UNIT VIII STUDY GUIDE

Finance in a Dynamic Environment

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 Activity

Learning Outcomes
1 Unit VIII Essay
2 Unit VIII Essay
Video: What is Human Capital? What Does Human Capital Mean? Human
5.1 Capital Meaning, Definition & Explanation
Unit VIII Essay
Chapter 28, pp. 994-1024
7.1
Unit VIII Essay
Unit Lesson
7.2 Chapter 30, pp. 1049-1090
Unit VIII Essay
Chapter 18, pp. 672-722
8
Unit VIII Essay

Reading Assignment
Chapter 18: Capital Budgeting and Valuation with Leverage, pp. 672-722

Chapter 28: Mergers and Acquisitions, pp. 994-1024

Chapter 30: Risk Management, pp. 1049-1090

In order to access the following resource, click the link below.

The Audopedia. (2016, August 13). What is human capital? What does human capital mean? Human capital
meaning, definition & explanation [Video file]. Retrieved from [Link]

Click here for a copy of the video transcript.

MBA 6081, Corporate Finance 1

Unit Lesson UNIT x STUDY GUIDE
Title
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.

Question: 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?
Answer: 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)

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,
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.

MBA 6081, Corporate Finance 2

These targets can be achieved using key strategic finance processes such asUNIT financial planning
x STUDY and
GUIDE
forecasting (i.e., scenario analysis and modeling capabilities), business intelligence
Title (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 monies for a given
year are 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
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.

MBA 6081, Corporate Finance 3

Ongoing review and evaluation: Another important element of strategic financialUNITmanagement
x STUDY GUIDEis the
implementation of ongoing review and evaluation. This element pertains to theTitle
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 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). Mitigating inefficiencies in budget spending: Evidence from an explorative
study. Journal of Accounting & Organizational Change, 11(4), 430–454.

Sax, J., & Andersen, T. J. (2018, June 5). Making risk management strategic: Integrating enterprise risk
management with strategic planning. European Management Review.

MBA 6081, Corporate Finance 4