Strategic Finance

Financial Management deals with the decisions of a firm related to investment, financing and dividend (Veshvanath)

To carry on business, a firm invests in tangible assets like plant and machinery, buildings, and intangible assets like goodwill and patents. This comprises the investment decision

What is finance?

These assets don’t come free; one has to pay for them, so a company needs to tap various sources of funds including shares, bonds, bank loans. This forms the financing decision

The investment in assets generates revenues and cash flows for a specific period of time. The managers of the company can either retain cash with the company for further investment or distribute to the owners of the company—the shareholders. This constitutes the dividend decision

Financing and Dividend decision

Which investment/s should the company accept and what are the financial implications of undertaking the same?

How should the company finance those investments? What should be the mix of owners’ contribution— equity and borrowed funds, i.e., debt at any given point in time?

How much of the income generated from operations should be returned to shareholders in the form of dividends and how much is to be retained for further investment?

Financial Managers Decisions

Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders

On the other hand, the short term decisions can be grouped under the heading "Working capital management".

This subject deals with the short-term balance of current assets and current liabilities;

Financial decisions: Time perspective

The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Working capital management

Finance theoreticians generally agree that the objective of a firm is to maximize wealth

Whose wealth? whether it should be the wealth of shareholders or the wealth of the firm, which includes bondholders and preferred stockholders

Shareholder wealth maximization rule requires managers to work towards a sustainable increase in the price of the firm’s stock

Objective of financial managers

The identification of the possible strategies capable of maximizing an organization's net present value, the allocation of scarce capital resources among the competing opportunities, and the implementation and monitoring of the chosen strategy so as to achieve stated objectives

What is strategic financial management