PART 5: SPECIAL TOPICSSecond, the finance function assesses the feasibility of a strategic plan, given a company’s existing and
prospective sources of funding. Though some corporate giants, such as Microsoft and Intel, hold such
vast amounts of cash that they are nearly unconstrained in their ability to make large new investments, for
most companies financial constraints are more limiting. Given a broad set of strategic objectives, financial
managers must determine whether the company’s ability to generate cash internally, plus its ability to raise
cash externally, will be sufficient to fund new spending initiatives.^2 Financial analysts generally treat expected
dividend payments as a factor that limits a company’s ability to make new investments. Similarly, if fulfilling
strategic objectives will require a significant increase in leverage, it is the finance group’s role to communicate
this trade-off to the top management team. As we see in other chapters, financial managers have several tools
that enable them to highlight the trade-offs that companies face when setting growth targets.
Third, finance clearly plays an important control function as companies implement their strategic plans.
Financial analysts prepare and update cash budgets to make sure that companies do not unknowingly
slip into a liquidity crisis. At an even more detailed level, analysts monitor individual items in the cash
budget, such as changes in inventories and receivables (our focus in the online Chapter 18) and changes
in payables (our focus in the online Chapter 19). Here, too, financial managers must evaluate trade-offs.
Fourth, a major contribution of finance to the strategic planning process involves risk management. If
a company’s strategy calls for making new investments in overseas markets (either producing or selling
abroad), then the company faces a new set of risk exposures. The finance function manages these
exposures so the company takes those risks that it believes it has a comparative advantage in taking and
hedges risks for which it has no advantage. Similarly, more than in any other functional area, the job of
finance is to identify problems that could develop in the future if the company’s strategic plans unfold in
unexpected ways. Developing ‘problem scenarios’ and options for dealing with them is an important part
of finance’s risk-management responsibility, which is covered in Chapter 23 online.
In this chapter, we focus primarily on the second and third roles just described.1 A company decides to compete by making a major investment to modernise its production
facilities. Describe two ways in which meeting this objective might force a company to sacrifice
other objectives.2 Company A competes in a market in which the demand for its product and its selling price are
highly unpredictable. Company B competes in a market in which these factors are much more
stable. Which company probably creates cash budgets more frequently and monitors them more
carefully?CONCEPT REVIEW QUESTIONS 16-1
16-2 PLANNING FOR GROWTH
16-2a SUSTAINABLE GROWTH
Most companies strive to grow over time, and most companies view rapid growth as preferable to slow
growth. Of course, rapid growth does not always maximise wealth, since it is possible for growth to be2 Considerations such as these are particularly important when credit market conditions are extremely tight, such as during the global financial crisis.LO 16.2What role does finance play in
a company’s strategic planning
process?
thinking cap
question