The Strategic Role Of Financial Management

Financial Management has a strategic role. Strategic financial management is the process of setting objectives throughout the business and deciding what resources will be needed to achieve these objectives. Financial management has a strategic role in the sense that this planning is taking place in a changing environment.

Strategic Financial Planning sets out the broad series of steps that need to be taken to achieve the businesss strategic objectives. These plans are developed by top management and will typically involve deciding what resources will be needed to achieve the objectives in the business plan and how the resources will be allocated in a changing business environment. Strategic plans are concerned with a longer time frame, commonly 3-5 years.

Some of the Most Important changes in the external environment that affect financial management: TAXATION: In 2000, GST was introduced lead to a shift in emphasis from direct to indirect taxation, while at the same time, broadening the tax base. The rate of company tax and capital gains tax was lowered, and accelerated depreciation was decreased. TECHNOLOGY: rapid developments have enabled financial managers to do more detailed and extensive analyses of the financial implications of decisions. Has increased the risk of fraud by members of finance staff. FINANCIAL INNOVATION: lots of new financial products in the last decade (greater choices), due to the competition between financial institutions.

strategic droop:
Too many project started at a time, with the hope that one will compensate for the other project disappointment, this creating a strategic droop, this also result in inter department rivalry, competition for resources, and inferior result of all project, one can go for gap analysis backed by crap analysis to prevent such situapin

Economic Value Added

In corporate finance, Economic Value Added or EVA, is an estimate of a firm's economic profit being the value created in excess of the required return of the company's investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital. This amount can be determined by making adjustments to GAAP accounting. There are potentially over 160 adjustments that could be made but in practice only five or seven key ones are made, depending on the company and the industry it competes in.

Calculating EVA
EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital. The basic formula is:

where:

, is the Return on Invested Capital (ROIC); is the weighted average cost of capital (WACC); is the economic capital employed; NOPAT is the net operating profit after tax, with adjustments and translations, generally for the amortization of goodwill, the capitalization of brand advertising and others non-cash items.

EVA Calculation: EVA = net operating profit after taxes a capital charge [the residual income method] therefore EVA = NOPAT (c capital), or EVA = (ROIC-WACC)* Invested capital or alternatively EVA = (r x capital) (c capital) so that EVA = (r-c) capital [the spread method, or excess return method] where: r = rate of return, and c = cost of capital, or the Weighted Average Cost of Capital (WACC). NOPAT is profits derived from a companys operations after cash taxes but before financing costs and non-cash bookkeeping entries. It is the total pool of profits available to provide a cash return to those who provide capital to the firm. Capital is the amount of cash invested in the business, net of depreciation. It can be calculated as the sum of interest-bearing debt and equity or as the sum of net assets less non-interest-bearing current liabilities (NIBCLs). The capital charge is the cash flow required to compensate investors for the riskiness of the business given the amount of economic capital invested. The cost of capital is the minimum rate of return on capital required to compensate investors (debt and equity) for bearing risk, their opportunity cost.

Another perspective on EVA can be gained by looking at a firms return on net assets (RONA). RONA is a ratio that is calculated by dividing a firms NOPAT by the amount of capital it employs (RONA = NOPAT/Capital) after making the necessary adjustments of the data reported by a conventional financial accounting system. EVA = (RONA required minimum return) net investments If RONA is above the threshold rate, EVA is positive.

Market value added

Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors. If MVA is positive, the firm has added value. If it is negative, the firm has destroyed value. The amount of value added needs to be greater than the firm's investors could have achieved investing in the market portfolio, adjusted for the leverage (beta coefficient) of the firm relative to the market. The formula for MVA is:

where: MVA is market value added V is the market value of the firm, including the value of the firm's equity and debt K is the capital invested in the firm

MVA is the present value of a series of EVA values. MVA is economically equivalent to the traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if the cost of capital is used for discounting.

wealth maximization
Definition
A process that increases the current net value of business or shareholder capital gains, with the objective of bringing in the highest possible return. The wealth maximization strategy generally involves making sound financial investment decisions which take into consideration any risk factors that would compromise or outweigh the anticipated benefits.

Wealth Maximization
Wealth maximization is a modern approach to financial management. Maximization of profit used to be the main aim of a business and financial management till the concept of wealth maximization came into being. It is a superior goal compared to profit maximization as it takes broader arena into consideration. Wealth or Value of a business is defined as the market price of the capital invested by shareholders. Wealth maximization simply means maximization of shareholders wealth. It is combination of two words viz. wealth and maximization. Wealth of a shareholder maximize when the net worth of a company maximizes.

To be even more meticulous, a shareholder holds share in the company /business and his wealth will improve if the share price in the market increases which in turn is a function of net worth. This is because wealth maximization is also known as net worth maximization. Finance managers are the agents of shareholders and their job is to look after the interest of the shareholders. The objective of any shareholder or investor would be good return on their capital and safety of their capital. Both these objectives are well served by wealth maximization as a decision criterion to business.

Leveraged buyout
A leveraged buyout (LBO) is an acquisition (usually of a company, but can also be single assets such as a real estate property) where the purchase price is financed through a combination of equity and debt and in which the cash flows or assets of the target are used to secure and repay the debt. Since the debt, be it senior or mezzanine, always has a lower cost of capital than the equity, the returns on the equity increase with increasing debt. The debt thus effectively serves as a lever to increase returns which explains the origin of the term LBO. LBOs are a very common occurrence in today's "Mergers and Acquisitions" (M&A) environment. The term LBO is usually employed when a financial sponsor acquires a company. However, many corporate transactions are partially funded by bank debt, thus effectively also representing an LBO. LBOs can have many different forms such as Management Buy-out (MBO), Management Buy-in (MBI), secondary buyout and tertiary buyout, among others, and can occur in growth situations, restructuring situations and insolvencies. LBOs mostly occur in private companies, but can also be employed with public companies (in a so-called PtP transaction -- Public to Private). As financial sponsors increase their returns by employing a very high leverage (i.e., a high ratio of debt to equity), they have an incentive to employ as much debt as possible to finance an acquisition. This has in many cases led to situations, in which companies were "overlevered", meaning that they did not generate sufficient cash flows to service their debt, which in turn led to insolvency or to debt-to-equity swaps in which the equity owners lose control over the business and the debt providers assume the equity.

Restructuring
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring. Executives involved in restructuring often hire financial and legal advisors to assist in the transaction details and negotiation. It may also be done by a new CEO hired specifically to make the difficult and controversial decisions required to save or reposition the company. It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations. The basic nature of restructuring is a zero sum game. Strategic restructuring reduces financial losses, simultaneously reducing tensions between debt and equity holders to facilitate a prompt resolution of a distressed situation.

Inflation and Financial Decision-Making Inflation is defined as a sustained increase in the general level of prices. Basically, the purchasing power of our currency declines. Inflation expectations impact not only a project's required return but also the projected cash flows. Inflation also impacts a firm's stock and bond values because interest rates are directly affected by inflation expectations. As a result, understanding inflation is critical to managing a firm's financial resources and directly impacts financial decision-making.

The purpose of this exercise is to provide you with some additional information about how inflation impacts financial decision-making. Keep in mind that while we've only focused on inflation rates in the United States, global firms face different inflation rates in every country in which they do business. Some countries experience severe inflation or hyperinflation making realistic cash flow projections almost impossible. Inflation impacts every financial decision within the firm to some extent.

Dividend Decision
Overview of Dividend Decision

Dividend decision refers to the policy that the management formulates in regard to earnings for distribution as dividends among shareholders. Dividend decision determines the division of earnings between payments to shareholders and retained earnings . The Dividend Decision, in Corporate finance, is a decision made by the directors of a company about the amount and timing of any cash payments made to the company's stockholders. The Dividend Decision is an important part of the present day corporate world. The Dividend decision is an important one for the firm as it may influence its capital structure and stock price. In addition, the Dividend decision may determine the amount of taxation that stockholders pay.
Factors influencing Dividend Decisions

There are certain issues that are taken into account by the directors while making the dividend decisions: Free Cash Flow Signaling of Information Clients of Dividends

Free Cash Flow Theory

The free cash flow theory is one of the prime factors of consideration when a dividend decision is taken. As per this theory the companies provide the shareholders with the money that is left after investing in all the projects that have a positive net present value.
Signaling of Information

It has been observed that the increase of the worth of stocks in the share market is directly proportional to the dividend information that is available in the market about the company. Whenever a company announces that it would provide more dividends to its shareholders, the price of the shares increases.
Clients of Dividends

While taking dividend decisions the directors have to be aware of the needs of the various types of shareholders as a particular type of distribution of shares may not be suitable for a certain group of shareholders. It has been seen that the companies have been making decent profits and also reduced their expenditure by providing dividends to only a particular group of shareholders. For more information please refer to the following links:
Forms of Dividend

Scrip Dividend- An unusual type of dividend involving the distribution of promissory notes that calls for some type of payment at a future date. Bond Dividend- A type of liability dividend paid in the dividend payer's bonds. Property Dividend- A stockholder dividend paid in a form other than cash, scrip, or the firm's own stock. Cash Dividend- A dividend paid in cash to a company's shareholders , normally out of the its current earnings or accumulated profits Debenture Dividend Optional Dividend- Dividend which the shareholder can choose to take as either cash or stock.
Significance of dividend decision

The firm has to balance between the growth of the company and the distribution to the shareholders It has a critical influence on the value of the firm It has to also to strike a balance between the long term financing decision( company distributing dividend in the absence of any investment opportunity) and the wealth maximization The market price gets affected if dividends paid are less. Retained earnings helps the firm to concentrate on the growth, expansion and modernization of the firm To sum up, it to a large extent affects the financial structure, flow of funds, corporate liquidity, stock prices, and growth of the company and investor's satisfaction.
Factors influencing the dividend decision

Liquidity of funds Stability of earnings Financing policy of the firm Dividend policy of competitive firms Past dividend rates Debt obligation Ability to borrow Growth needs of the company Profit rates Legal requirements Policy of control Corporate taxation policy Tax position of shareholders Effect of trade policy Attitude of the investor group

The Financial Aspects of Supply Chain Management

Supply chain management enables businesses to save money on shipping costs, along with expenditures related to product storage and in-transit maintenance. Other financial aspects of the discipline include accurate item accounting and financial reporting. To ensure supply chain administration is a success, various personnel work collaboratively -- and they range from logistics managers and warehouse foremen to operations analysts.

How does the stage of a product's life cycle affect price?

An analogy to this process can be observed in production as well. First, a product is being developed. After we know what it is that we are selling and what the customer wants, we introduce it to the market. As our product becomes known by consumers, it grows until it establishes a solid position in the market. At this point, our product is mature. After a period of time, the product is overtaken by development and the introduction of superior competitors. Then it goes into decline and is eventually withdrawn. All these phases together are called product life cycle. INTRODUCTION In the Introduction stage of the product life cycle, a product or a service is introduced to the market. This stage involves focused and intense marketing effort designed to establish a clear identity and promote maximum awareness. Consumers are testing the product in this phase. GROWTH After a product is introduced in the market, consumers become more interested in it. This is called the Growth stage of the product life cycle. Sales are increasing and competitors are emerging as well. Products become more profitable and companies form alliances, joint ventures, and takeovers. Customers are accustomed to the product and are starting to purchase it repetitively. Marketing efforts and costs are still significant. Advertising costs are high. Market share tends to stabilize. MATURITY The market has reached saturation. Some producers at a later stage of the Maturity stage of the product life cycle begin to leave the market due to poor profit margins. Sales dynamics is beginning to decrease. Sales volume reaches a steady state supported by loyal customers. Producers attempt to differentiate their products. Brands, trademarks, and image are key tools in this production life cycle stage. Price wars and intense competition are common. DECLINE Continuous decline in sales signals entry into the Decline stage of the production life cycle. Competition is taking over your market share at this point. Economic and production conditions are becoming unfavorable. Introduction of innovative products or a change in consumer tastes is common reason for a decline. There is intense price-cutting and many more products are withdrawn from the market. Profits can be improved by reducing marketing and cutting other costs. Source(s):

Operations management
Operations management is an area of management concerned with overseeing, designing, and controlling the process of production and redesigningbusiness operations in the production of goods or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed, and effective in terms of meeting customer requirements. It is concerned with managing the process that converts inputs (in the forms of materials, labor, and energy) into outputs (in the form of goods and/or services). The relationship of operations management tosenior management in commercial contexts can be compared to the relationship of line officers to highest-level senior officers in military science. The highest-level officers shape the strategy and revise it over time, while the line officers make tactical decisions in support of carrying out the strategy. In business as in military affairs, the boundaries between levels are not always distinct; tactical information dynamically informs strategy, and individual people often move between roles over time.

Cinema queue. Operations Management studies both manufacturing and services

According to the U.S. Department of Education, operations management is the field concerned with managing and directing the physical and/or technical functions of a firm or organization, particularly those relating to development, production, and manufacturing. Operations management programs typically include instruction in principles of general management, manufacturing and production systems, plant management, equipment maintenance management, production control, industrial labor relations and skilled trades supervision, strategic manufacturing policy, systems analysis, productivity analysis and cost control, and [1][2] materials planning. Management, including operations management, is like engineering in that it blends art with applied science. People skills, creativity, rational analysis, and knowledge of technology are all required for success.

VALUATION OF BUSINESS/ SHARES

1. INTRODUCTION The Indian Mergers and Acquisitions are growing exponentially. Not only are foreign investors entering corporate India, but also, Indian entrepreneurs are eyeing foreign acquisitions. The liberalization of Indian economy which commenced sometime in early nineties, gave a great amount of boost to mergers and acquisitions. M& A is the buzzword amongst top Corporate Houses as everyone has become conscious of competitiveness and scalability. The restructuring of businesses and/or companies have resulted in long lasting benefits due to enhancement of competitiveness and sustainability. The globalization has opened floodgates for various international players to enter the Country and at the same time many Indian companies have gone ahead and acquired companies abroad. Investors have become more active in protecting their value. Any transaction of purchase/ sale of business/ companies require determination of fair value for the transaction to satisfy stakeholders and/or Regulators. Business valuation is an unformulated and subjective process. Understanding the finer points of valuing a business is a skill that takes time to perfect. There are various methodologies for valuing a business, all having different relevance depending on the purpose of valuation. Key aspects of valuation along with various restructuring options have been explained hereunder: 2. VALUE & PRICE 2.1 Value is a subjective term and can have different connotations. As Warren Buffet describes Price is what you pay & Value is what you get. The Price paid for an asset is the result of a negotiation process between a willing Buyer and the willing Seller. Whereas Value refers to the intrinsic worth of an asset. Hence, the Value of the Product could be different from its Price. 2.2 Management of companies always sought help of Professionals like Chartered Accountants or Merchant Bankers to value the intrinsic worth of a Business/Shares using various techniques

of valuation. Valuation is not an exact Science. It is more an Art. Valuation is largely influenced by the valuers judgement, knowledge of the business, analysis and interpretation and the use of different methods, which may result in assigning different values based on different methods. It is more an application of common sense after analysing various supportive data obtained either from the management or through other publicly available sources. 2.3 Once the value is determined, what follows is detailed negotiations between th e purchaser and seller and if there is an agreement between the two, price of the asset (whether of shares or business) gets established. It is quite possible that the price is either far higher or far lower than the fair value. It is important to keep this differentiation between price and value in mind before attempting the valuation. 3. PURPOSE OF VALUATION 3.1 An important concept in valuation is recognising the intended purpose of valuation. The value often depends on its purpose. 3.2 Some of the purposes for which valuation may be required are as follows: Determining the consideration for Acquisition/ Sale of Business or for Purchase/Sale of Equity stake Determining the swap ratio for Merger/Demerger Corporate Restructuring Sale/ Purchase of Intangible assets including brands, patents, copyrights, trademarks, rights. Determining the value of family owned business and assets in case of Family Separation. Determining the Fair value of shares for issuing ESOP as per the ESOP guidelines. Determining the fair value of shares for Listing on the Stock Exchange. Disinvestment of PSU stocks by the Government Determining the Portfolio Value of Investments by Venture Funds or Private Equity Funds Liquidation of company Other Corporate restructuring

3.3 A clear understanding of the purpose for which the valuation is being attempted is very important aspect to be kept in mind before commencement of the valuation exercise. The structure of the transactions also plays very important role in determining the value. For example, if only assets are being transferred out from a Company, valuation of equity shares is of no importance. The general purpose value may have to be suitably modified for the special purpose for which the valuation is done. The factors affecting that value with reference to the special purpose must be judged and brought into final assessment in a sound and reasonable manner.

4. SOURCES OF INFORMATION The first step while attempting any valuation exercise is to collect relevant and optimal information required for valuing Share or Business of a company. Such information can be obtained from one or more of the following sources: 4.1 Historical Results This will include Annual Reports for at least past 3 years of the Company being valued. Apart from review of detailed financials, it is very important to look carefully at the Directors Report, Management Discussions, Corporate Governance Reports, Auditors Report and Notes to accounts. There are instances that the growth prospects and opportunities for the company mentioned in these documents are absolutely opposite to the future outlook as demonstrated in the projections. A detailed analysis of the past performance is a very important starting point in any valuation exercise. It is critical to note from the past results, various important aspects such as non-recurring income/ expenditure, non-operating income, change in Government/Tax regulations affecting business, tax benefits enjoyed, and so on. 4.2 Future Projections This will include Future Expected Profitability, Balance Sheet and Cash Flows along with detailed Assumptions underlying the projections. It is important to cover the period which will comprise the entire cycle of the business. In certain industry even 3-year period will cover the cycle whereas in certain industries like heavy engineering or cement, a longer period of 5 to 7 years may capture the cycle. It is impossible to predict the future in a precise way particularly considering the dynamic nature of the economy. One should ensure that the assumption behind the future projections is reasonable at a point of time when they are prepared. Few common mistakes which are found in the projections are: (1) assuming production much higher than the capacities without capturing additional capital cost (2) showing unreasonable changes in selling price of the final products or of raw materials (3) showing unreasonable change in the working capital movements (4) capturing tax benefits even after the sunset clause under the Tax laws (5) unreasonable changes in manpower cost and so on. 4.3 Discussions with the Management It is very important that open, fair and detailed discussions are carried out between the Valuer and the Management. When one refers to the Management, it should not be restricted to only representatives of Finance Department. All critical people of the Management need to be interviewed. It is always advisable to obtain a written Representation from the Management of various inputs given by them. This helps in defending the valuation in the eventuality of it being challenged by any Authority. 4.4 Market Surveys, Other Publicly available data This will include various outside data available publicly. It may pertain to the industry as well as the Company being valued. Thanks to technology advancement, most of these data are available on the net. Various newspaper reports are also available on the subject. It is advisable to double check the accuracy of these data before heavily relying on such data. Nowadays various Software packages are available on Corporate data. It should be ensured that updated version of such data is used. It is experienced that a lot of time is spent by the valuer on review and analysis of irrelevant data. The relevance of the data being reviewed and used in valuation need to be strictly monitored. 4.5 Stock Market quotations

The details of stock market prices of the listed companies are nowadays available on the website of the stock exchange. It is important to keep in mind that the data should be picked up not only of the market prices but also for the volumes of the shares being traded. Due adjustments also need to be made for illiquid or Thinly traded Shares, Rights Issue, Bonus issues, Stock split, open offers, Buy Back, etc. Stock exchange website also gives details of various announcements made by the Company in last few months. This helps to capture some very critical information and at times could prove to be vital for the valuation exercise. 4.6 Data on Comparable Companies Review of data on comparable companies is one very important feature in any valuation exercise. Care needs to be taken that such companies are really comparable. It is possible that geographically the companies are located in different areas which may have substantial difference in the operations. For example Cement Companies located near to Limestone Reserve and those which are located far off are not strictly comparable. Further, different funding pattern of two companies and investment also makes them non-comparable. Having seen what could be relevant data for valuation, lets now proceed to understand the various methods of Valuation. 5. VALUATION METHODOLOGIES 5.1 There are many methodologies that a valuer may use to value the Shares of a Company/Business. In practice, however, the valuer normally uses different methodologies of valuation and arrives at a fair value for the entire business by combining the values arrived using various methods. 5.2 The Methodologies of Valuation also depend on the purpose of the valuation. If the Valuation is for the purpose of a liquidation, the Intrinsic Value of the Net Assets of the Company is more appropriate and not the Earnings Capacity. Similarly, during a Merger, the valuer would want to value both the concerned Companies in a similar manner to have a relative value. 5.3 The Value of a Business would also differ from the point of view of the Buyer and that of the Seller, depending on the vision, strategy and future projections made by each of them independently.