Corporate Financial Management

The article focuses on the strategic planning process of financial management. In order for an organization to be successful, they must create a strategic plan that will position the firm for growth and competitiveness. The senior management team will need to analyze all data, including the financial records, to ensure that the organization can make a profit, remain competitive and be in position for continued growth. The use of the strategic financial process in other sectors is discussed. In addition, there is an exploration of how different types of financial risk are key components in the enterprise risk management process.

In order for an organization to be successful, it must create a strategic plan that will position the firm for growth and competitiveness. The senior management team will need to analyze all data, including the financial records, to ensure that the organization can make a profit, remain competitive and be in position for continued growth. "In discussing corporate financial strategy, the question can well be asked as to how strategy differs from more modest decision making" (Bierman, 1980, p. 1).

Bierman (1980) provided five elements and four approaches that he believed should be considered by corporate financial managers as they planned their strategies for the organizations in which they worked. The five elements were to:

• Identify the problems and opportunities that existed.
• Set goals and objectives.
• Develop a procedure for providing potential solutions or "paths" that the organization could follow in order to find a solution.
• Choose the best solution given the possible solutions and the organization's objectives.
• Implement a review process where the best solution can be evaluated on its performance.

These elements are very broad so that the corporate finance manager has an opportunity to consider a wide range of financial decisions. For example, the organization's main goal may be to pursue substantial growth with minimum risk. Therefore, the financial management team has to take these factors into consideration when developing the strategic financial plan for the organization.

Application

Financial Planning in Other Sectors

Although the focus of this article is on corporate finance, strategic financial planning is important in other sectors as well. Having a sound financial planning process is essential to a healthy organization. This section discusses how a non-profit organization evaluated its financial position and implemented processes in order to keep them on track.

A social service organization (Making Ends Meet, n.d.) identified four important stages in the financial planning process. These stages are: Reviewing the past, forecasting the future, setting strategies and plans, and setting annual budgets. Each of these phases is of equal importance and some of the tasks at each phase include:

Reviewing the past:

• Audit current and recent trends in demand and consumption.
• Watch the trends in funding streams.
• Follow and research the true performance and results, such as end-of-year position and conduct against certain signs for social services.
• Collect similar research regarding the real costs incurred and the cost drivers.
• Review the results and evaluate the recommendations from any additional research reports and administration letters from outside auditors.

Forecasting the future:

• Evaluate the force behind countries' policies and plans of action.
• Find and approximate levels of the differing funding streams.
• Review the force of nearby policy initiatives and prerogatives.
• Decide what the future results of known trends may be in relation to supply and demand.
• Recognize the economic significance of demographic tends and similar drivers of demand that the council does not control.

Setting strategies and plans:

• Include the recognition of institutional context for strategic planning.
• Include the linking of economic planning with service, human resources and asset management initiatives.
• Include the collection of research on the knowledge and abilities needed in order to effectively budget all levels of organizational management.
• Include the engagement of every key stakeholder in the planning of strategic finances.

Setting annual budgets:

• Come to consensus on what the budget process should be.
• Make sure that budgets include the recognition of financial plans.
• Integrate budget managers into budget setting initiatives.
• Connect every commitment and foreseen change in demand with the nearby and usable resources.
• React to unintended and unforeseen differences.
• Review budget structures.
• Engage with key stakeholders.
• Make sure that short term choices regarding budget setting don't weaken the priorities of long-term strategizing.

As the organization goes through the process, key decision makers should determine the types of policies that need to be in effect in order to be successful at each of the individual phases. Although these steps apply to a non-profit organization, the steps are valuable for any type of organization. Therefore, the corporate sector may benefit by comparing and contrasting how each of the sectors operate and discussing what works for both.

Viewpoint

Risk Management

With scandals such as Enron, one would think that corporations would adhere to ethical standards. Unfortunately, many view companies like Enron as the "ones that got caught," and changes have not occurred in the operations of some businesses because the issue has not been taken seriously. However, the trend is changing. According to a survey conducted in January, 2007 by the Risk Management Association (RMA), many organizations "are moving toward a fully integrated enterprise risk management approach where a myriad of risk types are measured and many of the processes automated and standardized" (p. 14).

Categories of Organizational Objectives

There are many situations that can affect the future of a business. These situations can be positive or negative. Situations with negative impact may be viewed as risks, whereas, situations with a positive impact can be seen as opportunities. The overall objective of most businesses is to minimize risk and seize opportunities. Enterprise risk management (ERM) addresses the risks and opportunities facing an organization by classifying objectives into four categories:

• Strategic -- "big picture" goals focused on supporting an organization's mission.
• Operations -- effective and efficient use of the company's resources.
• Reporting -- reliability of reporting.
• Compliance -- compliance with laws and regulations.

By placing an organization's objectives into categories, one can focus on different aspects of enterprise risk management. Although the categories are different, they can overlap in terms of objectives.

Components of ERM

ERM is made up of eight interrelated components which define the manner in which a management team runs an organization and how the practices are processed (CSO, 2004). The components are:

• Internal Environment. The internal environment is the tone and culture of an organization. It sets the bar for how risk is viewed by the organization and the employees. Organizations develop their philosophy, integrity standards and ethical values on risk management.
• Objective Setting. Although an organization may have objectives in place prior to the implementation of a risk management plan, the ERM process ensures that the established objectives are in alignment with the organization's mission and position on risk.
• Event Identification. An organization must identify the internal and external events that may affect its ability to achieve goals, and the events have to be classified as risks or opportunities. Opportunities are shared with the management team to determine if they should be incorporated into the organization's goals and objectives.
• Risk Assessment. Risks are assessed and evaluated on a regular basis so that the organization can analyze what type of impact each has on the entity.
• Risk Response. The management team is responsible for selecting the appropriate action to risk events. Responses are based on an organization's risk tolerance and risk appetite.
• Control Activities. Policies and procedures are put in place to ensure that risk responses are effectively implemented.
• Information and Communication. Relevant information is identified and communicated in a timeframe that will allow employees to perform their responsibilities. The communication process should flow up, down, and across the organizational structure.
• Monitoring. The ERM system is monitored and modified when appropriate. Monitoring is achieved through management interventions, separate evaluations, or a combination of both.

Ensuring the Success of ERM

If one wanted to determine the effectiveness of an organization's ERM, he or she would have to assess whether or not the eight components are working effectively. In order for the components to be work effectively, material weaknesses must be eliminated and the risk level has to be within the organization's risk appetite. In addition, the management team and board of directors must have an understanding of how the four categories of objectives are being achieved and know that the reporting process is reliable and addresses compliance with laws and regulations.

The senior management team could also implement a corporate risk policy in order to ensure that the ERM process is successful. Brown (n.d.) suggested a four step process for this type of policy. The first step would be to identify the major risks faced by the organization. Once they have been identified, the next step would be to formulate an organizational method to evaluate, monitor and govern the risks.

During the measuring phase, a value is assigned to each risk level, and it could be quantitative or qualitative. The next phase, monitoring, requires the organization to track changes in risk over a period of time. The final step, controlling, requires the risk level to be modified in other to be in compliance with the risky appetite and procedures put in place by the shareholders and the board of directors. This foundation is enforced and adapted to every risk category.

The Types of Risk by Category

Brown (n.d.) provided a summary of eight types of risk that are placed into four different categories (i.e. financial risk, operational risk, strategic risk, and hazard risk).

Every business realizes that it will need to take some level of risk.management should include competitive advantages. When reviewing the competitive advantage, it may be best to create a grid such as the one listed above in order to compare and contrast the different categories. Three of the categories focus on the financial aspect of the organization. Therefore, this model can be considered a valuable tool in the strategic planning phase of financial management.

Category Identification Measurement Monitoring Control Financial: Market Risk Adverse movements in price or rates Notional measures such as position values; sensitivity measures such as duration, and optionality measures. Position reports, value at risk, scenario simulations and stress testing. Establish and closely monitor a limit structure appropriate for the organization's level of risk. Financial: Credit Risk Counterparty fails to perform as agreed under contract due to unwillingness or inability to pay on time. Credit risk is measured with a relative value score. Assessment factors include financial capacity such as current levels of earnings, cash flow and capital, and historical payment patterns. An annual review of the person's credit file. Limits on exposure to individuals, netting agreements across subsidiaries and products, third party guarantors. Financial: Liquidity Risk Liquidity risk involves funding and market liquidity. Cash on hand, working capital, lines of credit Provide credible advanced warning of a pending liquidity crisis. Cash flow forecasting can measure short-term liquidity positions. The contingency liquidity plan. Operational: Systems Risk The risk that an information technology system will fail to perform. Mean time between failures, average down time per period and processing error rates. Capacity utilization and other monitoring software should be installed. Well-developed business continuity and disaster recovery plan's response to major systems failures. Operational: Human Error Risk The risk that an employee, agent or contractor will fail to perform. Processing error rates can measure mistakes that have occurred. Academic and professional qualifications assess the potential for human errors. Regular organizational testing of employee knowledge, specific audits programs, and quality control programs. A set of critical procedures covering all aspects of operations as well as an ongoing objective testing and training function. Strategic: Legal and Regulatory Risk Civil and criminal lawsuits, regulatory sanction, costs of compliance and other restrictions imposed by an external authority. Settlement costs, penalties and fines paid, and the operating budgets of the legal and compliance departments. Compliance testing Corporate policies, internal audits, new product reviews, legal reviews and company training programs. Strategic: Business Strategy Risk The risk of loss associated with bad decision making by senior management. Earnings, capital and stock price. Others include economic value added and risk adjusted return on capital. Annual or quarterly benchmarking analysis of performance against peer group's results. An independent, informed and active board of directors providing oversight of management decision making. Hazard: D&O Risk The exposure of corporate managers to claims from shareholders, government agencies, employees and other alleged mismanagement. Litigation settlements, claims paid and the cost of insurance. Claims tracking and analysis, time spent by directors on corporate matters and performance evaluations. Sophisticated corporate governance and related compliance programs.

Conclusion

In order for organization's to be successful, they must create a strategic plan that will position the firm for growth and competitiveness. The senior management team will need to analysis all data, including the financial records, to ensure that the organization can make a profit, remain competitive and be position for continued growth.

Although the focus of this article is on corporate finance, strategic financial planning is important in other sectors as well. Having a sound financial planning process is essential to a healthy organization. The application section discussed how a non-profit organization evaluated its financial position and implemented processes in order to keep them on track. A social service organization (Making Ends Meet, n.d.) identified four important stages in the financial planning process. These stages are: Reviewing the past, forecasting the future, setting strategies and plans, and setting annual budgets.

With scandals such as Enron, one would think that corporations would adhere to ethical standards. Unfortunately, many view companies such as Enron as the "ones that got caught," and changes have not occurred in the operations of some businesses because the issue has not been taken seriously. However, the trend is changing. According to a survey conducted in January, 2007 by the Risk Management Association (RMA), many organizations "are moving toward a fully integrated enterprise risk management approach where a myriad of risk types are measured and many of the processes automated and standardized" (p. 14).

The senior management team could also implement a corporate risk policy in order to ensure that the ERM process is successful. Brown (n.d.) suggested a four step process for this type of policy. The first step would be to recognize the crucial and most important risks that the organization faces. Once they have been identified, the next step would be to form an organizational method to evaluate, watch and govern the risks.

During the measuring phase, a value is assigned to each risk level, and it could be quantitative or qualitative. The next phase, monitoring, requires the organization to track changes in risk over a period of time. The final step, controlling, requires the risk level to be modified in other to be in compliance with the risky appetite and procedures put in place by the shareholders and the board of directors. This foundation is enforced and adapted to every risk category. Brown (n.d.) provided a summary of eight types of risk that fall into four different categories (i.e. financial risk, operational risk, strategic risk and hazard risk).

Terms & Concepts

Corporate Finance: The specified area of economics that incorporates economic decisions made by institutions and the instruments and evaluations used to employ the decisions agreed upon.

Credit Risk: In the enterprise risk management model, this type of risk occurs when the other party cannot perform to the standards agreed upon under the contract because of their hesitancy or failure to make the payments on time.

Enterprise Risk Management: A basic shift in the method that company's use in assessing and approaching risk involved in investments. Aon's ERM methodology uses company's expertise in assessing and analyzing risk, recognizing causes for concern, and proactively create methods to agree and conform to preexisting regulations.

Financial Management: The method of controlling economic resources, such as accounting, economic reporting, budgeting, and gathering accounts receivable, managing risks, and insuring businesses.

Liquidity Risk: In the enterprise risk management model, the concept involves funding and market liquidity.

Market Risk: In the enterprise risk management model, it refers to adverse movements in price or rates.

Risk Management Association: A professional organization that is driven by members who try to further their members' abilities to find, recognize, evaluate and control the results of credit, operational, and market-based risks involving companies and their customers.

Strategic Planning: An institution's process of describing its strategy or approach in following decisions regarding the allocation of its resources to pursue the method, including its capital and customers.

Bibliography

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Bierman, H., Jr. (1980). Strategic financial planning. New York, NY: The Free Press.

Brown, B. (2007). Step-by-step enterprise risk management. Risk Management Magazine. Retrieved May 14, 2007, from http://www.rmmag.com/MGTemplate.cfm?Section=RMMagazine&template=Magazine/DisplayMagazines.cfm&AID=1142&ShowArticle=1

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Hung-Gay F., Jr-Ya W., & Jot Y. (2011). Toward a new paradigm for corporate financial management in the wake of the global financial crisis. International Review of Accounting, Banking and Finance, 3(3), 27–47. Retrieved November 14, 2014, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=93980897

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Zavorotniy, R. (2012). Place of value management in a system of corporate management and its financial methods. Journal of Knowledge Management, Economics & Information Technology, 2(5), 179-187. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88272948&site=ehost-live

Suggested Reading

Dhaouadi, K. (2014). The influence of top management team traits on corporate financial performance in the US. Canadian Journal of Administrative Sciences, 31(3), 200–213. Retrieved November 14, 2014, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=97851187

Guillen, G., Badell, M., & Puigjaner, L. (2007). A holistic framework for short-term supply chain management integrating production and corporate financial planning. International Journal of Production Economics, 106(1), 288-306.

Holder-Webb, L. & Cohen, J. (2007). The association between disclosure, distress, and failure. Journal of Business Ethics, 75(3), 301-314. Retrieved September 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=26618798&site=bsi-live

Newman, K. (2007). Treasury benchmarking -- what's getting in the way? Financial Executive, 23(7), 21. Retrieved September 28, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=26472692&site=bsi-live

Ryan, E., & Trahan, E. (2007). Corporate financial control mechanisms and firm performance: The case of value-based management systems. Journal of Business Finance & Accounting, 34(1/2), 111-138. Retrieved September 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/loginaspx?direct=true&db=bth&AN=24181262&site=bsi-live

Stewart, J. (2005, September). Fiscal incentives, corporate structure and financial aspects of treasury management operations. Accounting Forum (Elsevier), 29(3), 271-288. Retrieved September 26, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17830034 &site=bsi-live