Professional Documents
Culture Documents
Introduction
• Business requires additional capital, besides net profit from operations, and
the sale of assets the other sources of funds are Debt and Equity (Capital
structure of Firm).
• Determining optimal mix of debt and equity in firms capital structure is vital.
• Firm should have enough debt in its capital structure to boost ROI (earning
more than cost of debt).
• In adverse situation high debt can lead to poor stockholders return and
jeopardize companies survival.
• Fix debt obligations must be met regardless the circumstances.
• Issuance of stock can have issues like ownership, control of enterprise which
can lead to hostile takeovers, mergers, and acquisitions.
Sources of Funds
• Procurement of Capital
• A financial budget is the document that details how funds will be obtained and
spent for a specified period of time. (annual budgets are more common).
• Financial budgets are viewed as the planned allocation of firm’s resources based
on forecasts of the future. The different types of budgets include cash budgets,
operating budgets, sales budget, profit budget, factory budget, capital budget,
expense budget, divisional budget, variable budget, flexible budget, fixed budget
etc. These are important in guiding strategy implementation.
• Financial budgets limitations are: Cumbersome to make, expensive, Over
budgeting / under budgeting can cause problems, they can become substitute for
objectives, budgets hides inefficiencies if based solely on precedence rather than
periodic evaluation of circumstances.
• Budgets are sometimes used as instruments of tyranny – frustration / resentment.
Management and Usage of Funds
• It deals with investments and Asset mix decisions. It involves decisions like capital
investment, fixed asset acquisition, current assets, loans, advances, dividend
decisions, and relationship with share holders.
• Usage of funds is important since it relates to the efficiency and effectiveness of
resource utilization in the process of strategy implementation.
• Management of fund is important area of financial strategy and strategic decisions
are made for the system of finance, accounting, budgeting, management control
system, cash, credit, and risk management, cost control and reduction, tax
planning and advantages. All this leads to optimum utilization of funds.
• Organizations that implements strategies of stability, growth, and retrenchment
cannot escape rigors of proper management of funds.
• Financial plans and policies however present dilemma before management. The
priorities of management may often conflict with those of share holders.
Evaluating the Worth of Business
• The second approach is measuring the value of firms growth based largely on
future benefits its owners may derive through net profits. Establish business
worth as five times the firm’s current annual profit. Note: Firms suppress
earnings in financial statement to minimize taxes.
• The third approach is letting market determine a business worth.
• Base the firm’s worth on selling price of similar company and make a comparison.
• Use price earning ration where we divide the market price of common stock by
annual earnings per share and multiply this number by the firm’s average net
income for the past five years.
• Outstanding shares method where we multiply number of shares outstanding by
the market price per share and add a premium. The premium is simply a per share
amount that a person or firm is willing to pay to control or acquire the company.
Financial Management Strategies
Capital Acquisitions
• Debt Leverage, Stock Sales, & Gains From Operations
• Equity Financing Is Preferred For Related Diversification
• Debt Financing Is Preferred For Unrelated Diversification
• Leveraged Buyouts (Lbos) Make The Acquired Firm Pay Off The Debt
Resource Allocations
• Dividends, Stock Price, & Reinvestment
• Reinvest Earnings In Fast-growing Companies
• Keeping The Stockholders Contented With Consistent Dividends
• Use Of Stock Splits ( Or Reverses) To Maintain High Stock Prices
• Tracking Stock Keeps Interest In Company, But Doesn’t Allow
Takeover