Strategic Management: Formulation and Implementation

Finance For Strategic Management - Summary

The primary purposes of this chapter were to describe the basic financial statements and to discuss techniques used by managers to analyze them. In particular, the four major financial statements are:

  1. income tatement,
  2. balance sheet,
  3. statement of retained earnings,
  4. statement of changes in financial position.

Financial statement analysis begins with the calculation of a set of financial ratios. The basic tools of financial ratio analysis can be divided into five categories:

  1. liquidity ratios,
  2. debt-management ratios,
  3. efficiency ratios,
  4. profitability ratios and
  5. market ratios.

Using these techniques given in this chapter, managers should be able to quickly obtain insights into their own and competitors firms and be able to support their strategy assertions with hard financial data.

Pro forma financial statements provide the user with the basis for (1) evaluating the results of the firm's financial plans and (2) controlling the firm's operations during the planning period.

The breakeven analysis was also presented in this chapter. The objective of breakeven analysis is to determine the breakeven quantity of output by studying the relationships among the firm's cost structure, volume of output, and profit. There are many actual and potential applications of the breakeven approach. Some of these include: capital expenditure analysis, pricing policy, labor contract negotiations, cost structure, financing decisions.

This chapter also concerned with assessing the variability in the firm's residual earnings stream (either earnings per share or earnings available to the common shareholders) induced by the use of operating and financial leverage. Leverage may be defined as the employment of an asset or funds for which the firm pays a fixed cost or fixed return. Operating leverage is the responsiveness of the firm's earnings before interest and taxes (EBIT) to changes in sales revenues. A firm employs financial leverage when it finances a portion of its assets with securities bearing a fixed rate of return.

There are many other techniques which might be considered as highly important in the area of strategic management - for example, portfolio management, investment appraisal, the tax environment, financial reporting, share valuation, etc.

Although financial analyses are invaluable elements in contemporary managerial decision making, they should not supplant good judgment.