Financial management involves the formulation and execution of strategy. In the development of strategy and formulation of financial policies, several parameters are taken into consideration. The objective often entails making an informed decision that would position the firm strategically in the ever increasingly competitive market. In satisfaction of the managerial obligations, financial managers employ horizontal analysis, vertical analysis, ratio analysis, benchmarking, among other parameters in strategy layout and financial policy formulation. The function of business strategy and financial policy formulation does occur in isolation. It involves a comprehensive approach, in which the performance of a company is compared to previous years of operations and general industrial performance. It is from such an analytical background that the firm would be positioned strategically in terms of decision making. Ultimately, the main objective of business strategy and financial policy formulation is the maximization of profits and the minimization of losses.
Financial strategy refers to the framework of operations that the business distinctly designs and decides to pursue in its profit earning objective. In the implementation of the strategies, definite financial policies must be outlined and pursued. This paper discusses various terms used in financial policy formulation and business strategy .
In horizontal analysis, a line of items are consistently analyzed to observe the company’s performance over a period of time that involves a number of financial periods. The rationale primarily bases on the deliberate observation of the trend or pattern that the set of analysis illustrates.
In vertical analysis, a set of items within one financial year is compared against an account. Usually the purpose of the analysis is to identify the general performance of the business in light of the items present in the unit. For example, vertical analysis could be employed to observe the unit’s performance in terms of inventory, receivables, payables and prepayments, among others.
The concept of ratio analysis suffices for purposes of evaluating the business performance relative to the industrial performance or an arbitrarily set standard. They include profitability, liquidity and debt utilization ratios. Profitability ratios measure the firm’s ability to employ the asset and capital at its disposal for purposes of making profits. Liquidity ratios are ratios that measure the firm’s ability to offset its debts. Liquidity of the firm determines the going concern concept and is ordinarily an essential element of business strategy. Asset utilization ratios are ratios that show the financial performance of the firm relative to the asset resource at its disposal. Debt utilization ratios are ratios that measure the company’s utility of its debt. Overall, all the ratios focus on the firm’s activities towards efficiencies and business efficacy. In business strategy development, the ratios give the framework upon which decision making and policies are made.
In benchmarking, the firm sets an arbitrary standard that would be employed to compare against the actual performance. The variances of the actual performance against the arbitrary standard are thereby investigated. The related sources of deviation are then acted upon or further strategies undertaken in respect of the variations.
In formulating business strategy and financial policies, the firm would use the techniques enunciated above for purposes of developing a working strategy and outline. The firm would, for instance, set a benchmark against which the firm’s activities would be steered towards achieving. After implementation of strategies, the related outcomes are analysed and variances investigated. Feedback obtained from these processes is then employed in the development of future policies and strategies. This approach enables the firm make informed and accurate decisions that improves its position in the market.
Information is power. The statement simply reinforces the known and appreciated concept that businesses need to plan before rolling out their policies in the market. The planning process entails strategy lay out and financial policy formulation. The parameters employed in the determination and formulation of business strategy essentially incorporates the factors described. Horizontal analysis, vertical analysis, ratios and benchmarking are just but elements of business information that collectively suffice as good models for decision making on business strategy and financial policy formulation.
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