The objective of a financial strategy can be captured in terms of the important financial activities to be undertaken and also in terms of the expected impact of these activities on the business. Following are the objectives of financial strategy of a business:
1. Estimation of the accurate amount of required capital and its timing
2. Raising all the necessary capital with acceptable terms and the lowest possible cost
3. Efficient and effective application of the capital in various functions of the business
4. Generations of higher profits on the revenues
5. Timely settlement of all the liabilities of the business
6. The timely payment of all the creditors of the business
7. Timely repayment of the the loans and other debt instrument
8. Generation of attractive returns on investment for the shareholders
9. Management of all the risks in the business environment
10. Undertaking growth initiatives and executing them
11. Ensuring the stability and sustainability of the business in long-term
12. Realisation of the dreams of the promoters in terms of advancement of the company
13. Making all the stakeholders of the company happy and satisfied with it
14. Increasing the credit rating of the company to avail larger and cheaper funds from all kinds of investors
For the smooth management of the finance function in the company, an organisation chart is prepared for the department. Various corporate policies for the financial decisions are prepared. Delegation of financial powers is prepared. Modern softwares are suggested to capture the business data to understand what is going on correctly and what needs improvement. The financial plan analyses observations made by the statutory auditors and if there are any negative observations, suitable measures are undertaken to rectify them. Measures are undertaken to rectify where there might be a possibility of financial fraud. To prevent this, a suitable vigilance mechanism is put in place. Various applicable compliances for the company are identified and the track record of their compliance is studied. The treatment of relations with the other departments is defined.
Financial strategy includes management of all financial aspects of a company in line with the business strategy. The strategy defines the financial vision of the company and the financial objectives in short-term, mid-term and long-term. It includes understanding the current requirement of funds and also the requirement for future growth initiatives. During the preparation of a financial strategy, the current financial performance of the company is analysed; action is taken on the areas that need improvement. As an important part of the financial strategy, the prevalent capital structure of the company is analysed and its implications for stability, credit rating, market price of shares of the company are analysed. Suitable steps are undertaken to reach the desired state of capital structure. For this, various available modes of funding of the company are analysed for their pros and cons and funds are secured for company’s activities. Financial projections are made in a financial model. Looking at the growth growth rate of the company and life cycle stage of the company the dividend policy is prepared.
Various kinds of business risks are mapped and their financial impact is measured. Various mitigation measures are suggested and implemented. A valuation of the business is carried out. The rate of return on the investment is measured vis-a-vis the cost of capital. The financial impact of the strategic decisions of the company such as mergers and acquisitions or joint venture is analysed. If the company is in financial distress or if there is a decline in financial performance, strategies are evolved for the turnaround of the company. Study of imports and exports of the company is made to understand the impact of trends in commodity prices and foreign exchange. If the company has a presence abroad, analysis of international business is carried out.
The trends in working capital requirement are studied and plans are made to mobilize the increase in working capital. The cash flow of the company is projected and suitable provisions are made to fulfill the deficit. Various business scenarios are taken into account such as conservative case, average case and aggressive case. The impact of pricing on the viability of business as well as on the demand is considered and the impact of competition is studied. Analysis of various product segments and market segments is carried out to understand their relative importance. Various business models are are studied to see where the maximum value lies in the value chain. Tax structure is evolved to reduce the impact of direct and indirect taxes. The insurances required for the company are identified and provisions are made for them. Various tax and other kinds of benefits from various government and causes government bodies are analysed.
A suitable strategy is evolved to make appropriate investments of the excess funds of the company with due care for liquidity.
A financial strategy can be focused only on a few aspects of the mentioned above as per the requirement of the business.
Apohan provides services for the individual components of the financing strategy or an integrated financial strategy for a business to achieve all the objectives of a good financial strategy that are listed here.