Business Financial Strategy

Financial strategy examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action. It can also provide competitive advantage through a lower cost of funds and a flexible ability to raise capital to support a business strategy. Financial strategy usually attempts to maximize the financial value of the firm.

The trade-off between advancing the desired debt-to-equity ratio and relying on internal long-term financing via cash flow is a key issue in financial strategy. Many small and medium-sized companies try to avoid all external sources of funds in order to avoid outside entanglements and to keep control of the company within the family. Many believe that only by financing through long-term debt can a corporation use financial leverage to boost earnings per share, thus raising stock price and the overall value of the company. Higher debt levels not only deter takeover by other firms (by making the company less attractive), but also leads to improved productivity and improved cash flows by forcing management to focus on core businesses.

A very popular financial strategy is the leveraged buy out—a company is acquired in a transaction financed largely by debt—usually obtained from a third party, such as an insurance company or an investment banker. Ultimately the debt is paid with money generated from the acquired company’s operations or by sales of its assets. The acquired company, in effect, pays for its own acquisition. Management of the leveraged buy out is then under tremendous pressure to keep the highly leveraged company profitable. Unfortunately the huge amount of debt on the acquired company’s books may actually cause its eventual decline by focusing management’s attention on short-term matters.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

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TV Advertising

Television can only be effective if you see it enough. And enough is a lot. Enough is expensive. How much is enough? Many experts say you can measure how much enough is by understanding rating points. A GRP, or Gross Rating Point, is calculated on the basis of one percent of the TV sets in the TV marketing area. If one million TV sets are in the area, one rating point equal 10,000 sets. The cost of TV advertising is determined by the size of each GRP in the marketing area, and advertisers pay for a given number of GRPs when the buy advertising time. The experts advise that you should not consider TV advertising unless you can afford to pay for 150 GRP per month. Those can come in the form of 75 GRP per week every other week, or 50 GRPs for three weeks out of four, or even 150 GRPs for one week per month. How much a single rating point costs in your area depends upon the size of area, the competitive situation, and the time of year.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Pro Forma Income Statement

Because marketing managers are accountable for the profit impact of their actions, they must translate their strategies and tactics into pro forma, or projected, income statements. A pro forma income statement displays projected revenues, budgeted expenses, and estimated net profit for an organization, product, or service during a specific planning period, usually a year. Pro forma income statements include a sales forecast and a listing of variable and fixed costs that can be programmed or committed.

Pro forma income statements can be prepared in different ways and reflect varying levels of specificity. They have a typical layout consisting of six major categories or line items:

1. Sales—forecasted unit volume times unit selling price
2. Cost of goods sold—costs incurred in buying or producing products and services. Generally speaking, these costs are constant per unit within certain volume ranges and vary with total unit volume.
3. Gross margin (sometimes called gross profit)—represents the remainder after cost of goods sold has been subtracted from sales.
4. Marketing expenses—generally programmed expenses budgeted to produce sales. Advertising expenses are typically fixed. Sales expenses can be fixed, such as a salesperson’s salary, or variable, such as sales commissions. Freight or delivery expenses are typically constant per unit and vary with total unit volume.
5. General and administrative expenses—generally, committed fixed costs for the planning period, which cannot be avoided if the organization is to operate. These costs are frequently called overhead.
6. Net income before (income) taxes (often called net profit before taxes—the remainder after all costs have been subtracted from sales.

A pro forma income statement reflects a marketing manager’s expectations (sales) given criterion inputs (costs). This means that a manager must think specifically about customer response to strategies and tactics and focus attention on the organization’s financial objectives of profitability and growth when preparing a pro forma income statement.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Inflation

Inflation is a rise in the general level of prices. The most commonly reported measure of inflation is the annual percentage change in the consumer price index (CPI). The consumer price index tracks changes in the prices of a group of goods and services that most consumers buy. Prices are increasing when the CPI is positive and decreasing when it is negative. One major cause of inflation is the relationship between wages and productivity. Productivity is the output per worker hour. When wages increase faster than productivity, the result is inflation. The amount we can consume of any product depends upon the amount we produce. When wages go up but output does not, we have more money income but not more purchasing power. This occurs because the total supply of goods available for purchase has not increased as rapidly as the amount of money in circulation. The combination of rising wages and constant or sagging output exerts an upward push on prices.

Wage increases in one industry often put pressure on other industries to increase wages. Another cause of inflation is the expectation that inflation will continue in the future. Labor unions demand wage increases in anticipation of expected increases in the cost of living. Manufacturers raise the prices of their products in anticipation of future labor and raw material; cost increases. Consumers borrow money to finance today’s purchases in the belief that prices will be higher tomorrow. Some economists argue that inflation subsides only when people believe that it will subside.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, and my Lectures.

Price-earnings Ratio

Price-earnings ratios are published daily in newspapers for stock market-listed companies, along with the gross dividend yield, dividend cover and other information about the shares of each company. The method of calculation is what the name suggests:

Price-earnings ratio = stockmarket share price divided byEarnings per share

The stockmarket share price used is the one published in the financial newspapers at the close of business in the stock exchange for the previous evening.

As a generalization, when the price earnings ratio of a company is higher than the average for other companies in the same business sector, the stockmarket expects the company to achieve higher than average earnings per share in the foreseeable future to justify the above-average valuation of the shares.

In certain circumstances, the explanation may be quite different. For example, a takeover bid for the company may be widely expected, and the share price has already increased significantly in anticipation of the price to be offered by the bidder.

It must never be forgotten than the analysis of share prices, and especially the prediction of future changes, cannot be done simply by calculating the various ratios. If this was possible, making a fortune on the stockmarket would be easy. In practice, even the most experienced investment-fund managers would make costly errors of judgment from time to time.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Breakeven Formula

Breakeven Formula

The breakeven chart provides a picture of the relationship between sales volume and profits. However, a chart is not required for determining breakeven points. Instead, you can use a formula:

P(X) = F + V (X)

where

F = fixed costs

V = variable costs per unit

X = volume of output (in units)

P = price per unit

Rearranging this formula, the breakeven point is X = F(P – V). in other words, the breakeven point is the volume of sales where total costs just equal total revenues. If, for example, you have a product in which

F = fixed costs = $1,000.00

V = variable costs per unit = $0.75

P = price per unit = $1,00 per unit

then the breakeven point is $1,000/($1.00 – $0.75) = 4,000 units.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Letters Dealing with Orders

Most ordering today is done on standardized order forms, purchase forms, and requisition forms, and is handled by means of standardized procedures. Together with telephone ordering, which has surged to new highs in recent years, forms have eliminated most individual letters about orders. As long as there are human beings ordering and filling orders, there will be errors, exceptions, special requests, and problems to write about.

 

If you are ordering without a form (the form is missing from the catalog, you are responding to magazine ad), include the description of the desired item, the quantity, the size, the color, personalization/monogram, and the price. Include your own name, address, postal code, and state your method of payment. If you are paying by bank card, include its number, expiration date, and your signature. If you are buying from a company in your home state, add sales tax to the total. Also include any stated handling charges. Specify shipping directions or any special considerations.

 

When responding to orders received, it is helpful to have an all-purpose form for problem orders. After saying something like, “Thank you for your order. We are unable to ship your merchandise at once because . . . “ list a series of possible problems so that one or more can be circled, underlined, or checked off. Some suggestions: Payment has not been received. We no longer fill C.O.D. orders—please send a check or money order. We do not have a complete shipping address; a description of the enclosed merchandise; a copy of the sales slip, invoice, or shipping label; an explanation of why you’re returning it; your request for a refund, credit to your account, or replacement merchandise, an expression of appreciation. If returning the merchandise is difficult (in the case of a large appliance, for example), write first and ask how it should be returned. Always ask for (although you may not always get) reimbursement for your shipping costs.

 

When you are canceling a prepaid order or when asking for a refund, give all possible information: order/invoice/reference number, date of order, description of merchandise. Specify whether your payment should be returned to you as cash or check, as a credit to your account or your bank card (if you charged it), or as a credit to your company’s account.

 

Arrange your order on the page so that it can be deciphered at a glance. Instead of phrasing an order as a long sentence, arrange the information in columns. Set off data so as to be quickly read—there will be a similar chance of error in your order.

 

If you need merchandise or supplies by a certain date, state it clearly. By making explicit in your letter the importance of the delivery date, you will in most instances be able to cancel the order without forfeiture if you fail to receive it in time; the letter can serve as an informal contract.

 

If your first order should go astray and you send in a second, emphasize that it is a duplicate order. Too often, the first order eventually turns up and is also filled.

 

Orders were made for forms, and vice versa. Although no two order forms are precisely alike, a few items are standard: customer’s name, business name or title, address, postal code, and telephone number with area code; customer’s account number; description of merchandise, page where it appears in catalog (optional), quantity wanted, size, color, type; monogram or personalization; price per unit; total price for each item; shipping and handling chart; sales tax information; amount enclosed; shipping information (options available plus approximate length of shipping time); space for bank card number, expiration date; and signature; spaces for signatures from purchasing department or other authorization.

 

Individualized letters dealing with orders are generally typed on letterhead or memo stationery.

 

If writing about a personal order from your home, a handwritten note is acceptable if clearly written.

 

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight