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CIMA Strategic level F3 Formulation of Financial Strategy

CIMA Strategic level F3 Formulation of Financial Strategy – CIMA Strategic level F3 Financial strategy deals with the key elements in designing and managing the organisation’s financial strategy, in the context of contributing to achieving the organisation’s objectives and within its external constraints, such as the general regulatory and investment environment.

CIMA Strategic level F3 Formulation of Financial Strategy

Here we are providing CIMA Strategic level F3 Formulation of Financial Strategy Chapter 1 detailed Notes.

F3 syllabus is split into 3 topic areas:

A: Formulation of Financial Strategy (25%)

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B. Financing Decision (30%)

C: Investment decision and project Control (45%)

CIMA Strategic level F3 Formulation of Financial Strategy

1. Financial vs non-financial objectives

Strategy

A strategy is a plan of action designed to achieve a goal or objective. The aim of a strategy is to gain some kind of competitive advantage or to help to exploit future opportunities. A strategic plan tends to be an overall guide to the way forward rather than a detailed step by step approach due to the tendency of the real world to be uncertain. In the example of a chess game, a ‘strategy’ provides the over-riding approach that the player will take to win the game, but the exact set of moves they undertake will vary depending on the opponent’s moves.

Financial objectives

Maximising shareholder wealth

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In private sector organisations there is an over-riding objective ensure shareholder’s wealth isincreased through paying dividends and increasing the value of the shareholder’s equity (for instance through a higher share price).

Public sector – Value for money

Public sector organisations do not aim for profitability. Instead their focus is of the 3E’s of value: Effectiveness – achieving the goals of the organisation (e.g. education in a school) Efficiency – using resources as efficiently and productively as possible(e.g. best use of school teachers and schools) Economy – gaining resources at the lowest cost (e.g. buying books at the lowest possible cost ) Each of the 3E’s needs to be balanced to achieve the best overall result within the limited funds available.

Providing a surplus

Achieving a surplus (e.g. additional cash in the bank) is a key element of financial risk reduction, as it allows for businesses to survive periods of financial difficulty while the economy or business is turned back into profit. Crucially it provides cash for times when cashflow is short.

Non-financial objectives

Financial objectives need to balance against non-financial objectives of a business which can include:

  • Employee welfare
  • Customer service
  • Ethics
  • Increases in market share
  • Being competitive
  • Health and safety
  • Environmental issues
  • Good supplier relationships
  • Putting up barriers to entry to the market

2. Sustainability and integrated reporting

Limitations of financial statements in reflecting non-financial capital base

The IASB’s Framework states that the objective of financial statements is:

‘to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions ’

The following lists some of the reasons why the overall objective has not been met and hence the drivers for change:

Information overload – annual reports of entities have become complex and comprehensive due to the growth of standards and disclosure. A simpler approach or alternative format is required to extract useful information.

Backward looking – the financial statements report on transactions that have already taken place. In order to make economic decisions, users require forward looking information. Past performance may not be a guide to future performance.

Difficulty in forecasting – Forecasting is difficult and incorrect forecasts can be translated as management incompetence with an impact on share price and hence investment. They are also costly.

Accounting scandals and governance – The response to recent accounting scandals has made reporting complicated and detailed. For example, Enron and WorldCom scandals have led to an increase of regulation (Sarbanes-Oxley Act) and hence disclosure. Rooting out weaknesses in Boards has resulted in legislation and voluntary codes promoting good corporate governance with the effect of increased disclosure.

Corporate social reporting – the current thinking (stakeholder view) is that organisations have a social responsibility insofar as impact on future generations (e.g. pollution, carbon emissions), public responsibility (e.g. safety, charity etc.) and provision of opportunity for less advantaged groups (e.g. employment). This requires visibility in the form of reporting.

Increasing the scope of financial reporting

  • Operating and financial review (OFR) – this assesses the results of the period and discusses the future prospects of the business. This is an Accounting Standard Board’s (ASB) standard known as RS1. It is a Reporting Statement of Best Practise
  • Environmental report – this reports on the business’s environmental responsibilities and the effects of its activities on its environment
  • Social report – the aim of social reporting is to measure and disclose the social impact of a business’s activities.
  • Sustainability report – the environmental and social reporting can be combined into a single report on sustainability. The Global reporting initiative (GRI) is a set of guidelines regarding sustainability reporting i.e. the environmental, social and economic aspects of performance. Applying these guidelines is voluntary.

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