Research Paper on "Developing a Financial Strategy"

Research Paper 5 pages (1457 words) Sources: 3

[EXCERPT] . . . .

Financial Strategy

The single constant in today's dynamic society is represented by change. The players in the business community are continually facing amounting threats from various sources. They for instance have to integrate the growing customer demands in their product creation and service delivery or they have to continually train and compensate the staff members in a manner which motivates them and stimulates performances and commitments. Also, the economic agents are obliged to continually research the market and the industry in order to identify and serve new customer needs, but also to identify and counteract new competitive strategies.

But in order for the economic agents to be able to develop and implement a business model focused around these prerogatives, they must possess financial resources. And more than possessing the financial resources, they have to be able to use them in an efficient manner, in a manner in which they consume as few resources as possible and generate as many positive results as possible.

One particular means to attaining these objectives is represented by the development and implementation of a powerful financial strategy. A financial strategy is virtually the multitude of tools and techniques used by the economic agent in the administration of its financial resources, as part of an integrated effort of attaining its pre-established objectives. In a more specific manner, the financial strategy incorporates the "practices a firm adopts to pursue its financial objectives" (ADVFN).

The financial strategy is not an isolated organizational operation and decision, but it is an integrated effort. The decisions made throughout the development and implementation of a financial strategy impact all components of the company. For instance, as the enterprise is being founded, the financial strategy selected reveals the proprietorship and control of the firm. For example, if there are numerous people contributing with money, the control and ownership would be divided between these people. Such a situation is common when more shareholders participate in the costs of the firm, but also in its profits.

A different situation is observed when the single owner of the firm possesses insufficient resources and requires a bank loan. The owner would remain the sole proprietor, but would have to explain the means in which he is using the money, guarantee to return it and make monthly payments. The two financial possibilities of issuing equity to shareholders and requesting a bank loan are different and raise various complexities.

In the case of the bank loan for instance, the solicitor remains the single owner of the firm and detains control of it, whereas in the case of equity, the control is shared with the rest of the stockowners. Then, with bank loans, the company has to make the monthly payments, regardless of the financial results of the firm. In the case of equity however, the firm would reimburse its shareholders at the end of the fiscal year, and in proportion with the profits registered by the firm. If the board decides not to distribute dividends or if the firm does not generate a profit, then it would not allocate funds to the shareholders.

A final difference is revealed at the level of legal considerations. When the economic agent issues equity and collects money from the investors, the money it will come to repay the investors is legally considered as profit and is as such subjected to taxes. On the other hand, in the case the economic agent funds its operations through bank loans, these are legally perceived as debt, and are as such exonerated from taxation (Burk and Lehman, 2004).

The situations presented above are relatively simplistic and, within the real life context, they can be found in combination or in various other forms. Also, as the business develops, the economic agent is presented with various alternatives to the financial strategy. The company could for instance consider funding through donors. Then, it could consider the generated revenues as sources of future investments.

Other alternatives of the financial strategy include the provision of services to member customers, and the request of a membership fee in order to benefit from the respective items. Also, it is possible for the economic agent to solicit other types of investments, or to engage in internal processes of financial restructuring so that it saves money and creates new investment opportunities (Shapiro).

Additionally, the role and importance of the financial strategy go… READ MORE

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