3. Role of Finance in Strategic Planning
Fundamental success of a strategy depends on three
critical factors
A firm’s alignment with the external environment
A realistic internal view of its core competencies and
sustainable competitive advantages
Careful implementation and monitoring
4. Strategic Planning and Decision
Making Process
Vision Statement
Mission Statement
Analysis
Strategy Formulation and
Strategy Implementation and Management.
5. The Role of Finance
Financial
goals and metrics are established
based on benchmarking the “best-in-industry” and
include
Free cash flow
Economic Value-Added
Asset Management
Financing Decisions and Capital Structure
Profitability Ratios
Risk Assessment and Management
Tax Optimization
7. Aligning Finance with strategy –
Finance functions
Generating budgets, reports, routine financial status
updates and providing management reports for
decision making
Providing usable building block data to support
analysis
Ensuring cash availability and rationing of capital
Providing analysis of new possibilities
Other activities ( compliance with regulations, audits,
banking function, etc.)
8. Aligning Finance with strategy
Strategic alignment does not require adding new
functions – it just requires deepening of the traditional
activities
Finance can make a major contribution to strategic
alignment by promoting and supporting the monitoring
process
Generating reports transforms to having a good
balanced scorecard with outcome measures and
performance drivers
Budgets should reflect the costs/benefits and
scheduled timelines of the Action Plans and Other
Key Strategic Initiatives.
9. Aligning Finance with strategy
Finance function happens in the deep recesses of
the “backroom’’ but it is the oxygen to an
organization’s short and long term health
In today’s changing world there should be minute
details and projections regarding investments
made, costs incurred, potential cash flows and
profits to implement a strategy to its fullest
potential.
Hence, Finance as a function is required at every
stage to execute a strategy
12. Finance & HR
Business delivers through people and profits.
HR decisions affect firm’s profitability.
CFO - Manage Financial Assets
CHRO - Manage Human Capital
Balanced Score Card for better financial
performance
13. Harris Corporation
Communication and IT based company in Florida.
Healthcare services – John Hopkin’s Medicine
On-site medical imaging center
100 % of the Florida employees (6500 ) and their
dependents use the imaging center.
90%use the pharmacy and
75% use the medical center.
19. Finance & Systems
Business Intelligence
Strategic planning & Budgeting
Performance measurement metric
Financial processes
Systems serve as integration tool between
finance and operations.
20. Finance & Systems
Technological shifts & choices
Financial modelling & use of information
technology
Drastic shift in role of CIO
Relationship between CIO and CFO
22. Finance leads with the mind.
Marketing leads with the heart.
Together finance and marketing are a failed
marriage – do u all agree?
23. What is the reality?
Finance and marketing dept. together
Collaborative environment.
Accurate budget planning.
Added marketing flexibility.
Overall stronger organization.
flexible and successful organization
24. Banking industry
Marketing concept lately entered
Advertising and promotional measures.
Launching new schemes
Market oriented approach in India.
26. Derivatives
A derivative is an instrument whose value depends
on the values of other more basic underlying
variables
-Forward Contracts
-Future Contracts
-Swaps
- Options
27. Forwards and Futures Contracts
Contract to buy or sell a certain asset for a certain
price at a certain time in the future.
- Long Position
-Short Position
The forward price for a contract is the delivery
price that would be applicable to the contract if
were negotiated today
28. FORWARDS
Private contract between 2 parties
Non-standard contract
FUTURES
Exchange traded
Standard contract
Usually 1 specified delivery date
Settled at end of contract
Settled daily
Some credit risk
2.28
Range of delivery dates
Virtually no credit risk
29. Options
Option give the right to do something but not an
obligation.
Buyer makes upfront payment to get this right
30. Use of Derivatives
To hedge risks
To speculate
To lock in an arbitrage profit
Help in risk transfer from those who have it to
those who will take it.
31. “If we don’t hedge jet fuel price risk, we
are speculating. It is our fiduciary duty
to try and hedge this risk.”
Scott Topping,
Director of Corporate Finance for Southwest Airlines
32. FUEL HEDGING IN AIRLINE
INDUSTRY
NEED
After labour, jet fuel is the second largest
operating expense for airlines.
High volatility of jet fuel prices.
Historical daily volatility over a recent 25-day
period for Gulf Coast has averaged 58.7 percent.
34. PREDICAMENT
Air travel commodity business
Intense airline competition, firm unable to pass along
fuel costs to customers.
Airlines decided to hedge fuel prices
Carriers that produced an adequate return, tended to
be those that had good fuel hedge positions in place.
35. STRATEGY
Southwest Airlines use derivative instruments based
on crude oil, heating oil, or jet fuel to hedge their fuel
cost risk.
They rely on plain vanilla instruments to hedge their
jet fuel costs, including swaps, futures, call options,
and collars (including zero-cost collars).
36. RESULT
In 2008, locked in more than 70% of the fuel it
expected to consume that year at about $51 a barrel,
far below average crude price of $126.62 a barrel.
Other large airlines, meanwhile, have only 20% to
30% of their fuel "hedged" that year at an average
cost of $100 a barrel.
Fuel costs were up 20% for Southwest in the first
quarter whereas American said its fuel costs were up
nearly 50%, which wiped out profit for the nation's
largest airline.
37. OVERALL IMPACT
Since then the airline has hedged 70% to 80% of its
anticipated fuel use every year, more than any other
airline. The airline said it saved $727 million in 2008
by locking in lower fuel prices in prior years.
Southwest only airline to make profits.
Hedging enables Southwest to drive revenue growth,
protect fuel prices and the rest of the cost structure,
and thus enables it to expand and grow.
39. Derivatives- A Weapon of Mass
Destruction??
Baring’s Bank- a 233 year old investment bank had
huge exposures in the banking sector.
Collapsed on February 26, 1995 due to Nick Leeson’s
trading activities.
Reduced the values of the bank from $500 million to
$1.60 million.
Leeson used the infamous Error account 8888.
Leeson sold straddles, earned premium by selling over
37,000 straddles over a 14 month period.
40. Derivatives- Handle with Care
EURO STOXX index is a list of 50 blue-chip companies in the
Euro zone.
A trader at Societe Generale bank (Jerome Kerviel) took
positions on options on STOXX beyond his trading limits.
The trading limits had been breached but was ignored by top
management.
He had taken exposures worth $74 billion to make up for
losses which could not be squared off.
The bank incurred a loss of $7 billion.
43. International Finance
“International finance (also referred to as international
monetary economics or international macroeconomics) is
the branch of financial economics broadly concerned with
monetary and macroeconomic interrelations between two
or more countries.” – Wikipedia
Simple Definition: Branch of Finance that deals with
interconnecting the financial markets of the world.
Two Major Domains:
• Global Capital Market
• Foreign Exchange (Forex) Market
44. Global Capital Market
Rapid growth and
At $190 trillion, it was 4+ times of global GDP
From 2003-06, capital markets increased
by $65 trillion. Global GDP increased by
$12 trillion and Goods and Services
volume increased by a mere $5.4 trillion
Source : US Dept. of Treasury Reports
diversification of investor bases
Increased activity by official
monetary sources
Investors search for higher
yields and greater portfolio
diversification
Liberalization of financial
markets, resulting in expanded
market access to global
financial services
Rapid expansion of savings,
particularly in emerging
markets (esp. the BRIC
countries)
45. Forex Market
What is it ?
Foreign Exchange Market is where foreign currency transactions
are carried out and exchange rates between such currencies are
determined.
What is a Foreign currency Transaction ?
Exchange of two different currencies between two different
parties.
46. Exchange Rate
What is it?
The rate at which two currencies are exchanged
Eg: INR/USD – 61.43
Types:
Direct, Indirect, Cash, Spot & Forward
How is the rate fixed ?
Purchase Power Parity (PPP)
Absolute
Relative
Interest Rate Parity
58. Strategy - Classification of Income
Funding Mix Matrix
Unrestricted
• Local authority
grant,
Investment
income
• One-off grants
and public
donations
General
Fundraising
Core
Financing
Long-term
Short-term
Project
Funding
Programme
Funding
• Lottery Fund
• Legal Services
Commission
Restricted
60. Conclusion
Finance plays an important role in improving the
performance of the various other functions of the firm.
It helps firm implement and monitor their strategies
Creating specific, industry-related, and measurable
financial goals
Strengthening the organization’s capabilities with hard-to-
imitate and non-substitutable competencies.
It creates sustainable competitive advantages that
maximize a firm’s value, the main objective of all
stakeholders.
Notas do Editor
Arbitrage: taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance
Delivered record net income of $1.09 billion, excluding productivity charges, while reported net income was $923 million after charges
Amounts are continuing operations, FY06 and FY12 EPS exclude special itemsOperating Free Cash Flow is cash from operations less capital expenditures net of proceeds from disposals of PP&ECAGR = Compound Annual Growth RateOperating Free Cash Flow excluding cash paid for productivity initiatives was $1.21 billionSales Growth = 8.8% (2012), Volume+PriceGenerated strong operating free cash flowof more than $1 billion for the third consecutive year, providing the fuel for continued top-tier dividend growth
Our predominant focus is on driving continued global growth in Ketchup & Sauces, our largest core category with sales of more than $5 billion. We are leveraging our advantaged, well-balanced geographic portfolio, led by our accelerating growth in Emerging Markets. We are building and increasingly capitalizing on unique global capabilities and infrastructure to support continued growth and improved productivity.
We increased the annualized common stock dividend for Fiscal 2013 by more than 7% to $2.06 per share. This increase reflects our solid results over the past seven years and continued confidence in our proven growth plan. It marks our ninth consecutive year of dividend growth, during which time we will have returned more than $5 billion in dividends to shareholders.Return a high percentage of EPS to shareholders through top-tier dividend.