Financial Strategies Creating Values in Global Era
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01-03-2009, 10:01 AM
Financial Strategies Creating Values in Global Era
In this current throat-cut environment where nothing is constant but everything is possible and flexible. It is very tough task to formulate strategy. The term strategy is generally used for future planning and working of the organization in corporate panorama, especially financial strategies are playing very important role and Pricing strategies are major decisions under the financial strategies. Generally, in this competitive environment firms / Companies/organizations are trying to achieve success by defeating their best closest competitors through their good strategies.
In this current era of corporate governance where we are searching for most adoptive corporate governance system for the world, financial strategies are also claiming their importance in the decision making process and for providing best options for global managers. Though it is not clear that which decision option is good for a particular business, Researchers are searching for some strategies which are easy to adopt and simple to implement with low cost and favorable results.
As long term factor : Strategies are generally long term plans for the organization. In this current competitive global era strategies are generally very common acceptable concepts. Without strategies, planning for the organization is day dreaming or nightmare. Specially when we are talking about the financial decisions like project and implimentation selection decisions, pricing decisions, dividend decisions, cost decision, and other market and competitors decision. We have to concentrate more and more on the decisions which are very essential and effective for the organization. In the project and implimentation selection or we can say capital budgeting decisions it is very important task of the finance
manager to maintain the level of decision for the ongoing health of the organization. The cost involvement in the project and implimentation is very important factor.
Corporate Financial Strategies: The level of management for an organization is generally divided into three levels. They are very important as per organization need. The strategies can be understand under the following three forms:-
1) Corporate Level Strategy.
2) Business level strategy &
3) Functional level strategy.
In corporate level financial strategies the most common accepted concept is the CEO level & directors are entitled to form such policies, decisions which provides good sustainable results in the long term. Decisions like investment in new project and implimentation, diversification, mergers and acquisitions and take over, are related with the corporate level financial strategies. Some important corporate financial strategies are:-
* EVA â€œ Economic Value added
* ROI -- Return on Investment
* SVA â€œ Share Value Added.
* MVA â€œ Market value added
Now a days, the current scenario is M&A Scenario. The world becomes small market with big scope. Companies are adopting the concept of M&A and facing competition, proving their superiority in market by achieving a great share in overall market. In mergers and acquisition deal generally the valuation of assets of the companies are very important and crucial stage. It totally depends upon the market value of per share of the companies who are adopting M&A deals.
In this era of FDI where we are getting more foreign direct investment in our country & utilizing our manpower in good manner, producing more products, generating competitive services by using the foreign investment. (direct & indirect). So, here it is also very vital & essential factor now the value & the size of international investment in the Country. These all are the financial strategies which are essential requirement for any nation for its growth & success.
FDI vs Capital Structure :- The reality that without foreign investment the country like India cannot perform its business activity and prove its superiority in Asian Countries is true . But, the mix of debt (International) should be adequate. Currently, in capital structure we know that the organization as per its future requirements can adopt any ratio of debt and equity & preference mix. But they have to go through the guidelines given by SEBI & Income Tax Department. There is no any specific mix. The Company /organization can choose any debt-equity, preference mix which will be suitable for organization.
When the Organization is choosing foreign investment as debt it is very important thing to determine the future prospects of organization. The interest rate should be fair & then only organization can survive. Pay back period also plays very important role in this.
In the current scenario while the global market is facing terrible inflation due to globalization. It is very important step to take & think whether this FDI is good or bad for nations.
EVA & ROI Approach : When we are thinking about the corporate level strategy EVA & ROI approaches are playing very important role in the decision making process. The valuation of financial position of organization in a month, or in a quarter, or half yearly and or annually basis, it is the regular evaluating task of management. The question arises what is EVA ? EVA is nothing but Economic Value Added for the organization.
EVA = Net profit -- Capital Charge.
EVA = Capital employed (ROI-cost of Capital)
In the current scenario, in the current economic framework the concept which required better value and profitability is generally acceptable by the companies. The accounting system what generally we are following are not sufficient as compare to global maintaining system and which will not stand and face the challenges in increasingly changeable capital markets.
For the computation purpose EVA is ascertained by deducting the cost of capital from net operating profit after tax i.e.
EVA = PBIT (I-Tax) â€œ cost of capital
PBIT operating profit before interest and Tax .
T = Tax rate (Respective financial years)
Cost of Capital = Cost of equity + Cost of debit
In financial planning the main drivers of Economic value added are
* Capital employed
Capital employed : is a very important role player or determinant of Economic Value added . Bigger the size with positive spread lead to maximum EVA. Similarly lower the size of capital employed lead to minimum EVA. So we can say that capital employed is the one of the factors which affect the EVA.
Risk of an organization can be divided mainly into two criteria --
Operating Risk &
The value of total risk always affects the value of EVA or determination of EVA. Making Co-operation between operating risk & operating cost / profit and same for financial risk is very good and suggestive strategy for any concern. The concept of more risk resulting more return is not always correct but this concept increases entrepreneurship among the business people and developing more risk bearing capacity.
Spread :- The term spread in EVA context is defined as the difference between return on capital employed and cost on capital employed. When we are computing product of the difference between return on capital employed and cost of capital employed with the capital employed we will get the value of EVA. So, the main thing is what is the position of return on capital employed as compare to cost of capital employed.
Suppose , Return on capital employed = Rs.1,00,000
Cost on capital employed = Rs 9,00,000
Capital employed is = Rs 5,00,000
Then we can say the return on capital employed Rs 100,000 is more than cost Rs 90,000 So it would be the positive spread. In the other hand it ROCE is Rs 90,.000 & COCE is Rs 1,00,000 then it will be the negative spread. When there is negative spread economic value will be destructive.
Growth rate in Earnings :- It is another determinant of economic value added. If the organization is earning good growth year on year simultaneously the EVA will also reach high & company can go for diversification or expansion of business.
Conclusion: At last the financial strategies for creating values in different sectors like production,service,IT are how furnishing & performing their job to attain the organization goal, how financial managers are doing their job like arrangement and disbursement of finance, allocation of finance to various sub-segments based on their performance and share, are important points. While discussing the financial strategies especially for stock exchanges or we can say Indian capital market the strategies are very sensitive and conditions are very conditional decisions are very quick movers. In the fluctuated market we have to formulate consistent strategy and which is like counting stars in the sky in the moonlight.
* Financial strategies should be not constant changeable.
* Organizations have to ready for all the future happening positive or negative
* More concentration on increasing economic value added through spread and positive ROCE.
* Amendments in Govt. regulation according to need or up gradation.
* Hiring skilled and research oriented, analytical, financial managers.
2) Business line
3) MCS text by Govindrajan
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