Interface of financial policy2nd September 2022 0 By indiafreenotes
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.
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.
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.
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.