Explain about financial strategy.

Financial strategy tells about how to gather funds and how to utilise the funds. The main purpose is adequate supply of funds to meet present and future needs of business activities. The main aim is to maximise financial value of a firm.

  • Evaluating financial performances − Firm financial performances can be measured by analysing financial ratios of the firm.

  • Financial forecasting − By analysing financial needs, funds will be allocated accordingly. By using scientific techniques accurate forecasts are made, which provides basis to strategic decisions.

  • Capital structure planning − Capital structure decisions will be made on reasonable debt and equity capital. Capital structure provides financial stability.

  • Other financial considerations − Cash flow budgets, acquisitions, leverages, diversification, corporate restructuring etc.

Components of a financial strategy includes −

  • Financing decision
    • External funds
    • Internal funds
    • Capital structure
    • Debt equity ratio
    • Cost of capital
    • Lease financing
    • Leverage decisions
    • Trading on equity
  • Investment decisions
    • Hurdle rate
    • Capital rationing
    • Risk factor
  • Dividend decisions
  • Working capital management
  • Cash flow management
  • Managing growth and risks

Key elements in financial strategy include −

  • Source of funds
  • Projected financial statements
  • Management