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.

Organizational Paralysis


Within 6 months of life some organizations suffer a paralysis:

  1. Point zero minus six months: growing anticipation of the new organization is rife; most senior managers are preoccupied with networking amongst the organization’s rising stars in order to be well positioned for advancement.
  2. Point zero minus three months: the new organization is due shortly, so no one will do anything in case it is seen to be wrong in light of the new structure.
  3. Point zero minus one month: all senior managers desperately plead for a new job so the sin of the last year’s time wasting can be hoofed off onto another poor unsuspecting victim.
  4. Point zero: the planned reorganization is put back two months to accommodate the wishes of an intransigent director who keeps digging in his heels and refuses to listen.
  5. Point zero plus six months: senior mangers look forward to extremely generous takeover conditions and contemplating retirement

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