Financial Strategy the Single Constant

¶ … 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 beyond this very commencement of the firm and expand throughout all operations and business results. The financial strategy establishes the budgets for all organizational departments, and as such directly influences the performances and resources of the respective departments. The financial strategy ascertains whether the company would be able to adequately research the market, identify customer needs and properly address and serve the target market. The financial strategy also defines the levels of product development and specialization, which directly influences the levels of customer satisfaction and adjacently the organizational sales.

All in all, the financial strategy is one key factor in attaining organizational success and it is an integrant party of the overall business model. In other words, it has to be factored in when making any business decision and in turn, the financial strategy has to be created in such a manner that it supports the company in attaining its objectives.

In such a context then, the economic agents have to place a greater emphasis on the development of the adequate financial strategy. The specialized literature presents the reader with a wide array of models and advices on how to develop and implement the proper financial strategy.

Tony Graham (2007) for instance argues that the first step in developing the financial strategy is represented by the identification of the organizational goals, which is then followed by the identification of the interrelationships between the factors of the investment and financial decisions. Then, the third step would be represented by the analysis of the external factors which would impact the financial strategy.

As these three stages are completed, Graham recommends the evaluation of the current performances of the organization, before a new financial strategy is developed. Finally, he argues that it is necessary to create not just a single proposition of financial strategy, but a multitude of strategies, so that the deciding parties can make the best informed decision (Graham, 2007).

Economic editor Janet Shapiro at Civicus, the World Alliance for Citizen Participation, argues that the financial strategy is developed through the gradual completion of five stages. At the first level, the economic agent would complete the planning process, level at which great emphasis would be placed on prioritizing the goals, resources and other factors of importance to the company.

At the second level of strategy development, the economic agent would complete the budgeting operations. Particularly, at this stage, emphasis would be placed on the development of several alternative solutions for funding. These would be created and assessed in light of company specific requirements and features.

Third, the economic agent would observe and, if necessary, even create the financial systems. This stage would center on the identification of the policies surrounding the financial strategy. Some relevant examples refer to the ethics of financing the organizational operations, the norms and principles regarding the company's interactions with its various stakeholder categories and other such features.