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Chapter-1
Strategy formulation
Strategy formulation is vital to the well-being of a company or organization. There are two major
types of strategy: (1) corporate strategy, in which companies decide which line or lines of business
to engage in; and (2) business or competitive strategy, which sets the framework for achieving
success in a particular business. While business strategy often receives more attention than
corporate strategy, both forms of strategy involve planning, industry/market analysis, goal setting,
commitment of resources, and monitoring.
Policy Formulation
Policy formulation is the development of effective and acceptable
courses of action for addressing what has been placed on the policyagenda.
Notice that there are two parts to this definition of policy formulation:
1. Effective formulationmeans that the policy proposed is regarded asa valid, efficient, and implementablesolution to the issue at hand. If
the policy is seen as ineffective or unworkable in practice, there is nolegitimate reason to propose it. Policy analysts try to identify effectivealternatives. This is the analytical phase of policy formulation.
2. Acceptable formulationmeans that the proposed course of action islikely to be authorizedby the legitimate decision makers, usually
through majority-buildingin a bargaining process. That is, it must
bepolitically feasible. If the policy is likely to be rejected by thedecision making body, it may be impractical to suggest it. This is thepolitical phase of policy formulation.
There are, then, two aspects to policy formulation: the analyticaland
the political. First, effective policy alternatives, presumably based on soundanalysis, must be conceived and clearly articulated. Second, a politicalchoice among these alternatives must be made: The policy must beauthorized through a political process, such as legislation or regulation. Both
phases --- analysis and authorization --comprise policy formulation.
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Strategic decisions
Strategic decisions are those which affect the long term performance of the business and which relate
directly to its aims and objectives. They are usually taken at the highest levels of management and carry
higher levels of risk. However, effective strategic decisions bring high levels of reward.
The strategic decision to undertake the 'Strategic Spare Parts Project' was taken by directors at the
highest level in RWE npower in order to support its objective of reliable supply. The expected rewards
from the project were fewer availability losses leading to reduced costs and improved customer
satisfaction.
Meaning and Characteristics of Financial planning.
Finance is the life blood of business. No business can run successfully without adequate finance. Finance
is required to bring a business into existence, to keep it alive and also to see it growing and prospering.
Meaning of Financial Planning:
Finance is an important function of business. The application of planning to this function is calledfinancial planning. Financial planning is mainly concerned with the economical procurement and
profitable use of funds. According to Gutlman and Dougall, "Financial planning is concerned with raising,
controlling and administering of funds used in business." In the words of Bouneville and Dewey,
"Financial planning consists in the raising, providing and managing of all the money, capital of funds of
any kind to be used in connection with the business." Financial planning is an important element of the
overall planning of business enterprise. Financial planning includes the following:
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Estimating the amount of capital required for financing the business enterprise;
Determining capital structure;
Laying down policies for the administration of capital;
Formulating the programmes to provide the most effective use of capital.
Characteristics of a Good/ Sound Financial Planning:
The main characteristics of a good financial planning are as follows:
Simplicity
The financial plan should be as simple as possible so that it can be easily understood even by a layman,property executed and administered. A complicated financial plan creates unnecessary complications
and confusion.
Based on Clear-cut Objectives
The financial plan should be based on the clear-cut objectives of the company. It should aim to procure
adequate funds at the lowest cost so that the profitability of the business is improved.
Flexibility
The financial plan should not be rigid, but rather flexible enough to accommodate the changes which
may be introduced in it as and when necessary. The rigid composition of the financial plan may cause
unnecessary irritation and may limit the future development of the business unit.
Solvency an Liquidity
The financial plan should ensure solvency and liquidity of the business enterprise. solvency requires that
short-term and long-term payments should be made on due dates positively. This will ensure credit
worthiness and good will to the business enterprise. Liquidity means maintenance of adequate cashbalance in hand. Sometimes insufficiency of cash may make a business enterprise bankrupt.
Planning Foresight
Financial planning should have due foresight and vision to access the future needs, scope and scale of
operation of the business enterprise. On the basis, financial planning should be done in such a manner
that any adjustment needed in the future may be made without much difficulty. As the business
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proceeds, the financial adjustments become necessary which should be adjustable properly as and when
desired.
Contingencies Anticipated
The financial plan should be able to anticipate various contingencies which may arise in the near future.
The financial plan should make adequate provision for meeting the challenge of unforeseen events.
Minimum Dependence on Outside Sources
A long-term financial planning should aim at minimum dependence on outside resources. This can be
possible by retaining a part of the profits for ploughing back.
Intensive Use of Capital
Financial planning should ensure intensive use of capital. As far as possible, a proper balance between
fixed and working capital should be maintained.
Profitability
A financial plan should be drafted in such a way that the profitability of the business enterprise is not
adversely affected.
Economical
The financial plan should be quite economical i.e., the cost burden of raising various types of capital
should be minimum.
Government Financial Policy and Regulation
The financial policy should be prepared in accordance with the government financial policy and
regulation. It should not violate it under any circumstances.
Difference btw strategic and financial planning :
Strategic planning will have both internal and external factors, while financial planning will only have
internal planning. For example, strategic planning will have to consider what courses of action
competitors are taking, and have to respond to things that they are doing. Financial planning would not
have to consider this, as they only consider things within the business. They look at the financial picture
of the firm, and they dont consider what other firms are doing or what the market is doing. This is part
of what makes strategic planning so complex and expensive for a company to adequately perform.
When it comes down to it, financial planning is about measuring the resources that a company has at its
disposal, while strategic planning is more about planning how to use those resources to maintain the
best competitive advantage that they can. Financial planning is a part of strategic planning, but they are
two different things. In the end, you cant really have one without the other, and having success with
both types of planning are necessary for a business to be successful over the long run.
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The standardized requirements in place for banks and other depository institutions, which determines
how much liquidity is required to be held for a certain level of assets through regulatory agencies such
as the Bank for International Settlements, Federal Deposit Insurance Corporation or Federal Reserve
Board. These requirements are put into place to ensure that these institutions are not participating or
holding investments that increase the risk of default and that they have enough capital to sustain
operating losses while still honoring withdrawals.
Also known as "regulatory capital".
Investopedia Says
Investopedia explains 'Capital Requirement'
In the United States, the capital requirement for banks is based on several factors, but is mainly focused
on the weighted risk associated with each type of asset held by the bank. The capital requirements
guidelines are used to create capital ratios, which can then be used to evaluate and compare lending
institutions based on their relative safety.
An adequately capitalized institution, based on the Federal Deposit Insurance Act, must have a Tier 1
capital-to-risk weighted assets ratio of at least 4%. Institutions with a ratio below 4% are considered
undercapitalized and those below 3% are significantly undercapitalized.
Definition of 'Linkage'
Linkage occurs when an investor is able to purchase a security on one financial exchange and sell it on
another. Certain depositary receipts, such as American Depositary Receipts (ADRs), allow for linkage,
which means that an investor can purchase shares of a company on a foreign exchange, such as the
Toronto Stock Exchange, and then sell those shares on a domestic exchange, such as the New York Stock
Exchange.
Investopedia Says
Investopedia explains 'Linkage'
Linkage should not be confused with arbitrage situations where an investor looks to profit from price
discrepancies for equivalent securities trading on different exchanges. As financial markets progress,specifically with the growth of electronic exchanges spreading, the phenomenon of linkage will become
more relevant and useful for investors in the future.