Corporate Finance Strategy

A finance strategy should be integrated into an overall corporate strategy since it is just one component together with its marketing strategy and an operating strategy. Questions that need to be answered by the chief finance officer are perhaps mundane enough for some but critical to a firm’s long-term success. An example quandary for a finance chief is whether to fund an expansion project from internally-generated funds or to go outside either by borrowing from a bank or issuing additional shares to investors. An adjunct consideration is the cost of capital or cost of borrowing (interest rates prevailing in the market).

 Right Finance Strategy

Other questions that need smart answers are what to do with profits earned by the firm. Is it a good alternative to keep it as retained earnings as a buffer or reserve for future financial requirements? Or is it better to let go of accumulated profits and distribute them as dividends to stockholders? These types of questions are encountered by a finance officer and need to be evaluated in consonance with top management’s wishes with regards to the strategic direction the firm is taking. Many chief finance officers are often pressured to produce good quarterly bottom-line results that they had become reluctant to undertake or finance projects with long payback period to produce decent returns. This short-term outlook prevents them from the necessary investments to keep returns high in the future and consequently suffer from being left behind by competition that managed to invest in new equipment, for example. Japanese companies take the long view while most Western firms, especially American corporations, are overly concerned with a short-term outlook on share prices required by Wall Street stock analysts.

Site References:
• 6 - http://corporatefinance.mckinsey.com
• 7 - http://executive.education.insead.edu/finance_strategy

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