Financial strategy Essay Example | Topics and Well Written Essays - 750 words - 1

Financial strategy - Essay Example The most important step in developing start up financial strategy is ‘to undertake a realistic evaluation of the financial alternative available and consider the impact of capital source selection will have on the development and ultimate contours of the company.(Richard D Harroch and Gregory c Smith, page 703)2 It is also important that financial needs of the firm should be evaluated overtime. Every business requires two types of finances at the startup. One is long term finance and other is short term finance. Long term finances are required to meet long term plans of business. ‘Long term plans are part of an integrated strategy that, along with production and marketing plans, guides the firm toward strategic goals. Those long term plans consider proposed outlay for fixed assets, research and development activities, marketing and development actions, capital structure, and major source of financing.’ (Lawrence J Gitman, page 115)3 Finances required for long term plans are not invested all at once at start of the business but gradually over time. Basic sources of long term finance requirements are equity contributions of the ownership and debt capital. Strategy to obtain long term finance from equity or debt capital is matter of overall policy of the company and depends a lot on expected rate of return of investments in total assets of the company. This is because there is a difference in raising fund as equity capital and debt capital. The main difference is that debt investors into the business of the firm are entitled to contractual set of cash flows (interest and capital), whereas equity investors have a claim on the residual cash flows of the firm, after the company has satisfied all other claims and liabilities. Interest paid on debt capital represent a tax- deductible expense, whereas dividend paid to equity investors has to come out of profits after tax. Debts have a fixed maturity