Finance for Strategic Decision Making

Finance for Strategic Decision Making offers managers in practically all levels of management a surprisingly simple approach to demystify the technicalities and inherent strange language that non-finance decision makers often encounter to get through the riddle of financial complexities in drawing business decisions. Today, managers from all disciplines are forced to take the painful tasks of facing financial expertise as an indispensable component of the position. This task of wrestling with all the financial jargons and formulae takes a popular shorter route with this book by M.

P. Narayanan and Vikram Nanda. Faced with the prospect and problem of bringing in just another finance book into the realm of business and education, the authors clearly understand the shortcomings managers have and the limited time for them to decode the myriad of formulae often associated with books in finance. The ensuing topics in every chapter articulate these managerial constraints and the authors simply present concepts and theories enough to make sound decisions.

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Here, economics is integrated but toned down to the degree of relevant range only – again enough for the managers to correlate the various business disciplines towards the objective of valuing the capitalist concept of shareholder value. The authors adroitly connects the stakeholder and shareholder concepts and clearly puts the manager in the line of fire between identifying not only the correct decisions to be made but more importantly the delivery of those decisions that impacts on the pockets of the organizations in the most strategic manner.

The key word here is strategic – which comprise value-added decision making in non-traditional finance areas and no longer in the realm of the usual traditional themes.

The latter appears already corrupted by the chaotic competitive environment where every business appears to have been mostly brought, and which leaves highly progressive finance-conscious companies into the elite level of financial wizardry. The authors also provide some practical wisdom often ignored or overlooked by managers – that every decision, especially the strategic type, always entail some form of financing.

Indeed, it is rare in business, if ever, that decisions are free from deployment of resources in any form. Interestingly, the book puts emphasis on the case approach and brings the manager right in the middle of the finance jungle clear enough for him to identify the drivers of shareholder value and how decisions can be directed towards creating these values. The books consists of nine chapters arranged systematically and logically according to the sequence managers would better understand the complexities of financial decision making with.

The authors repeatedly argue that managers must address strategic decisions beyond the simple and the normal operating character of everyday decision-making. In addition, the authors bring the finance managers closer to the success level through timely questions and answers and in surprisingly simple terms that effectively removes the hard sell many finance books try to overcome. In the first three chapters, the authors define the roles of the managers in the area of resource allocation and endorses the critical area of measuring financial valuation over periods through the example of, say, net present values system.

Here, the authors revisit the sources of financing for the company through the debt and equity routes. Managers are reminded that the debt and equity portals create a phenomenon factor called cost of capital and compels managers to approach the strategic decision making part of equity and debt financing with keen regard for the cost of acquiring them and the debt-equity mix that create and ensure managerial effectiveness.

The authors call this process the pure-play scenario. The next chapters bring the managers into the base of the capital structure. In chapter 4, such capital structure is explained in an environment of market imperfections such as taxes and bankruptcies and their effects on the payout policy and strategies, and vice versa. Here again, the authors put a reality show rather than theoretical discussions that cannot be explained by market scenarios.

In chapter 5, the authors clarifies the strategy of balancing the twin payout strategies – dividends and repurchase – to bring the message to the shareholders on the need of addressing their dividend issues while making strategic decisions along financing operations from external sources –dividend payout versus debt-capital financing. The complexity of the managerial finance function takes a more serious turn when managers, in collaboration with the shareholders, clarify the real intent of mergers and acquisitions and whether these moves really create and deliver a higher shareholder value to the market.

The authors caution managers and shareholders on the need to reexamine the merger-acquisition strategies considering the fact that not all moves towards this business combinations trajectory create any expected value. Here, the authors clarify that the weight of a newly-created company can actually prove disastrous in the face of crisis and financial meltdowns. Nevertheless, the book provides measures to manage the inherent risks of business combinations in whatever form. Chapter seven turns to the phenomenon of divestiture in contrast to the mergers and acquisitions management binges upon.

The authors outline the simple, yet relevant strategies that recognize the need to move a step backward in expansion binges and show managers the way to measure when a segment, product, or component needs to be delivered in a spin- off or sell-off, or reinforced or simply removing excess company fat and focusing on the core businesses the firm is making good at. In chapter 8, the authors admit that the financing phenomenon is not risk-free and that the managers’ role in preemptive strategic planning is to identify and anticipate the risks of decisions in managerial finance.

The authors try to assuage managers that shareholder value can in fact be created under risks scenarios; and that managers may be equipped at creating this same shareholder value while addressing the risks and value-drivers of decisions in an atmosphere of even the greatest risks. The phenomenon of opportunities available in an environment of risks and risk management is a strategic uniqueness for managers aiming to tap wealth from uncharted courses.

The need to outsource, divest or spin-off is becoming a pervasive measure in an economy configured and reconfigured by growing markets, complexities, political climates and even by literally climate factors. Here, the authors console managers that niches are created out of crises situations. Chapter nine naturally brings the managerial finance function into an area where performance can be measured to evaluate the effectiveness of decisions made by management.

The authors imply that the financial reporting system that illustrates the economic value added as well as the accounting profit factors can be extrapolated or even linked together with shareholder value. Thus, business performance can be both assessed from both ends without so much biases as well as business units or segments now getting closer scrutiny through segment reporting or responsibility accounting using the finance theories and approaches used by managers.

Similarly, the incentives of the managers which the authors admit cannot be perfectly fit into the interests of the shareholders, can indeed be delineated and showcased with that of the shareholder value factor. Throughout the work, the authors seek to simplify, as well as, again, demystify the issues normally reserved for managers with the financial wizardry. The authors succeed, nevertheless in arguing what is good for shareholders and what is just for managers under a strategic alliance thinly separated by diverse interests – the economic profit, the management compensation and the shareholder value factors.

Also, the book makes it clear that finance is a never-ending discipline tempered by the capitalist structure of the free world and can only be controlled by its own weight when the economy becomes too heavy with its own invention of derivatives and financial innovations. The books make a rich suite of case studies, simulations and modeling for students as well as managers and all types of decision-makers. If the book has a weakness, it is best illustrated by the humble attempt to simplify matters for the managers and students, only to find itself mired just the same in identical complex issues the authors wanted to demystify.

Hence, the readers cannot blame the authors for somewhat reneging on the promise of simplification in some parts, because there are no other means to demystify them except to put managers into a level where they will appreciate the upside of the mystery and thus leave something to the next generation of authors to await, first, the simplification of the economic environment and then restate the complexities reserved for their and in behalf of their own times.

Overall, the Finance for Strategic Decision Making is an interesting, readable and extremely thought-provoking piece of simplified text book which will cater to a wider spectrum of users. The reader, worth his time, definitely will be in a position to recommend this book to all those with keen interests in managerial finance, accounting and even economics.