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What is a Financial Strategy? - Definition & Components

Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

Chartered Global Management Accountant certification tests the financial professional on a variety of topics. In this lesson, you'll learn about financial strategy as it relates to financing, investing and dividends.

Financial Strategy in Accounting

Molly, a certified public accountant with a Chartered Global Management Accountant (CGMA) certification, is facilitating a class for students wishing to follow her success. She starts by telling them that the CGMA certification has over 37 topics, but they will focus on financial strategy today. Financial strategy outlines an organization's financial short and long-term goals.

For the rest of this lesson, we will follow along as Molly explores the three components of financial strategy: financing, investment and dividends.

Financing

Molly asks the students to identify two ways an organization finances assets. One student mentions 'debt' while another states 'equity.' Molly affirms and explains that debt falls into two categories: obtaining a loan or selling bonds. Organizations can seek a loan from financial institutions, which is dependent on their credit rating and the health of their financial statements. The benefits of financing assets with a loan include increased credit rating if payments are paid on time and retaining cash. Drawbacks include the loan's interest payments and having a contractual arrangement, which means creditors have legal stance to enforce the contract.

Bonds are similar to a loan, whereby an organization receives money from investors with a promise to repay sometime in the future. The organization pays interest to the investor and the partnership represents a contractual arrangement, which are disadvantages to the organization. A benefit of selling bonds is the delay in repayment, which can have a longer term than a loan, sometimes extending 20 to 30 years.

Next Molly explains that financing with equity includes selling stock. When investors purchase stock, the organization receives cash to finance their assets. She groups students and asks them to identify the advantages and disadvantages of selling stock. One group states that there is no guarantee of dividends (a percentage of the company's earnings) or increase in the stock price. However, a disadvantage includes a lack of demand to purchase the stock.

One student raises her hand and wonders if organizations can use both debt and equity to finance assets. Molly says, 'absolutely, but they must find the most optimal mixture.'

Now let's explore investments.

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