Gubar A. A., Ph.D. Gritsenko L. L.

State Higher Education Institution

“Ukrainian Academy of Banking Of The National Bank of Ukraine”

Estimation of corporate financial strategy

Objective estimation of corporate financial strategy is necessary and relevant for a wide range of financial information users. In particular, analysis of competitor’s financial strategy is useful in benchmarking, in developing own strategies, for identifying prospects of cooperation or creating alliances. Also it is a good practice for investors to analyse financial strategy of investee company.

Estimation of corporate financial strategy is aimed at two targets:

- analysis of financial strategy, which is already implemented in the company, and making conclusion about competitive position of the separate enterprise and state of the industry in general;

- making accurate prediction of company’s development.

In this case estimation could be based only on the annual reports and other published data, so there is not enough data for applying methods of estimation of financial strategy.

Among the methods of estimation of financial strategy according to financial statements the most common is matrix of financial strategy. The research is aimed at identifying the advantages and disadvantages of this method of assessment strategies and analysis of the prospects of its application to achieving the goals of estimation.

Matrix of financial strategy is based on the calculation of three indices: the result of economic activity, the result of financial activity and the result of economic and financial activity.

The result of economic activity shows the liquidity of the company after financing all the costs associated with its development. It is calculated using the following formula:

REA = P – ∆N – I + S (1)

P – gross operating profit;

∆N – changes in financial and operational needs;

I – productive investment;

S – property sale.

A positive value of REA indicates an opportunity to implement large-scale investment projects.

The result of financial activity shows the financial policies of the company and is calculated using the following formula:

RFA = ∆L – F – T – (D+O) (2)

∆L – changes in loans;

F – financial costs (debt servicing);

T – income tax;

D – dividends;

O – other income and loss of financial activity.

RFA enables to analyze the volume and dynamics of financial resources as a result of financial activity. RFA takes positive values if additional loans are involved, and negative - with a reduction of debt financing.

The result of financial and economic activity (RFEA) describes the cash flow balance of the company. It is calculated as the sum of the results of economic and financial activities.

These figures may take three logical values "around zero", "significantly upper than zero", "significantly less than zero", which determines the position of the company in the matrix of financial strategy (table 1).

Table 1 – The matrix of financial strategy

	RFA << 0	RFA ≈ 0	RFA >>0
REA >>0	Paterfamilias RFEA ≈ 0	Rentier RFEA > 0	Holding RFEA >>0
REA ≈ 0	Episodic deficit RFEA < 0	Stable equilibrium RFEA ≈ 0	Attack RFEA > 0
REA << 0	Crisis RFEA << 0	Dilemma RFEA < 0	Unstable equilibrium RFEA ≈ 0

For each matrix square there are identified characteristics and possible future strategies. Main diagonal matrix is the equilibrium zone. Above the diagonal there is the success zone, in which scores are positive and create marketable products. When is a diagonal zone of deficits, where the consumption of liquid assets.

The major drawback of this method is the lack of a clear criterion of separation matrix square. Belonging to the square is defined by the expert for each company and the reporting period, which makes difficult to use a matrix to large volumes of data.

Analysis of the Financial Strategy was held for the leading companies of the ukrainian industry, their position in the financial strategy matrix is given in table 2.

Table 2 - Results of analysis of financial strategies of enterprises

Enterprise	Year				Forecast
	2006	2007	2008	2009
JSC «Sumy Frunze NPO»	Dilemma	Attack	Unstable equilibrium	Dilemma	Stable equilibrium, episodic deficit, crisis
OJSC "Turboatom"	Episodic deficit	Paterfamilias	Crisis	Episodic deficit	Stable equilibrium, dilemma
JSC "Dniprovazhmash"	Unstable equilibrium	Stable equilibrium	Stable equilibrium	Dilemma	Stable equilibrium, episodic deficit, crisis
JSC "Motor-Sich"	Stable equilibrium	Unstable equilibrium	Dilemma	Episodic deficit	Stable equilibrium, dilemma
Novokramatorsky mashinostroitelny zavod J.St.Co	Stable equilibrium	Rentier	Paterfamilias	Stable equilibrium	Any position except "holding"
JSC «Zaporozhtransformator»	Stable equilibrium	Attack	Episodic deficit	Dilemma	Stable equilibrium, episodic deficit, crisis

In general the matrix of financial strategies adequately reflects macroeconomic processes. So in 2006, most enterprises were concentrated in equilibrium zone. During 2007 there was marked positive dynamics, some businesses moved to the success zone. The economic crisis in 2008 adversely affected the financial position of enterprises, so they occupied positions in the zone of deficits and equilibrium zone. In 2009 companies are finding a way out of the crisis.

Thus, the results of estimation of corporate financial strategy show the trends in the industry, which confirms the possibility and expediency of using a matrix. Matrix of financial strategy describes the financial policy of the reporting period, helping to predict the "critical path" of the enterprise in the future and generates a graphic map of strategic financial development.