based management. Value-based management is expounded as a management approach focused on maximizing shareholder value. Value-based management includes strategies for creating, measuring, and managing value. Value-based management is a combined and holistic approach to business that embraces and informs the corporate culture, corporate communications, corporate mission, corporate strategy, corporate organization, corporate decision making, and corporate awards and compensation packages.

The economic value added strategy is general mechanism used in value-based management. Economic value added is the net operating profit minus a charge for the opportunity cost of all the capital invested in the project. Economic value added analysis is measured a useful process for looking at varying company unit performances on a cost-of-capital basis where risks are attuned. Value added managers may receive compensation based on the outcome of economic value added analysis. Finally, the economic value added approach is a measure of economic performance and a strategy for building shareholder wealth.

• Get accurate and timely financial data before making long-term financial decisions.

Smart business owners let accurate data inform their mission-critical moves. It still shocks me to see the number of small and medium size companies who make big decisions with inaccurate or grossly incomplete financial information.

• Have a Spending Plan And Budget

As you should have a spending plan for your personal finances, you also need one for your business. The foundation of smarter financial decisions for your business always starts with a good budget, as this is still the best way for you to keep track of your expenses and other payables. With a budget, you won’t be spending any more than you have to. And, you’ll come face-to-face with the figures as to where you need to cut back on your business expenses.

You can get started with these six steps:

• Make a spreadsheet, as this makes it easier for you to input amounts, make computations, and even add columns and rows whenever modifications have to be made.
• Consider cost-cutting; if you can find certain areas in your business budget where you’re absolutely certain, the costs don’t have to be that high.
• Shop around for new suppliers and other services, so you’re sure you always have the lowest and most competitive rates from your current suppliers.

• Review your strategic pricing decisions

Most businesses set their prices when the business is new and desperately needs business, and as a result, set pricing levels low. Over time, the business may make nominal increases to pricing every few years, but rarely does the owner ever sit down and fundamentally rethink his pricing model. Do you price in relationship to your costs and your competitors? The most successful companies take both of these factors into consideration, but they also price in relationship to the cost of the status quo for their customers.

How much is the problem that your product or service solves already costing them? What is the real value of your product of service? What is the “frame of reference” you could give your customers that would help them immediately see your product or service as both the logically sound and emotionally satisfying solution?

• Consider changing how you charge

Is there a way you can move from a one-time charge to an ongoing revenue stream? Perhaps you do have a one-time charge for the initial purchase, but is there a way you can provide ongoing value to service your client on an ongoing basis?

The smartest business models allow companies to annuitize their business relationships.

• Don’t Consider Accounts Receivable As Cash Or Income

It’s wrong to consider accounts receivable as cash or income. Remember that it’s cash not until you actually receive the amounts. So, until you do, don’t think you already have that money to spend. Otherwise, you may be budgeting investments or other major expenses for the money you don’t actually have yet. If there are delays in those receivables, then your business’s financial stability will suffer.

• Find the optimal staffing level and manage your hiring intelligently

Look for a simple heuristic that helps you know when you need to hire more production and operational staff (e.g., sales per employee, projects per operations staff, etc.) and when you are too heavy. What are the indicators that alert you to the need to staff up or staff down? What investments could you make in technology, systems, and training that would allow you to produce more with fewer people?

Note that generally “A” players produce multiples more value than B or C players, yet cost only a percentage more.

Constantly be on the lookout for ways you can upgrade your team over time so that you can produce more with less.

• Get clear, fresh perspective before you make a major capital investment

All too often, business owners find a succession of small commitment steps lead them over the edge of the cliff when making the big infrastructure and capital decisions. They let sunk costs and vested interests that they are afraid of losing push them to chase bad money with good.

After you have gathered all the relevant facts, step back with your leadership team and ask the question fresh: “Knowing all we know today and imagining that we had no sunk costs at this point at all, what is the best decision for the business over the short, medium, and long-term?”

• Know the difference between strategic expenses and nonstrategic expenses

Strategic expenses are those things that directly help you sell more or produce better. They include marketing campaigns that work, salespeople who sell, technology upgrades that reap real returns and ongoing advantages of significant value, and intellectual property barriers that give you a sustainable advantage for which the market will pay. Nonstrategic expenses essentially include everything else.

Outspend your competition for strategic expenses in good times and bad. Relentlessly cut nonstrategic expenses. And repeat this over and over.

The advocates of this school of thought argue that the dividends have no impact on the share price or market value of the firm. The argue that the shareholders do not differentiate between the present dividend and the future capital gains and are basically interested in higher returns either earned by the firm by investing the profits in future profitable investments.

They believe that the profits are distributed as dividends only if no adequate investment opportunities for investments for the business.

Residuals theory of Dividends

The theory is based upon the assumptions that since the external financing has excessive costs and may not be available to the firm. The firm finances its investment by retained earnings or by retaining earnings. The retaining earnings are that portion of profits that is not distributed to the investors.

The residual theory of dividend policy is that the firm will only pay dividends from residual earnings, that is, from earnings left over after all suitable (positive NPV) investment opportunities have been financed. With the residual dividend policy, the primary focus of the firm’s management is indeed on investment, not dividends.

Thus the firm’s decision to pay the dividends is influenced by:

• The investment opportunities available to the business
• The availability of the internal funds. If the internal funds are excessive and all the investments are finances the residual is paid as dividends.

Thus, the divided policy is totally passive in nature and has no influence on the market price of the firm.

Modigliani and Miller (MM) Approach

This theory was proposed by Franco Modigliani and Merton Miller in 1961 who argued that the value of the firm is determined by the basic earning power, the firm’s risk and not by the distribution of earnings. The value of the firm therefore depends on the investment decisions and not the dividend decision. However, their argument was based on some assumptions.

Assumptions of MM hypothesis

• The capital markets are perfect and all the investors behave rationally.
• There are no taxes and flotation costs and if the taxes are there then there is no difference between the dividends tax and capital gains tax.
• No transaction costs associated with share floatation.
• The firm’s investment policy is independent of the dividend policy. The effect of this assumption is that the new investments out of retained earnings will not change and there will not change in the required rate of return of the firm.
• There is perfect certainty by every investor as to future investments and profits of the firm. Thus investors are able to forecast earnings and dividends with certainty.

The MM hypothesis is based upon the arbitrage theory. The arbitrage process involves switching and balancing the operations. Arbitrage leads to entering into two transactions which exactly balance or completely offset the effect of each other.

Tax Differential View of Dividend Policy

The tax differential view of dividend policy is the belief that shareholders prefer equity appreciation to dividends because capital gains are effectively taxed at lower rates than dividends when the investment time horizon and other factors are considered. Corporations that adopt this viewpoint generally have lower targeted payout ratios, or a long-term dividend-to-earnings ratio, as dividend payments are set rather than variable.

Every company has the responsibility to act in the best interests of its owners, the shareholders. That includes putting any leftover cash to its highest and best use. In some cases, the tax differential view of dividend policy is a reason for a company to adopt a growth strategy rather than a value strategy. In other words, they serve their shareholders’ tax needs by plowing leftover cash back into capital expenditures and other ways to grow the company (and therefore the stock value) rather than giving leftover cash back to the shareholders in the form of dividends.

It is important to note, however, that the difference in capital gains tax rates and dividend tax rates is the key here. The larger the difference between the tax rates, the larger the incentive to trade one policy for the other.

Gordon & Linter’s Theory

The bird in hand is a theory that says investors prefer dividends from stock investing to potential capital gains because of the inherent uncertainty associated with capital gains. Based on the adage, “a bird in the hand is worth two in the bush,” the bird-in-hand theory states that investors prefer the certainty of dividend payments to the possibility of substantially higher future capital gains.

Myron Gordon and John Lintner developed the bird-in-hand theory as a counterpoint to the Modigliani-Miller dividend irrelevance theory. The dividend irrelevance theory maintains that investors are indifferent to whether their returns from holding stock arise from dividends or capital gains. Under the bird-in-hand theory, stocks with high dividend payouts are sought by investors and, consequently, command a higher market price.

Bird in Hand vs. Capital Gains Investing

Investing in capital gains is mainly predicated on conjecture. An investor may gain an advantage in capital gains by conducting extensive company, market, and macroeconomic research. However, ultimately, the performance of a stock hinges on a host of factors that are out of the investor’s control.

For this reason, capital gains investing represents the “two in the bush” side of the adage. Investors chase capital gains because there is a possibility that those gains may be large, but it is equally possible that capital gains may be nonexistent or, worse, negative.

Treasury Bills:

The treasury bills are issued by RBI on behalf of the Central Government. Earlier they were issued on the basis of tenders floated regularly but now are available on tap system, i.e., on rates announced by RBI every week. These bills are issued only in bearer form. Name of the purchaser is not mentioned on the bills, rather they are easily transferable from one investor to another.

No interest is paid on the bills but the return is the difference between the purchase price and face (par) value of the bill. Since there is a backing of the Central Government, these are risk free securities. A very active secondary market exists for these bills so it has made them highly liquid. Treasury bills are one of the popular marketable securities even though the yield on them may be low.

Negotiable Certificates of Deposit (CD’s):

The money is deposited in a bank for a fixed period of time and marketable receipt is issued. The receipt may be registered or bearer, the latter facilitates transactions in the secondary market. The denominations and maturity periods are decided as per the needs of the investor.

On maturity the amount deposited and interests are paid. The CD’s are different from the treasury bills which are issued on discount. The short-term surplus funds can be used to earn interest in this method. The investment is secure unless the bank fails, the chances of which are remote.

Unit 1964 Scheme:

The Unit Trust of India’s unit 1964 scheme is very popular for making short-term investments. It is an open ended scheme which allows investors to withdraw their funds on a continuing basis. The units have a face value of Rs10. The purchase and sale value of units is not based on net assets value but it is determined administratively in such a manner that they rise gradually over time.

The unit scheme offers a good avenue for investing short-term funds and has the following advantages:

(i) The dividend income from unit received by companies is treated as inter-corporate dividend, it qualifies for tax exemption up to 80 per cent under Sec. 80M of the Income Tax Act. Many Companies purchase cum-dividend units in May, collect dividend in July and then sell the units.

(ii) The yield can be increased by a careful synchronizing of the purchase and sale of units because the capital loss on sale of units would qualify for a tax set-off, of which 80 per cent of the dividend income would be tax free.

(iii) There is an active secondary- market for units, there will be no liquidity problem.

Ready Forwards:

A commercial bank or some other organisation may enter into a ready forward deal with a company willing to invest funds for a short period of time. Under this system the bank sells and repurchases the same security (that means that company purchases and sells securities in turn) at pre­determined prices.

The difference between the purchase and sale price is the income of the company. Ready forwards are generally done in units, public sector bonds or government securities. Ready forward deals are linked with the position of the money market. The investor can hope to earn more if money market is tight during busy season and at closing of the year.

Badla Financing:

Badla financing is used in stock exchange transactions when a broker wants to carry forward his transactions from one settlement period to another. Badla financing is done through operators in stock exchange. It is the financing of transactions of a broker who wants to carry forward this deal to the other settlement period. The badla rates are decided on the day of settlement.

Badla transaction is financed on the security of shares purchased whose settlement is to be carried forward. Sometime this financing facility may be extended for a particular share only. For example, a company may provide badla finance to a broker X 10 crores for purchasing ACC shares in forward market. Badla rates vary with demand and supply position of funds.

Badla financing offers attractive interest rates. However, it becomes risky if the broker defaults in his commitment. Even the wide fluctuation in prices of shares may also affect the value of security.

An investor in this type of financing should be careful about following things:

(i) The selection of a broker should be on the basis of reputation.

(ii) The shares with a sound intrinsic value should be selected.

(iii) The margin should be adequate.

(iv) The possession of securities should be taken.

Inter-Corporate Deposits:

These are short term deposits with other companies which attract a good rate of return.

Inter-corporate deposits are of three types:

(i) Call Deposits:

It is a deposit which a lender can withdraw on one day’s notice. In practice it takes three days to get this money. The rate of interest at present is 14 per cent on these deposits.

(ii) Three Months Deposits:

These deposits are popular and are used by borrowers to tide over short- term inadequacy of funds. The interest rate on such deposits is influenced by bank overdraft interest rate and at present the borrowing rate is 22 per cent per annum.

(iii) Six-month Deposits:

The lenders may not have surplus funds for a very long period. Six-month period is normally the maximum which lenders may prefer. The current interest rate on these deposits is 24 per cent per annum.

Since inter-corporate deposits are unsecured loans, the creditworthiness of the borrower should be ascertained. Section 370 of the Company’s Act has placed certain restriction on inter-company deposits, so these provisions should be adhered to, these provisions are:

(a) A company cannot lend more than 10 per cent of its net worth (equity plus free reserves) to any single company.

(b) The total lending of a company cannot exceed 30 per cent of its net worth without the prior approval of the central government and a special resolution should permit such a lending.

Bill Discounting:

A bill arises out of credit sales. The buyer will accept a bill drawn on him by the seller. In order to raise funds the seller may get the bill discounted with his bank. The bank will charge discount and release the balance amount to the drawer. These bills normally do not exceed 90 days.

A company may also discount the bills as a bank does thus using its surplus funds. The bill discounting is considered superior to inter-corporate deposits.

The company should ensure that the discounted bills are:

(a) Trade bills (resulting from a trade transaction) and not accommodation bills (helping each other),

(b) The bills backed by the letter of credit of a bank will be most secure as these are guaranteed by the drawee’s bank.

Investment in Marketable Securities:

A firm has to maintain a reasonable balance of cash. This is necessary because there is no perfect balancing of inflows and outflows of cash. Sometimes more cash is received than required for quick payments. Instead of keeping the surplus cash as idle, the firm tries to invest it in marketable securities.

It will bring some income to the business. The cash surpluses will be available during slack seasons and will be required when demand picks up again. The investment of this cash in securities needs a prudent and cautious approach. The selection of securities for investment should be carefully made so that the amount is raised quickly on demand.

In choosing among alternative securities, the firm should examine three basic features of a security: safety, maturity and marketability. The security element deals with the absence of any type of risk. The securities with risk may give higher returns but these should be avoided. There should not be any default in payment when the securities are redeemed. The maturity periods will give higher returns.

The short-period securities will carry lower rates of interest but these should be preferred. The surplus cash can be invested only for smaller periods because the amount may be required for meeting operating cash needs in the short periods.

The securities should have a ready market. These investments can be made only in near cash securities. If the securities selected are such which require some time for realisation then there may be payment problems. So, the securities should have a ready market and may be realizable in a very short period.

Money Market Mutual Funds (MMMF):

‘Money market mutual fund’ means a scheme of a mutual fund which has been set up with the objective of investing exclusively in money market instruments. These instruments include treasury bills, dated Government securities with an expired maturity of upto one year, call and notice money, commercial paper, commercial bills accepted by banks and certificates of deposits.

Till recently, only commercial banks and public financial institutions were allowed to set up MMMFs. But in November 1995, the Government has permitted private sector mutual funds also to set up money market mutual fund. MMMFs are wholesale markets for low risk, high liquidity and short-term securities. The main feature of this fund is the access to persons of small savings.

Sustainable competitive advantages are a set of assets, characteristics, or capabilities that allow an organization to meet its customer needs better than its competition can. Sustainable competitive advantages are difficult to duplicate or replicate.

At its most basic level, there are three key types of sustainable competitive advantage.

• Cost advantage: The business competes on price.
• Value advantage: The business provides a differentiated offering that is perceived to be of superior value.
• Focus advantage: The business focuses on a specific market niche, with a tailored offering designed specifically for that segment of the market.

Types and Examples of Sustainable Competitive Advantages

Low Cost Provider/ Low pricing

Economies of scale and efficient operations can help a company keep competition out by being the low cost provider. Being the low cost provider can be a significant barrier to entry. In addition, low pricing done consistently can build brand loyalty be a huge competitive advantage (i.e. Wal-Mart).

Market or Pricing Power

A company that has the ability to increase prices without losing market share is said to have pricing power. Companies that have pricing power are usually taking advantage of high barriers to entry or have earned the dominant position in their market.

Powerful Brands

It takes a large investment in time and money to build a brand. It takes very little to destroy it. A good brand is invaluable because it causes customers to prefer the brand over competitors. Being the market leader and having a great corporate reputation can be part of a powerful brand and a competitive advantage (i.e. Coca-Cola (KO).

Strategic assets

Patents, trademarks, copy rights, domain names, and long term contracts would be examples of strategic assets that provide sustainable competitive advantages. Companies with excellent research and development might have valuable strategic assets (i.e. International Business Machines (IBM).

Barriers to Entry

Cost advantages of an existing company over a new company is the most common barrier to entry. High investment costs (i.e. AT&T (T)) and government regulations are common impediments to companies trying to enter new markets. High barriers to entry sometimes create monopolies or near monopolies (i.e. utility companies).

Adapting Product Line

A product that never changes is ripe for competition. A product line that can evolve allows for improved or complementary follow up products that keeps customers coming back for the “new” and improved version (i.e. Apple iPhone) and possibly some accessories to go with it.

Product Differentiation

A unique product or service builds customer loyalty and is less likely to lose market share to a competitor than an advantage based on cost. The quality, number of models, flexibility in ordering (i.e. custom orders), and customer service are all aspects that can positively differentiate a product or service.

Strong Balance Sheet / Cash

Companies with low debt and/or lots of cash have the flexibility to make opportune investments and never have a problem with access to working capital, liquidity, or solvency (i.e. Johnson & Johnson (JNJ).The balance sheet is the foundation of the company.

Outstanding Management / People

There is always the intangible of outstanding management. This is hard to quantify, but there are winners and losers. Winners seem to make the right decisions at the right time. Winners somehow motivate and get the most out of their employees, particularly when facing challenges. Management that has been successful for a number of years is a competitive advantage.

Steps to developing a sustainable competitive advantage

• Understand the market and its segments. Look for those niches that aren’t well serviced by competitors and can be profitably targeted and sold to.
• Develop an understanding of what customers really want and establish a value proposition that grabs their attention.
• Work out the key things that you need to do really well to support and deliver the value proposition. For example, service levels, quality, branding, pricing, et cetera.
• Understand what your strengths and core competencies are and how you can use these in innovative ways to provide value to your chosen market.
• Design your business model to support and deliver the value proposition.

At the end of this process, you will have a very clearly defined statement of:

• Who you will be selling to (customers and market segments);
• Why they will buy from you and not your competitors (the value proposition); and
• The key things you need to excel at to be able to consistently deliver your value proposition.

International assignment management is one of the hardest areas for HR professionals to master and one of the most costly. The expense of a three-year international assignment can cost millions, yet many organizations fail to get it right. Despite their significant investments in international assignments, companies still report a 42 percent failure rate in these assignments.

With so much at risk, global organizations must invest in upfront and ongoing programs that will make international assignments successful. Selecting the right person, preparing the expatriate (expat) and the family, measuring the employee’s performance from afar, and repatriating the individual at the end of an assignment require a well-planned, well-managed program. Knowing what to expect from start to finish as well as having some tools to work with can help minimize the risk.

New technologies provide greater opportunities in globalization for businesses of all sizes, but this international growth requires sending employees to foreign countries, either temporarily or permanently, to oversee the operation, administration, and marketing of international negotiations. Unfortunately, the biggest obstacles in International business are problems caused by cross-cultural differences. When cultural differences are not respected, appreciated and noted, negotiations can fail. By training employees in cross-cultural differences before sending them abroad, you can resolve many of these misunderstood issues.

Incorporate Multiple Delivery Modes

Quality elearning is not as simple as posting a series of videos on a shared drive. Not everyone can absorb knowledge or skills just from watching videos. Although convenient, self-paced videos often lack the power to keep viewers engaged. Plus, studies have shown that different people learn differently. These differences can be especially profound across diverse cultures, generations and languages.

Search for a native cross-cultural trainer from the country the employee will work in. Use foreign in-house training personnel or contact your local Small Business Administration to find businesses specialized in this type of training. You can also locate this specialized training from online businesses like InterCultural Group, People Going Global or Interchange Institute. Ask for training in cultural practices in business, and in body language and facial gestures for the country you are doing business in. Many foreign countries emphasize hand and body gestures. Learning to identify these can help the negotiation run smoothly.

Teach future international employees a little of the language used in the country they will work in. The foreign business associate will not see it as insulting or embarrassing when a foreign associate mispronounces a word. To the contrary, it is a sign of respect and recognition to attempt to speak the foreign language.

Train the employee to slow down. Most Americans and Canadians are trained to work on a schedule. They live fast-paced lives and stick to set times faithfully. Other cultures are not as defined in their daily schedules. Help the employee understand these different perceptions of time and be a little more flexible with scheduling meetings and other work related events. Understand that the negotiating partners may be more interested in the long-term relationship rather than just closing the deal in a week.

Define the country’s cultural standing when referring to power, individualism, collectivism and masculinity vs. feminism. For instance, some countries put more emphasis on group communication rather than individual decisions. Teach employees to respect these differences even if they don’t coincide with their personal beliefs.

Train the employees in local culture, art, history and politics. This will give them topics of conversation not related to business to help remove the stress from the business negotiation. Explain the importance of complimenting a culture and country, without comparing it unfavorably to that of their native country. Allow the employee to demonstrate pride in their country without demeaning the foreign country.

Train the employee to be aware of culture shock and its possible interference in the work environment. Explain the three stages of culture shock, which are initial optimism, followed by a period of frustration and gradual improvement of mood and satisfaction.