Concept :Strategic financial management is basically about the

identification of the possible strategies capable of maximizing an

organization's market value. It involves the allocation of scarce capital
resources among competing opportunities. It also encompasses the
implementation and monitoring of the chosen strategy so as to achieve
agreed objectives.
Process sfpp:

Individuals use financial planning strategies for a variety of reasons that include planning for
future purchases, paying for an education, or retiring comfortably. There are many
resources available to help design a reasonable financial plan so that earnings can be used
wisely over time and be available when needed. The most common types of financial
planning methods include personal budgeting, investment planning, estate planning, tax
and business planning, retirement and estate planning, and educational saving.
One common type of financial planning strategy is cash flow management. which refers to
the process by which individuals and families carefully decide how and where to allocate
income to pay for household and lifestyle costs. Income is balanced against bills,
entertainment, and other expenses to make sure that costs are covered and that some
money is left each month for other things. It is important that individuals understand the
basics of personal money management early in life so that other forms of financial planning
can be handled correctly.
Other financial planning strategies that are common have to do with investing money and
increasing wealth. Income that is earned can be added to savings accounts, money market
accounts, mutual funds, stocks, bonds and other interest earning accounts to earn more
over time. Saving money is an important hallmark of any sound strategy for financial
planning, whether it is for the short term or long term.

The lack of planning and control of cash resources is the reason often given for
the failure of many small businesses in Australia. However, good forecasting can
help reduce your business risk.
Much like a map helps you plan a long road trip, a financial forecast (often called
a cash budget, cash flow, or financial plan) helps you achieve your goals and get
your business to where you want it to be.
A financial forecast is a tool that allows you to use your resources where they're
most needed, so you can control the cash flow of your business, instead of it
controlling you. It allows you to control your money so you are more likely to
achieve your desired net profit.

What is a financial forecast?

A financial forecast is simply a financial plan or budget for your business. It is an
estimate of two essential future financial outcomes for a business your
projected income and expenses. Create a cashflow forecast by adding income
and expenses as they are due. You will then know exactly how much you need to
make every month for a profitable business.
A financial forecast is the best guess of what will happen to your business
financially over a period of time. Usually, financial forecasts are an estimate of
future income and expenses for a business over the next year and are used to
develop the projections of profit and loss statements, balance sheetsand, most
critically, the cash flow forecast.
Predicting the financial future of your business is not easy, especially if you are
starting a business and do not have a trading history. Initially, your financial
forecasts will be inexact and inaccurate. However, frequent forecasting with
adjustments as required will promote more accurate forecasting.
Back to top

Why prepare a financial forecast?

The financial forecast is critical to your business plan, especially if it is for the
purpose of getting a bank loan. More importantly, you are an investor in your own
business and you must have confidence in the validity of your business concept.
Use a financial forecast to prove to yourself that your business will generate your
desired profit and when it will start to make that profit.
A financial forecast is a vital tool in the financial management of your business
and, like your business plan, requires regular review and amendment to be
effective. Once the period for which you prepared the budget is over, be sure to
compare the actual results against your budget forecasts. Examine why
variations have occurred, take any remedial action necessary to correct the
problem, or plan for them accordingly in your next budget.
Advantages of an effective financial forecast:

Demonstrates the financial viability of a new business venture. Allows you to construct a
model of how your business might perform financially if certain strategies, events and plans are
carried out.

Allows you to measure the actual financial operation of the business against the forecast
financial plan and make adjustments where necessary.
Allows you to guide your business in the right direction and take control of your cash

flow.

Provides a benchmark against which to measure future performance.

Identifies potential risks and cash shortfalls to keep the business out of financial trouble.

Provides an estimate of future cash needs and whether additional private equity or
borrowing is necessary.

Assists you to secure a bank loan or other funding. Lenders and investors require
financial forecasts to show your capacity to repay the loan.

Back to top

How often should I prepare a financial forecast?

How often you forecast will depend on the circumstances of your business and
where it is positioned in the business life cycle. If you are planning to start a
business, you will develop an annual financial forecast as part of yourfeasibility
study to prove that the business is viable.
Monthly or weekly forecasts may be necessary when the business is just starting
or if the business is experiencing difficulties or rapid growth. Frequent forecasts
allow you to closely monitor your figures and develop strategies to rectify any
problems before they become a major issue. Rolling monthly or quarterly
forecasts may be more appropriate for a stable, mature business.
You should regularly measure and monitor the performance of your business,
and compare your financial forecasts with the actual figures as they become
available. If necessary, adjust your forecasts to reflect the changes.
Monitoring the differences between your forecasts and the actual figures will help
you to:

Identify the cause of the variation so you can take corrective action before it becomes a
major problem.

Fine tune your skills so you prepare more accurate forecasts next year.

Back to top

What are the components of a financial forecast?

Creating a financial forecast shows you the financial requirements to start the
business, convince you and your bank of the viability of your business or your
business growth, and what resources you need to keep the business profitable.
Your financial forecast will be based on information gathered from industry
and market research. Since you will be responsible for achieving the
predetermined financial objectives, make sure your estimates and assumptions
are realistic. Be consistent and make sure that your financial forecast reflects the
rest of the business plan. For example, your sales forecast should reflect the
capacity of production equipment mentioned in the operational section.
Combine the components of your financial forecasts to generate projected
financial statements, (balance sheet, profit and loss statement). You may need
help from your accountant to assemble the figures in the conventional format, but
the research and operational assumptions should be your own.
You can develop your own financial forecast by using the spreadsheets to
complete the individual components. Then add the timing dimension (when you
expect to receive payment and the amount) over 12 months to generate an
annual cash flow forecast.
Use the components listed below to develop a cash flow forecast for your own
small business.

Cash flow forecast

Establishment costs
Sales forecast
Cost of goods sold forecast
Expenses forecast

Financing Strategies
The entrepreneurs goal in securing financing should be to identify the appropriate mix of
funds with the least cost to the business and the fewest restrictions on business operations.
The founder(s) usually seeks to retain as large a share of ownership in the firm as possible,
so as to realize returns on the investment and innovation and to maintain business control.
Sometimes, however, it is important to realize that equity investors can contribute much
more to the business than money-including management expertise, contacts, marketing
channels, and business partners.
Debt providers can also be valuable resources to a recycling company. For example, even
before a young company is bankable, it can be useful to recruit a commercial banker as a
business advisor. The banker may be interested in helping the venture achieve a level of
profitability that will allow for bank debt to be placed in the future.
As noted in Figure 3-3, fund raising is an ongoing process for the entrepreneur, in
partnership with his or her board members, management and professional advisors. No
single source or amount of capital will be appropriate for all of a companys financing needs
during its development. Rather, the financing of the company should be seen as an
incremental process, as with the expansion of staffing, manufacturing or marketing efforts.
At each stage of company development, the firm only needs to attain the funds to achieve
the next milestone, while laying the groundwork for future financing rounds. This staged

approach limits the risk for the entrepreneur and the investor. It also ensures that the
founder has to give up smaller shares of his or her companys equity early on, when the
companys valuation is lower. As success is achieved on progressive milestones, the
company will be worth more and future equity financing rounds will yield more dollars for
each ownership share in the company.
Top of Page

Style Strategy
Stock selection for individual investors can be a daunting task. Choosing
securities from the global marketplace, analyzing, evaluating, purchasing
and tracking performance of those securities within a diversified portfolio
is not something most individual non-professional investors are able or
willing to do. Instead, investors can make portfolio allocation decisions by
choosing among broad categories of securities, such as "large-cap",
"growth", "international" or "emerging markets". This approach to
investing - looking at the underlying characteristics common to certain
types of investments - is termed style investing.
The popularity of style investing increased considerably for institutional
investors during the 1980s as the pension consulting community
encouraged clients to categorize equity styles during the asset allocation
process. Both institutional and individual investors found that
categorizing stocks by style simplifies investor choices and allows them
to process information about stocks within a category more easily and
more efficiently. Allocating savings across a limited number of investment
styles is a far easier and much less intimidating task than choosing
among thousands of investment options available throughout the world.
By classifying assets according to a specific style, investors are also
better able to evaluate the performance of professional money
managers. In other words, all the money mangers handling emerging
growth stock funds can be ranked by performance in that particular
category. In fact, money managers are generally evaluated not in terms

of absolute performance but relative to a performance benchmark for

their style of investing.
Over the past decade, a new set of sub-styles, in addition to the usual
styles of value and growth, has been accepted by the investment
community. These are: deep and relative value and disciplined and
aggressive growth.
Value style managers look for stocks that are incorrectly priced given
the issuer's exiting assets and earnings. They employ traditional
valuation measures that equate a stock's price to the company's intrinsic
value. Value companies tend to have relatively low price/earnings ratios,
pay higher dividends and have historically more stable stock prices. The
value manager's basic assumption is that the issuer's worth will, at some
point, be revalued and thereby generate gains for the money manager.
There are several reasons that a stock might be undervalued: the
company may be so small that the stock is thinly traded and doesn't
attract much interest; the company is operating in an unpopular industry;
the corporate structure is complicated, making analysis difficult or the
stock price may not have fully reacted to positive new developments.
Value stocks are typically found in slower-growing sectors of the
economy like finance and basic industry but there are bargains to be
found even in "growth" sectors such as technology.
During the 1990s, Standard & Poor's identified three specific sub-styles:
deep value, relative value and new value.
Deep Value style uses the traditional Graham and Dodd approach
whereby managers buy the cheapest stocks and hold them for long
periods in anticipation of a market upswing.

 Relative Value money managers seek out stocks that are underappreciated relative to the market, their peer group, and the
company's earnings potential. Relative value stocks should also
feature some sort of channel (such as a patent or pending FDA
approval) that has the potential to unlock the stock's real value. A
typical holding period is three to five years. Unlike traditional value
managers, relative value managers pursue opportunities across all
economic sectors and may not concentrate on the usual "value
sectors".
New value managers choose their investments from all securities
categories, seeking any stock that holds prospect for significant
appreciation.
Growth style managers typically focus on an issuer's future earnings
potential. They try to identify stocks offering the potential for growing
earnings at above-average rates. Where value managers look at current
earnings and assets, growth managers look to the issuer's future
earnings power. Growth is generally associated with greater upside
potential relative to style investing and, of course, it has concomitant
greater downside risk.
Traditional growth style investing has also spawned a few sub
styles, specifically, disciplined growth or growth-at-a reasonableprice (GARP), and aggressive, or momentum, growth.
Disciplined growth style managers concentrate on companies
that they believe can grow their earnings at a rate higher than the
market average and that are selling for an appropriate price.

 Aggressive growth styles tend not to rely on traditional valuation

methods or fundamental analysis. They rely on technical analysis.
Sector Strategy
Look at a particular industry such as transportation. Because the
holdings of this type of fund are in the same industry, there is an inherent
lack of diversification associated with these funds. These funds tend to
increase substantially in price when there is an increased demand for the
product or service offering provided by the businesses in which the funds
invest. On the other hand, if there is a downturn in the specific sector in
which a sector fund invests, the fund will face heavy losses due to the
lack of diversification in its holdings.
Index Strategy
Tends to track the index it follows by purchasing the same weights and
types of securities in that index, such as an S&P fund. Investing in an
index fund is a form of passive investing. The primary advantage to such
a strategy is the lower management expense ratio on an index fund.
Also, a majority of mutual funds fail to beat broad indexes such as the
S&P 500.
If you can't beat the market, why not join it? We go over your options in
the following article: The Lowdown On Index Funds.
Global Strategy
A global strategist builds a diversified portfolio of securities from any
country throughout the globe (Not to be confused with an international
strategy, which may include securities from every other country except
the fund's home country.) Global money managers may further
concentrate on a particular style or sector or they may choose to allocate

investment capital in the same weightings as world market capitalization

weights.
Stable Value Strategy
The stable value investment style is a conservative fixed income
investment strategy. A stable value investment manager seeks shortterm fixed income securities and guaranteed investment contracts issued
by insurance companies. These funds are attractive to investors who
want high current income and protection from price volatility caused by
movements in interest rates.
Dollar-Cost Averaging
Dollar-cost averaging is a straightforward, traditional investing
methodology. Dollar-cost averaging is implemented when an investor
commits to investing a fixed dollar amount on a regular basis, usually
monthly purchase of shares in a mutual fund. When the fund's price
declines, the investor can buy a greater number of shares for the fixed
investment amount, and a lesser number when the share price is moves
up. This strategy results in lowering the average cost slightly, assuming
the fund fluctuates up and down.
Value Averaging
This is a strategy in which an investor adjusts the amount invested, up or
down, to meet a prescribed target. An example should clarify: Suppose
you are going to invest $200 per month in a mutual fund. At the end of
the first month, thanks to a decline in the fund's value, your initial $200
investment has declined to $190. In this case, you would contribute $210
the following month, bringing the value to $400 (2*$200). Similarly, if the
fund is worth $430 at the end of the second month, you only put in $170
to bring it up to the $600 target. What happens is that compared to dollar

cost averaging, you put in more when prices are down, and less when
prices are up.