Finance strategy includes:
1. Financing decision –
(a) It helps to determine what should be the source of procurement of funds.
(b) Factors affecting Financing Decision:
(i) Cash Flow Position: In case a company has strong cash flow position then it may raise finance by issuing debts, as they are to be paid back after some time and interest has to be paid on debt.
(ii) Return on Investment: If return on investment is higher than the rate of interest on debt then it will be beneficial for a firm to raise finance through borrowed funds.
(iii) Floatation Cost: The cost involved in issuing securities such as brokers commission, under writer’s fees, cost of prospectus etc. is called floatation cost. While selecting the source of finance, floatation cost should be taken into account.
(iv) Control: When existing shareholders are ready to dilute their control over the firm then new equity shares can be issued for raising finance but in reverse situation debts should be used.
(v) Tax Rate: Interest on debt is allowed as a deduction; thus in case of high tax rate, debt is preferred over equity but in case of low tax rate more preference is given to equity.
(vi) Cost of capital: The cost of raising funds from different sources is different. The cheapest source should be selected.
(vii) Risk: The risk associated with different sources is different. More risk is associated with borrowed funds as compared to owner’s fund as interest is paid on it and it is to be repaid also, after a fixed period of time or on expiry of its tenure
(viii) Period of Finance: For permanent capital requirement, Equity shares must be issued as they are not to be paid back and for long and medium term requirement, preference shares or debentures can be issued.
2. Investing decision
(a) It refers the selection of assets in which funds will be invested by business.
(b) It includes two types of Decisions:
i) Capital budgeting (Long term investment decisions).
ii) Working capital decisions (Short term investment decisions).
(c) Factors affecting the Investing Decisions:
(i) Nature of Business: Manufacturing concerns require huge investment in fixed assets & thus huge fixed capital is required for them but trading concerns need less fixed capital as they are not required to purchase plant and machinery etc.
(ii) Scale of Operations: An organization operating on large scale requires more fixed capital as compared to an organization operating on small scale.
(iii) Choice of Technique: An organization using capital intensive techniques requires more investment in plant & machinery as compared to an organization using labour intensive techniques.
(iv) Technology up gradation: Organizations using assets which become obsolete faster require more fixed capital as compared to other organizations.
(v) Growth Prospects: Companies having more growth plans require more fixed capital. In order to expand production capacity more plant & machinery are required.
(vi) Diversification: In case a company goes for diversification then it will require more fixed capital to invest in fixed assets like plant and machinery.
3. Dividend decisions –
(a) It helps to determine how much part of earning should be distributed as dividend.
(b) Factors affecting Dividend Decisions:
(i) Earning : Companies having high and stable earning could declare high rate of dividends as dividends are paid out of current and past earnings.
(ii) Stability of Dividends: Companies generally follow the policy of stable dividend. The dividend per share is not altered / changed in case earnings change by small proportion or increase in earnings is temporary in nature.
(iii) Growth Opportunities: In case there are growth prospects for the company in the near future them it will retain its earning and thus, no or less dividend will be declared.
(iv) Cash Flow Positions: Dividends involve an outflow of cash and thus, availability of adequate cash is foremost requirement for declaration of dividends.
(v) Taxation Policy: A company is required to pay tax on dividend declared by it. If tax on dividend is higher, company will prefer to pay less by way of dividends whereas if tax rates are lower then more dividends can be declared by the company.
(vi) Stock market reaction: Increase in dividend is good news for investors and hence market price of the shares increases in the stock market. Decrease in dividend reduces the market price of share.
(vii) Legal constraints: Under provisions of Companies Act, all earnings can’t be distributed and the company has to provide for various reserves. This limits the capacity of company to declare dividend.
(a) Means strategy by which a firm is efficiently able to differentiate from its competitors.
(b) Marketing strategy includes –
(i) Creation of brand.
(ii) Product differentiation.
(iii) Provide better product to its customers.
(iv) Increase efficiency to compete.
(c) Marketing strategy answers about following 3 things:
- Which market to compete?
- What s the bases of firm’s competition?
- When to compete?
(a) HR strategy helps in identifying current and future resources needs for organization.
(b) It ensures human resource requirement of an organization.
(c) Following are the steps for implementation of HR strategy:
(i) Ascertain current HR capacity of an organization. It helps to forecast future requirement of human resource.
(ii) Forecasting HR requirement.
(iii) Gap analysis
(iv) Development of HR strategy.
(a) Logistics strategy is defined as “the set of guiding principles, driving forces and ingrained attitudes that help to coordinate goals, plans and policies between partners across a given supply chain.”
(b) Logistics strategies are related with transportation or warehousing decisions.
(c) Elements of marketing strategy plane –
- Customer service policy.
- Inventory location policy.
- Transportation and distribution policy.
- Logistics organization structure
- IT and Communications capability
- Logistics Targets and metrics