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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Accounting Information


Accurate cost data are required for the successful implementation of the integrated physical distribution management concept using total cost analysis, for the management and control of physical distribution operations, and to aid in setting selling prices and in justifying price differentials.

As the cost of physical distribution increases, the need for accurate accounting for the costs becomes increasingly critical. Since the physical distribution function is relatively more energy intensive and labor intensive than other areas of the firm, its ratio of costs to total company costs has been steadily increasing. Efficient and effective distribution policies cannot be determined until the costs related to separate functional areas and their interaction are made available to distribution decision makers.

The quality of the accounting data will influence management’s ability to exploit new markets, take advantage of innovative transportation systems, make changes in packaging, choose between common carriers and private trucking, increase deliveries or increase inventories, and determine to what extent the order-processing system should be automated.

The accounting system must be capable of providing information to answer the following questions:

a)        What are the impacts of physical distribution costs on contribution by product, by territory, by customer, and by salesperson?

b)        What are the costs associated with providing additional levels of customer service? What trade-offs are necessary and what are the incremental benefits or losses?

c)        What is the optimal amount of inventory? How sensitive is the inventory level to changes in warehousing patterns or to changes in customer service levels? How much does it cost to hold inventory?

d)        What mix of transportation modes and carriers should be used?

e)        How many field warehouses should be used and where should they be located?

f)          How many production set-ups are required? Which plants will be used to produce each product?

g)        To what extent should the order-processing system be automated?

To answer these and other questions requires knowledge of the costs and revenues that will change if the physical distribution system changes. That is, determination of a product’s contribution should be based on how corporate revenues, expenses, and hence profitability would change if the product line were dropped. Any costs or revenues that are unaffected by the decision are irrelevant to the problem. For example, a relevant cost woul be public warehouse handling charges associated with a product’s sales; a non-relevant cost would be the overhead costs associated with the firm’s private trucking fleet.

Implementation of this approach to deceision making is severely hampered by the lack of availability of the right accounting data or the inability to use the data when they are available. The best and most sophisticated models are only as good as the accounting input, and a number of recent studies attest to the gross inadequacies of distribution cost data.

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, Lectures, Line of Sight

Leveraging better Payment Terms


Negotiating better payment terms is always easier if a company has some bargaining chips. The party with the most to lose or the most to gain is always on the defensive; therefore, the secret to successful negotiating is to develop leverage that forces the other party into one or the other of these positions. Other than not meeting payroll, only two conditions might create circumstances more detrimental to a company on the brink of failure than to a creator: (1) being evicted from the building that houses the business, and (2) not receiving critical materials and services to keep the business going.

 

Not much can be done about either situation. A business must be housed, and it must have materials and services to make and sell products. That’s why landlords and critical suppliers top the payment priority list. Some leverage can be achieved, however. Most lessors would rather work out an extended payment arrangement than go to the expense and aggravation of a formal eviction. As long as the renter’s market holds, deferring rent payments for at least several months should be a real possibility. That’s not a permanent solution, but it does provide some breathing space.

 

It might be possible to leverage critical suppliers to gain better terms. The threat to go to a competitor usually brings even the most recalcitrant supplier to terms. In most cases, a supplier has more to lose (the overdue amounts plus legal costs to sue) or gain (future sales) than a debtor company does. At least making suppliers think that’s the case is good negotiating ploy.

 

Assuming that you have taken reasonable precautions to safeguard your personal assets, the worst thing that can happen is that you will be forced to liquidate the business. Granted, this can be a blow to any entrepreneur’s ego. It might also reduce personal income for a while, however, once the liquidation is over, you can always begin again. As long as creditors believe that they have the most to lose, you’re in driver’s seat. The ultimate creditors’ threat is to force the company into bankruptcy. By making it clear that this won’t hurt and that other plans for the future are in the works anyway, such leverage vanishes abruptly.

 

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 contact www.asifjmir.com, Line of Sight