ROLE OF CORPORATE FINANCIAL

MANAGEMENT IN BUSINESS PLANNING,

STRATEGY AND DECISION MAKING

By UWL Student ID: 21346538

Accounting for Decision Makers

Mr. Chatura Liyanage

University of West London

01/05/2017

Word Count: 1,660

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Companies that grow for the sake of growth or that expand into areas outside their

core business strategy often stumble. On the other hand, companies that build scale

for the benefit of their customers and shareholders more often succeed over time -

Jamie Dimon (A-Z Quotes, n.d.)

The heart and soul of a successful business is financial management, which is the

efficient and effective management of finance of the business aligned towards

achieving the business goals. (Financial management and business success a guide

for entrepreneurs, 2016, pg. 1) In the financial world, there is a common

misinterpretation between the concept of an enterprise and a business. The sole

objective of a business is profit and wealth maximization, whereas an enterprise could

be non-profit oriented as well. (Masilo, 2014)

By mainly focusing on maximizing on earnings per share, healthy cash flows, Return

on Investments (ROI) and various other measurements of success, a business not only

designs and re-adjusts its short-term goals, but also aligns its actions for positive long-

term gains, a concept known as strategic financial management. (Grant, 2017)

These actions are the high level plans or strategies developed through careful analysis

of the competitive forces and market changes. Strategies will help the business

identify its consciously incompetent level and its actual position in the market, there

by means providing with the right level of information to develop a strategic plan to

generate revenue. (Kono and Barnes, 2010)

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Through the course of this essay, it will be attempted to discuss and elaborate further

on the roles of financial management in the strategic planning and decision making

process while introducing the primary tools and techniques that will assist to make

more refined decisions for a business. In aid of addressing profit-oriented businesses,

the term business will be used throughout the essay as described above. In addition,

the shortcomings of the key concepts have not been addressed for the benefit of the

topic and the theoretical aspects have been given more consideration with the

integration of practical application wherever possible.

The business plan, which is the blue print of any business, is structured in

collaboration with the individual leaders of all functional areas to ensure that the

strategies are in line with the objectives of the business. There onward the strategic

planning initiates, for example: setting targets for the sales team. (Financial

management and business success a guide for entrepreneurs, 2016, pg. 6-7) In the

words of Michael Porter, Strategy is the creation of a unique and valuable position,

involving a different set of activities, (Porter, 1996, pg. 3) whereas, strategic

planning is a tool that will define the roadmap to reach the end destination of the

stakeholders interest. (Dix and Mathews, 2002)

Hence, it is critical that the strategy and the strategic planning process is aligned with

the businesss vision, mission and values, its external environment, and its core

competencies for its success. Basically to consider everything that the business stands

for, example: Unilever aims to provide products to be used at every point of the day.

(Unilever global company website, n.d.) A SWOT analysis could be conducted to

understand the true potential of the business and to strategize accordingly. Further, a
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BCG matrix could also be used, which will examine the industry attractiveness

against the relative market share of the company and identify its strategic position to

generate growth opportunities. (Hanlon, 2017) These factors together will show the

sustainable competitive advantage or the differentiating factor of the business. (Harris

and Lenox, 2014)

In comparison to the present economic environment, businesses are rapidly influenced

by overcapacity and intense competition. However, globalization and technological

advancements have created new growth opportunities and have made financial funds

the most rare corporate resource, which has created the need for effective strategic

financial management to ensure that the funds are utilized to gain the right income

mix. (Bartlett and Ghoshal, 1994) An interesting strategy being followed by

McDonalds is the concept of can currency. The number of cans you present will

determine the eligible burger and McDonalds will in turn exchange the cans for cash

at the recycling depot. (Kim, 2016)

A study conducted to evaluate the existence of a connection between strategic

planning and financial performance revealed that firms that conducted higher levels of

strategic planning at every business stage performed better in both financially and

non-financially, as opposed to those that gave lesser priority. (Arasa and K'Obonyo,

2012, pg. 210- 211)

Hence, the shortcomings of the value chain can be immediately identified and the

processes can be altered accordingly, example: Starbucks is highly customer-centric.

The ratings and earnings given for each store can be analyzed and a trend can be
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identified for the reason behind one store being more profitable as opposed to another.

This could be taken as a case study and better operational practices could be

developed. (Arasa and K'Obonyo, 2012, pg. 210- 211)

Strategic financial management is also key to making maximum efficient use of the

corporate financial resources, in turn to maximize the Net Asset Value of the

shareholders. Budgeting, risk management and its review and evaluation are its key

elements. (Kono and Barnes, 2010) Cash budgets depict the expected future cash

inflows and outflows and provide a fiscal framework to make financial decisions. It

will also depict existing loopholes, such as: functional areas that are exceeding their

allocated budgets. Most importantly, budgets will ensure the liquidity of the business

without the need to access external financial resources. (Rothberg, 2013)

As a result of healthy cash flows, in the eyes of banks, investors and other lenders the

business will look creditworthy for investment opportunities as a key area of

corporate finance to find funds, such as from capital market, either through equity

finance and debt finance which would have varying repercussions. (Financial

management and business success a guide for entrepreneurs, 2016, pg. 11)

Due to the uncertainty of the economy, such as: the global financial crisis of 2008,

assessing and managing risk has become extremely vital. Directly impacting potential

risks must be identified and contingency plans must be prepared to ensure that the

business is able to remain being liquid even if they are not profitable during the

uncertainty. Companies like WSO2 conduct quarterly reviews to ensure positive

future cash flows.

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Maintaining good corporate governance is key to ensure that internal controls and

accounting are fair and transparent. A few companies that failed to do so were Enron,

Kodak and WorldCom who ultimately filed for bankruptcy. (CareersinAudit.com,

n.d.)

Certain strategic plans comprise of strategic themes; to differentiate ones business for

future benefits, example: capturing various market segments or demographics,

lowering warehouse cost. (Scaledagileframework.com, 2015) Nestl Global initiated

their business as a producer of condensed milk and infant food. Through various

mergers and acquisitions, Nestl is now dominating the FMCG industry with a

diversified portfolio. (Nestle.com, n.d.) Partially the reason behind this success is due

to strategic planning and the implementation of strategic financial management,

which identified the required improvements to increase the firms financial

capabilities and capitalized on new opportunities. (Financial management and

business success a guide for entrepreneurs, 2016, pg. 15)

Financial management influences three key areas of decision-making: investment,

financing and dividend decisions. The analytical techniques used are situational;

however timing is a common element influencing all above decisions. The timing of

certain financial policies, such as the interest rate, taxes and the capital market are

uncertain; hence it must be closely examined to arrive with accurate decisions.

(Financial Decision Making and the Techniques used in Financial Analysis, n.d., pg.

8-10) Businesses use the aid of certain tools and techniques to arrive at such

decisions.
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High priority is given to investment decisions as its outcome determines future cash

flows. Short-term investment decisions generate current assets necessary to perform

day-to-day activities. To identify the possible cash inflow, cash budget and ratio

analysis are used to identify the existing trends and could be cross-referenced to

understand their stability, profitability and other success factors. The balance sheet

could also be used to determine the income and costs for more refined decisions.

(Financial Decision Making and the Techniques used in Financial Analysis, n.d., pg.

8-10)

LinkedIn was bought over by Microsoft. A business does not simply attempt to

acquire another if not for a higher financial gain and to wipe off competition, it is a

well thought capital investment decision. They are evaluated on the risk and expected

return. An investor would only agree to go forth with an investment should there be a

high return. If a business invests in fixed assets or business operations, the expected

return would be profits, likewise if an investor purchase ordinary shares, the expected

return would be dividend payments. (Watson and Head, 2007, pg.2) Calculating the

payback period and Accounting Rate of Return is a common tool used to identify the

time taken to receive the ROI and the profit receivable. However, the shortcoming is

that the time value of money is ignored. (Financial Decision Making and the

Techniques used in Financial Analysis, n.d., pg. 8-10)

Hence, the Net Present Value could be used which takes into account the present

value of cash inflows and outflows and aids in arriving at a decision to go ahead with

the investment. The results of the BCG Matrix analysis stated above could also be
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integrated here to arrive at a more precise conclusion. (Financial Decision Making

and the Techniques used in Financial Analysis, n.d., pg. 8-10)

When making dividend decisions, the current situation of the business should be

considered to maximize the companys stock. Companies have a choice, either to pay

the dividend or to reinvest the capital for the best interest of their shareholders.

According to Warren Buffet, the second option has a higher return for the

shareholders and will generate more revenue for the business. It is highly

recommended to go forth with reinvesting for a positive growth. (Dividend Policy,

n.d., pg. 2)

The Balanced Score Card is a very common tool used to combine the financial and

operational measures and link the long-term strategy with the short-term strategies. It

ensures that the strategy evolves in response to the market changes to meet the

expectations of all stakeholders. (Financial Decision Making and the Techniques used

in Financial Analysis, n.d., pg. 11)

In addition, a business can also decide to exit through the use of financial

management as it clearly depicts the businesss current financial situation. It is mostly

related to the survival of a positive brand name and to identify if the stakeholders

interests could be more effectively met. (Financial management and business success

a guide for entrepreneurs, 2016, pg. 16-18)

In conclusion, when analyzing the information presented above, it can be understood

that strategic financial management has a strong and positive connection in

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determining and achieving business strategies and altering the business plan. Through

the application of decision making tools, such as: ratios, more precise financial

decisions can be agreed upon for the growth of the company. It is also important to

note that simply profit maximization would not contribute for the success of a

business, but healthy liquidity must also be achieved. It is based on the balance of

both that business will achieve success.

In addition, this essay has only been focused on the positive aspects of the mentioned

key concepts in order to provide an insight to its relevance for the success or failure of

running a business in todays economy.

Financial management faces certain limitations of its own, such as: it is time

consuming and is an on-going process where the production cost may change in

comparison to the previous budget, certain projects may not be approved which would

lead to a negative relationship of employees with the company. Also the time value of

money is not always 100% accurate; hence certain predictions and analysis may be

prone to failure, which in return will cost the business. (Yasser, 2015)

The tools and techniques used for decision-making mentioned above might not also

provide accurate information, as certain companies follow different accounting

practices, example: LIFO, and certain businesses depend on seasons, example: Ben

and Jerry may find the largest portion of their cash flow generating during summer,

but it will not remain static for the rest of the seasons. (Investopedia, n.d.) The

effectiveness of such tools and techniques have not been addressed in detail as well.
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However, as a whole, it is fair to conclude that corporate financial management is a

major influencer for the success of a business and the information and the quote made

by J. Dimon stands as testimony to the conclusion.

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