CF-E8

FIN 6301, Corporate Finance 1

Course Learning Outcomes for Unit VIII Upon completion of this unit, students should be able to:

1. Formulate financial decisions based on financial statement analysis.

2. Assess a company’s performance based on financial ratio analysis.

5. Assess a company’s management of human capital. 5.1 Analyze a company’s management of human capital.

7. Describe implications of mergers and acquisitions.

7.1 Explain reasons for a potential merger. 7.2 Identify reasons to manage risk in mergers and acquisitions.

8. Analyze the risk and return of a financial decision.

Course/Unit Learning Outcomes

Learning Activity

1 Unit VIII Essay

2 Unit VIII Essay

5.1 Video: What is Human Capital? What Does Human Capital Mean? Human

Capital Meaning, Definition & Explanation Unit VIII Essay

7.1 Chapter 22, 860-880 Unit VIII Essay

7.2 Unit Lesson Chapter 23, pp. 896-904 Unit VIII Essay

8 Chapter 21, pp. 834-852 Unit VIII Essay

Required Unit Resources Chapter 21: Dynamic Capital Structures and Corporate Valuation, pp. 834–852 Chapter 22: Mergers and Corporate Control, pp. 860–880 Chapter 23: Enterprise Risk Management, pp. 896–904 In order to access the following resource, click the link below. The Audiopedia. (2016, August 13). What is human capital? What does human capital mean? Human capital

meaning, definition & explanation [Video]. YouTube. https://youtu.be/hNdxYIDeiKw What is Human Capital Video Transcript

UNIT VIII STUDY GUIDE

Finance in a Dynamic Environment

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Unit Lesson

Strategic Financial Management Strategic financial management pertains to the planning and management of financial resources of organizations in order to achieve their business objectives and provide long-term maximum returns to their shareholders. Strategic financial management involves the precise definition of the objectives of the business, the quantification of resources (current and potential), and the creation of a financial plan that allows for the achievement of organizational goals. After the planning stage has been completed, the next steps are to establish the necessary procedures for the collection and analysis of data, to make decisions about finances, and to track projected and actual results in order to make the necessary adjustment for corrections. Strategy plays an important role in financial management because key decisions need to be made in order to maximize the wealth of shareholders. Strategic financial management involves a deep understanding of the assets and liabilities of a company, including knowledge concerning key operations such as expenditures, revenue, cash flow, profitability, and accounts receivable and payable. In addition to these financial operations, strategic finance also involves continuous planning, adjustment, and assessment of the various operations within a company. All of these financial decisions play an important role in the achievement of the long-term goals of a company.

Differences Between Strategic and Tactical

Strategic financial management practices are geared toward long-term success, whereas tactical financial management practices are geared more toward short-term positioning. However, effective strategic financial management often involves consideration of both short-term and long-term objectives, sometimes leading to changes in short-term goals in order to fulfill long-term goals. For example, the short-term goal of earning higher monthly profits may be temporarily stopped by closing a restaurant for a month to undergo significant renovations and improve training of the staff. This may lead to a temporary loss in earnings but can eventually have significant and positive long-term effects in terms of the overall growth of the restaurant. Short-term and long-term objectives are often influenced by the different stakeholders involved in a company. Reactions can vary, even if the outcome of the decision should lead to long-term benefits for the company. For example, shareholders may be upset with company management for making a decision that led to a short-term drop in the company’s stock price even though that decision could ultimately lead to long-term gains that can benefit the entire company.

Mechanisms for Achieving Goals in Strategic Finance Strategic finance is important to remain competitive in an increasingly globalized and dynamic business platform, underscoring the importance of having a robust strategic plan. The targets of strategic finance include internal goals, such as productive improvement and sound financial practices, and external goals,

Investment decisions (e.g., the combination or mixture of assets that need to be held, profitability management),

financial decisions (e.g., debt, equity, ratio), liquidity decisions (e.g.,

maintenance of cash reserves), and dividend decisions (e.g.,

amount of earnings to be given to shareholders, the frequency,

what and how much needs be retained)

Answer:

Given the nature of strategic financial management, what are some of the important topics that a

financial manager has

to use for strategic

decision-making?

Question:

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such as competitive stockholder value. These targets underscore the key processes of the importance of long-term planning, financial management, value management, and organizational development. These targets can be achieved using key strategic finance processes such as financial planning and forecasting (i.e., scenario analysis and modeling capabilities), business intelligence (i.e., sensitivity analysis), strategic planning (i.e., spreadsheets for the management and analysis of data), complete finance modeling (i.e., determination of the impact on profits, cash flow, balance sheet, and shareholder value), and capital management (i.e., aids in the decision-making process by connecting finances, capital management, capital structure, and taxation).

Elements of Strategic Financial Management Strategic financial management is applied to different aspects of the operations of businesses using several elements for the efficient use of their financial resources. The key elements of strategic financial management are budgeting, risk management, and ongoing review and evaluation. Budgeting: Budgeting refers to the ability of a strategic financial manager to increase financial efficiency, decrease waste, and identify operational activities that consistently exceed the allocated budget. The task of budgeting involves making sure there is money available to address all of the daily operating costs without taking unnecessary financial resources outside of the company. Another important issue that is a part of budgeting is the analysis of how the earnings of a company can be invested in order to facilitate the achievement of long-term goals. According to Rausch and Wall (2015), inefficiencies in budget spending are more likely to occur in finite- period budgets with fully flexible budgets. Both strategies are inefficient because unspent money for a given year is saved for the next year, and funds can be borrowed from future budgets. Rausch and Wall (2015) found that it is more efficient if budget funds are spent and saved at the discretion of the manager without being threatened by loss of funds or impending debts. To demonstrate how budgeting can be an important element of strategic finance, consider the following example. Lea is a strategic financial manager in a small manufacturing company. Among her many tasks is budgeting the resources of the company in order to maintain its day-to-day operations and ensure that enough earnings are accrued in order to achieve long-term goals. For instance, she conducts daily analysis of the output of the production, ensuring that the target number of products are produced every day. She also monitors different aspects of the operations to ensure that the allocated budget does not exceed the actual operations resources. Based on her data, she notices that that target number of products manufactured can be increased based on her findings that the workers often finish early because the target has already been achieved. Based on her analysis, she could make several recommendations and changes that could lead to an increased workload within the confines of the allocated budget and resources at that moment in the company’s operations. Risk management: Another important element of strategic financial management is risk management. Risk management pertains to the evaluation of the potential risks that a company may encounter based or making capital expenditures or implementing certain policies in the workplace. According to Sax and Andersen (2018), risk assessment is associated with an increase in profitability and decrease in financial leverage, which are both facilitated by strategic planning. As a risk assessment approach, companies may also use value-at-risk (VaR) strategies in order to determine the risk of a particular decision. VaR involves the estimation of potential loss of an investment based on given normal market conditions and a specific time period (e.g., a single day). Information gained from the VaR analysis can lead to proceeding with or withdrawing from a financial decision. To demonstrate how risk management is an important element of strategic finance, consider the following example. One of the jobs Jimmy has as a financial manager of a small manufacturing company is to conduct risk assessment regarding the company’s various transactions. The company is currently in the process of expanding its operations with the intent of buying more equipment in order to increase production. To determine whether this goal presents minimal risk and is worthy of being pursued financially, Jimmy conducted a VaR analysis. Based on this analysis involving considerations of normal market conditions in a given day, Jimmy decided that pursuing the decision to buy more equipment should be made because of the

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projected profitability of this investment. He presented this assessment to other leaders to help them decide whether expanding the operations though more equipment should be pursued. Ongoing review and evaluation: Another important element of strategic financial management is the implementation of ongoing review and evaluation. This element pertains to the development of structures and procedures that will allow for regular reviews and evaluations regarding the day-to-day progress of the operations of a company. This element is particularly important in order to achieve the long-term goals of a company. To demonstrate how ongoing review and evaluation are important elements of strategic finance, consider the following example. As a financial manager in a family-owned company selling pastry products, such as cookies and cakes, Michelle regularly conducts review and evaluation of the profits earned every day and the performance of her employees. She has made a system of determining the financial health of the company by creating a database containing spreadsheets, which allow her to input the daily gross revenue, the operating costs for each day, and the net profits. In addition, she also conducts a regular evaluation of her employees, and their performances are also tracked in a system involving easily completed spreadsheets that include the number of absences, tardiness, and disciplinary actions. She uses this system to track the progress of her company in order to make the necessary changes and adjustments to ensure that the company remains profitable and efficient. Based on this system, she can detect increases and decreases in profits and their possible relationship with the performance assessments of her employees.

Conclusion Strategic financial management is important because it encompasses various aspects of healthy organizational functioning. Strategic financial management is particularly important to the maximization of profits and the minimization of costs through efficient organizational practices based on the planning and fulfillment of long-term objectives. In the pursuit of long-term objectives, certain short-term compromises may be necessary. This underscores the importance for strategic finance managers to engage in careful planning and deliberation of organizational finances and resources.

References Rausch, A., & Wall, F. (2015, November 2). Mitigating inefficiencies in budget spending: Evidence from an

explorative study. Journal of Accounting & Organizational Change, 11(4), 430–454. Sax, J., & Andersen, T. J. (2019, Autumn). Making risk management strategic: Integrating enterprise risk

management with strategic planning. European Management Review: The Journal of The European Academy of Management, 16(3), 719–740.