STRATEGIC FINANCIAL MANAGEMENT

Strategic Financial Management

Strategic Financial Management

The major challenge to management is to find, develop, and evaluate investment opportunities to insure growth and profitability within prudent limits of risk and liquidity. Without new investments a company continues to liquidate. Risky projects may go sour and impair profits and liquidity. The handling of major investments--capital expenditures--is guided by company goals, strategies, and policies, supported by objectives, plans, and programs. Capital expenditure projects collectively relate to the plans and programs. I will first start from the definition of the project opportunity for the company, and then will describe the issues that should be apprised for the project to be accepted as eligible for investment consideration and ultimately will draw the conclusions regarding the techniques that are now well-spread in the world of modern business and opportunities.

Analysis of profitability, risk, and liquidity is essential but, at best, is only a guide to management judgment. Faulty or inadequate analysis can limit perception and cause costly errors. Most strategic decisions are beyond relevant quantitative expression. Some projects are mandated by government, or contract. Many projects provide only intangible benefits. Yet it is likely that significant analysis is applicable to well over half the total projects in dollar terms and even more in total number of projects. Capital expenditures require evaluation of:

•Fixed assets (life over one year and capitalized)

•Expenses--charges to expense as incurred

•Current assets--less related current liabilities

•Intangibles such as management time

•Use of existing facilities (opportunity cost)

•Loss of sales of existing products.

Evaluation must also include competitive response, the regulatory situation, employee reactions (morale), public relations, stockholder relations, and internal politics.

A project that is scheduled to become a capital (financial) lease should be fully analyzed as a purchase and the lease alternative defined. The source of the funds is a financing (not investing) decision. Projects must be approved at the appropriate management level for inclusion in budgets and financial plans. The total capital expenditure budget is the basis for overall review and approval and evaluation for the effect on growth, profitability, liquidity, and risk.

The Importance of Valuation Process for Investment Analysts.

When providing a thorough due diligence process for one or another project, financial analysts have on aim to minimize the investment risk by getting to know the entrepreneur or the management team, the product, and the market potential presented in the investment proposal. Due to possible agency problems, caused by information asymmetry and moral hazard issues, the screening of deals is extremely important. This has received extensive attention in the academic literature (for a recent overview, see Muzyka, Leleux, & Birley, 1996). Recent research (Fried & Hisrich, 1994; Steier & Greenwood, 1995) has shown that the due diligence process is an iterative one, where the first step is to assess whether a proposal meets the investment criteria of the venture fund (e.g., with respect to the investment stage, sector, or magnitude of the investment proposal) and whether the proposal is viable at first sight. A formal valuation of a company will only be performed ...