Finance theory and financial strategy

Finance Theory & Financial Strategy

Inventory management[ edit ] Which are stocks of manufactured products and the material that make up the product, which includes raw materials, work-in-progress, finished goods, stores and spares supplies.

This led to decision making and allocation of resources inline with this strategy. Includes labour, materials, equipment maintenance, shipping and facilities costs. The equation of working out the average cost of capital can be found on the right.

Long term assets - also known as Capital Budgeting for financial managers. One idea is to look at each project as its own mini-firm, an all equity project or company Myers pg.

The basis of the theory is that debt capital used beyond the point of minimum weighted average cost of capital will cause devaluation and unnecessary leverage for the company.

Dividend decisions - Disbursement of dividend to shareholders and retained earnings. This is also beneficial to the shareholders for growth in the value of shares and for increased dividends paid out in the future.

Increasing value on the Discounted Cash Flow Analysis but must also consider uncertain, unquantifiable factors which could be strategically beneficial. The main indicator Finance theory and financial strategy be used here is the net working capital: But also on the theory that there must be a balance between the pay out to satisfy shareholders for them to continue to invest in the company.

Component of a financial strategy[ edit ] When making a financial strategy, financial managers need to include the following basic elements. General Motors, for example, is based upon this strategic planning and financial planning. But the company will also need to retain profits to be reinvested so more profits can be made for the future.

More elements could be added, depending on the size and industry of the project. It appears to be somewhat haphazard in many cases. Myers believes that most strategic planners are not well schooled in the tools of modern finance pg Yet there is not any favorable market response to being diversified.

These assets will be acquired if they are proven to be strategically sound and assets are classified into 2 classifications: This infers that it is important for management and shareholders to agree to a balanced ratio which both sides can benefit from, in the long term.

The ratio as which this is distributed is called the dividend-pay out ratio. The finance department that handles the financial planning and analysis may support the strategic initiative in some manner, but not in an integrated, holistic approach.

Decision making[ edit ] Each decisions made by financial managers must be strategic sound and not only have benefits financially e.

Will the project contribute to the bottom line or will it cost money. Financing decisions - concerns the optimal levels of each financing source - E.

Investment decisions[ edit ] For a financial manager in an organisation this will be mainly regarding the selection of assets which funds from the firm will be invested in. To explain this further, a proposal could have a negative impact from the Discounted Cash Flow analysis, but if it is strategically beneficial to the company this decision will be accepted by the financial managers over a decision which has a positive impact on the Discounted Cash Flow analysis but is not strategically beneficial.

Although this is often an exception for shareholders who only wish to hold for the short term dividend gain.

Strategic financial management

For new business ventures and those started by existing companies. It may actually have a relatively high cost for a firm to diversify into another industry either through acquisition or start-up.

This can be further split into: Senior management sets a direction, vision and mission statement based upon who the firm is now and how it has evolved.

Finance Theory I

This is one of the most crucial financial decisions for a firm. Debt - Equity ratio. Often it is a plan for one year but more typically 3 to 5 years if a longer term view is taken. Cash management[ edit ] Concerned with the management of cash flow in and out of the firm, within the firm, and cash balances held by the firm at a point of time by financing deficit or investing surplus cash.

This impact is dramatic and favorable as compared to the financing decision. Some techniques used in strategic planning includes: Credit policy which includes credit standards, credit terms and collection efforts. Needs to be broken down into monthly numbers and subtracted from the revenue forecast see below.

You can make much more money through smart investment decisions than smart financing decisions.Finance Theory and Financial Strategy Created Date: Z. Finance theory and Financial strategy Strategic Planning means several things. But it certainly is a part of the decision-making in resource management of the business benefits.

Finance theory has significant advantages in understanding the function of capital markets. Despite its major advances, finance theory has had scant impact on strategic planning. Strategic planning needs finance and should learn to apply finance theory correctly.

However, finance theory must be extended in order to. Free Essay: Myers, S.C. (). “Finance Theory and Financial Strategy”. Interfaces, Introduction This journal explained how to bridge the gap between.

To sharpen the financial analysis, the managers returned to the marketing strategy and delved deeper into it. Now the financial analysis helped clarify the marketing issues to. Free Essay: Finance Theory & Financial Strategy By Stewart C Myers How do firms integrate strategic planning and financial analysis?

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Finance theory and financial strategy
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