Deck 15: Finance in Strategic Planning

Question 1

Why is the finance function so important in planning and executing strategies?

Answer 1

$\bullet$ Financial terms often are the basis for measuring the performance and success of strategies. Beyond that concern, there are powerful reasons for managing the firm's finances in synchronization with its strategies. There is a symbiotic relationship between the substance and success of the strategies and the financial health of the firm. Financial resources are required to pay for all the other resources that go into implementing strategy-land, plant, equipment, salaries, contracted services. The financial achievements of the strategy determine the firm's ability to continue to obtain the capital necessary to support both future strategies and current operations.

Question 2

The finance department has four traditional areas of responsibility in an organization. Identify at least three of them.

Answer 2

$\bullet$ Processing the transactions needed to keep the business running
$\bullet$ Managing the financial flows within the organization
$\bullet$ Controlling the risks associated with handling large sums of money
$\bullet$ Providing decision support to other functional areas.

Question 3

Describe four contributions that the finance function can make to the strategic planning process.

Answer 3

$\bullet$ The process begins with an assessment of the organization's resources. Principal among these are its finances. This includes cash reserves, free cash flow, unused debt capacity, stock price (if it is a publicly traded for-profit business), and credit rating. There also should be some commentary about the strengths (or not) of the organization balance sheet.
$\bullet$ When the process moves on to the assessment of the external environment, the finance department may have something to say about the financial strengths and weaknesses of the organization's competitors. It also can offer some general comments about trends in the markets for debt and equity, as well as their implications for the organization's cost of capital.
$\bullet$ Wherever possible, the finance department assists in assigning monetary values to all the activities related to the strategy.
$\bullet$ In many cases, good financial management will perform "scenario analyses" of a strategy and its related financial flows, taking into account different possible success rates for the strategy, different environmental circumstances (economic trends, legal mandates), and different competitor strategies.
$\bullet$ As it comes to understand the short and long-term financial effects of the proposed strategy, the finance department must determine whether the organization can afford an investment in it. Does it have, or can it arrange to have, the funds needed to cover both the working capital and investment capital called for by the strategy?
$\bullet$ The responsibilities of the finance department continue as the strategies are being implemented. The financial performance of each strategic project is monitored to ascertain whether it continues to justify the capital invested in it. Are the original projections being met? Is it on course to return a profit that will cover the cost of capital? Have there been changes in the availability and cost of the capital on which the organization is relying? More or less capital may be available, at a higher or lower cost. This may prompt the organization to reduce or eliminate certain strategies, to invest more in other strategies, or to add entirely new strategies.

Question 4

Along with rating firms, the book encourages organizations to integrate their financial management and strategic planning. Identify the two ways in which this can occur.

Question 5

Why does an organization need to worry about the capital demands of its large-scale, non-strategic projects?

Question 6

Explain how to calculate the net present value (NPV) of a strategy proposal.

Question 7

From what sources might the investment capital for a large established organizations originate?

Question 8

From what sources might the investment capital for a new business venture originate during its first three to five years?

Question 9

What is the "cost of capital" of an organization and how is it determined?

Question 10

Explain three differences between debt and equity as sources of capital for an organization.

Question 11

What are some criteria that should be taken into consideration in allocating available capital among several strategic proposals?

Question 12

Define the term "creditworthiness" as it applies to corporate financial management.

Question 13

What measures can an organization take to enhance its creditworthiness?

Question 14

Identify the three financial metrics that organization leaders should always be monitoring.