Corporate Financial Strategy
This article focuses on corporate financial strategy. It provides an overview of the history, strengths, and weaknesses of the corporate financial strategy field. The main components of corporate financial strategy, including value-based management, strategic planning, mergers and acquisitions, cost analysis, and capital budgets, are addressed. The relationship between corporate financial strategy and investor relations are described.
Keywords Business Strategy; Business Units; Capital Budgeting; Capital Budgets; Corporate Development; Corporation; Cost Analysis; Cost Benefit Analysis; Cost-Effectiveness; Financial Strategy; Growth; Growth Companies; Investor Relations; Operating Business Plan; Performance; Strategic Planning; Value-Based Management; Vertical Merger
Finance: Corporate Financial Strategy
Corporate financial strategy is a business approach in which financial tools and instruments are used to assess and evaluate the likely success and outcomes of proposed business strategies and projects. In the twenty-first century, corporate leaders and decision makers use corporate financial strategy to:
- Actively enhance shareholder value
- Attain venture capital
- Promote corporate growth.
Corporations promote growth through organic or inorganic business activities. Corporate growth refers to economic expansion as measured by any of a number of indicators such as: Increased revenue, staffing, and market share. Issues that effect corporate value and growth include human capital, intellectual property, change management, and investment funding. Growth corporations tend to have an operating business plan that guides the company toward growth choices and activities. An operating business plan refers to a dynamic document that highlights the strengths and weakness of the company and guides the company toward learning and increased efficiency. A corporation's operating business plan is informed and driven by its corporate financial strategy.
The Combination of Finance
The field of corporate financial strategy brings together the forces of corporate finance and corporate strategy to compliment and balance one another. In successful corporate finance strategy, corporate finance and strategy functions work together to create shareholder value. Corporate financial strategy is a multi-faceted and multi-field approach to business operations and management. The history of finance and strategy in corporate settings has been one of divisiveness and territoriality. Finance and strategy, and financial and strategic decision making in general, have long been considered separate intellectual and decision-making forces. Chief financial officers have been known to favor either finance or strategy as their main decision making influence. For example, chief financial officers and managers that favor economic or finance-based decision-making may rely on managerial economics or applied economics to make business decisions. Ultimately, there is no substantial conflict between corporate finance and corporate strategy tools and instruments. Finance and strategy, which have a history of being separate endeavors in the corporate sector, are complimentary functions that have the potential to reinforce and balance one another. Corporations that integrate finance and strategy functions have the greatest opportunities for growth and value added endeavors (Thackray, 1995).
Corporations, in the twenty-first century, share many of the same characteristics. For example, the modern corporation is usually organized into business units. Each business unit within the modern corporation is accountable for its' own profits or losses. Business planning is generally decentralized. Business unit product line managers focus on profits for single products over the shorter term. Rapid development and innovation in information technology continues to change production functions and the nature of the products and services sold and delivered to customers (Egan, 1995). Despite the similarities that characterize modern corporations, corporations do differ in their ability to combine finance and strategy factors. In the increasingly competitive global market, successful integration between finance and strategy dimensions may mean the difference between corporate success and corporate failure. Chief financial officers, managers, and planning teams that use financial strategy as their decision-making compass may create more wealth and growth for their companies and shareholders than those corporations that base their business decisions on either finance or strategy.
Steps for Developing Successful Corporate Financial Strategy
Corporate financial strategy is most successful when the strategy is maintained internally and aligned with the operations of the corporation. Fully integrated corporate financial strategies can be developed using the following steps (Mallette, 2005):
- Build a sufficient capital structure: Capital structure refers to the means through which a company finances itself. Financing may come from long term-debt, common stock, and retained earnings. Corporations can determine the best capital structure for its purposes through the use of three forms of analyses: Downside cash flow scenario modeling, peer group analysis, and bond rating analysis. Downside cash flow scenario modeling is a process in which a capital structure is taken from a set of downside cash flow scenarios. Peer group analysis is a process in which common capital structures and fads of peer businesses, are evaluated for insight into operating features. Bond rating analysis is a process in a review of the debt capacity within certain debt ratings.
- Determine the correct market valuation: Correct market valuation evaluates whether the corporation is undervalued or overvalued in the marketplace. Market valuation refers to a measure of how much the business is worth in the marketplace. Review financial measures such as investor expectations for growth, margins, and investments. Compare investors' expectations and managements' expectations to check for disparity.
- Establish the optimum corporate financial strategy: Develop an optimum strategy for value creation that provides sufficient funding, financial balance, and a growing cash reserve.
Ultimately, corporate financial strategy is a firm-specific enterprise. Corporations design their individual corporate financial strategies based on their available tools, resources, insights, goals, and objectives. Common components of corporate financial strategies include: Value-based management, strategic planning, mergers and acquisitions, cost analysis, and capital budgets. The following section describes and analyzes the main components of corporate financial strategies used today in the private sector. This section serves as the foundation for later discussion of the relationship between corporate financial strategy and investor relations.
Chief financial officers, managers, and planning teams develop their corporate financial strategies to maximize and optimize growth and shareholder value. Corporate financial strategies are characterized as return driven strategies. A return driven corporate strategy refers to a set of corporation specific guidelines for creating, maintaining, and analyzing corporate strategy focused on utmost, long-range wealth development. In the twenty-first century, managers have an increased responsibility to create shareholder value, watch the performance of a business, and safeguard long-term business success. Return driven corporate financial strategy prioritizes value added outcomes and directs the business with a critical eye toward return, value, and growth (Frigo, 2003). The following components of corporate financial strategies, including value-based management, strategic planning, mergers and acquisitions, cost analysis, and capital budgets, are used by chief financial officers, managers, and planning teams to create shareholder value.
Chief financial officers, managers, and planning teams may choose to base their corporate financial strategy on the principles of value-based management. Value-based management refers to a management approach focused on maximizing shareholder value. Value-based management includes strategies for creating, measuring, and managing value. Value-based management is an integrated and holistic approach to business that encompasses and informs the corporate culture, corporate communications, corporate mission, corporate strategy, corporate organization, corporate decision making, and corporate awards and compensation packages. The economic value added (EVA) strategy is one of the most common tools used in value-based management. Economic value added refers to the net operating profit minus a charge for the opportunity cost of all the capital invested in the project. Economic value added analysis is considered a beneficial lens for looking at varying company unit performances on a cost-of-capital basis where risks are adjusted. Value added managers may receive compensation based on the outcome of economic value added analysis. Ultimately, the economic value added approach is a measure of economic performance and a strategy for creating shareholder wealth (Bhalla, 2004). Critics of economic...
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