Introductory Lecture

by Dr Safdar A Butt

STRATEGIC FINANCE:
CFO AS A MANAGER
Overview of Strategic Finance

11/30/2014

Views about Finance Managers

Awe:
What he does is all mystery, not understood by

other managers
Whatever he says is not opposed

Contempt:
Necessary evil
Other managers work hard, while finance manager

only measures what others earn.

Overview of Strategic Finance

11/30/2014

The real situation

Both views are wrong.
Finance is no mystery: it is almost a scientific

subject, based on time tested theories and

practices.
Finance manager makes as much if not a
higher contribution than other managers
towards companys profits. For example,
increasing ROE through capital structure.
Overview of Strategic Finance

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What does a CFO do?

Shapes the balance sheet of his company.
Makes decisions on:
How to raise finance
How to invest the funds
How to manage the risks faced by the company

while raising or investing finance.

Overview of Strategic Finance

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Factors affecting financial decisions

Uncertainty
All decisions relate to future that is unknown.

Time Value of Money

A rupee today is worth more than a rupee tomorrow

or next month, or next year.

Objective
Increasing the wealth of the shareholders

Overview of Strategic Finance

11/30/2014

The Financial Objective

Shareholders Wealth Maximization
Internal Means: Profits or Dividends
External Means: Share price increase

Overview of Strategic Finance

11/30/2014

Measuring the worth of a company

Book Value
Market Value
To a shareholder, market value is more

important because he can sell his shares only

at the market.
A finance manager has to live with both the
requirements: increasing the book value as
well as market value of his companys shares.
Overview of Strategic Finance

11/30/2014

CFOs role as a manager

Functions of Managers
Decision-making
Planning
Organizing
Leadership

Controlling

Finance Manager performs all the above

functions in his department just like any other

manager.`
Overview of Strategic Finance

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Horizons of Finance Function

Short Term Horizon (Current)
Finance: current liabilities
Investment: current assets, funds management
Risk management: internal controls, financial

reporting & monitoring

Long Term Horizon (Strategic)

Finance: Capital structure
Investment: Project or fixed assets selection

Risk management: strategic budgeting

Overview of Strategic Finance

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Definition of Strategic Finance

Strategic financial management refers to those

processes and activities relating to financing,

investing and risk management that have a
long term (or strategic) importance for the
company.

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Achieving the financial objective

What to do to achieve the FO: Strategy
How to achieve the FO: Implementing the

strategy
Obstacles to achieving the FO: problem
solving

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Strategy
Business Strategy
Operational policies and plans
Operational risk management

Financial Strategy
Financial policies and plans
Raising finance: Long term and short term
Investing: long term assets and working capital
Cash flow management
Financial risk management
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Obstacles to Financial Objective

Agency problem
Corporate Governance
Stakeholder issues

Competitive forces
Limitations on resources
Economic factors

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The Question
Role of Strategy in Finance
Role of Finance in (Business) Strategy

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SWOT in finance
Strengths:
Resourcefulness, ability to use resources effectively

and efficiently, good systems

Weaknesses:
Poor systems, inability to use resources properly

Opportunities:
To raise finance; to invest

Threats:
Rising cost of capital, takeovers
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Strengths: Good Systems

Accounting:
Financial records
Management / costing records
Taxes and consultancies
MIS Reporting

Operational:
Treasury management (Cash and Credit)
Internal / external auditing

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Weaknesses: Poor Systems

Reactionary mode of management
Absence of procedures, or poor procedures
Lack of adherence to procedures / too many

exceptions
Absence of check and balances
Centralization of decision-making process

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Opportunities:
Raising Funds:
Change capital mix to lower the overall cost of

funds
Timing the issue of shares, or raising debt
Borrowing to pay dividend

Investment opportunities:
Buying new fixed assets or companies
Changing asset levels to improve profitability

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Threats
Rising cost of capital
Poor return on existing investments
Immobility of investments
Takeovers from raiders
Bankruptcy arising out of irrational repayment

demands

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Scope of Finance
Financial Management is essentially about

managing strengths and weaknesses in the

finance aspect of a business
Corporate Finance is about managing
opportunities and threats in the finance aspect
of a business
Strategic Finance is about dealing with
financial issues of long term importance.
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Finance in Business Strategy

Why finance is ignored by other managers?
Finance treated as net result of other managers

efforts

Why finance managers ignore all other

managers?
Principal Cause:
Lack of understanding each others perspective
Not necessarily lack of congruence of interests
Short term vision: todays benefits preferred over

long term advantages

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Key issues in financial strategy

Generally, higher shareholders wealth comes only

from better profits. However, financing decisions can

make a difference between profit and ROE.
Better profits come from a good combination of
efforts of all the segments of the business, including
finance.
Financial Tools for better profits:
Cash flow management
Managing accessibility to and cost of capital
Time value of money
Efficient MIS reporting

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Thank you
Dr. Safdar A Butt

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