Financial Strategy for Your Business

Introduction 

All organizations, regardless of their background, profit oriented or not, require a sound financial strategy to help them make key decisions with respect to their financial goals, operating costs, their financial projections and how to manage their collections. Financial access is crucial in ensuring the growth and sustainability of organizations. Other than the internally generated funds and personal sources of capital, organizations are usually forced to borrow money or seek donations from outside sources in order to fund their investment and other organizational activities. All these funds and sources require proper financial management so as to guarantee success. A company’s financial strategy provides the guidelines, the road map or the plan a company needs to use in their pursuit of financial objectives ( Edgington , 2010). A financial strategy is what determines how best a company uses its financial recourses to achieve desirable growth and sustainability. Using the Toyota Motor Company as an example, this essay is going to evaluate its financial strategy and assess whether the company’s financial performance is in line with its financial strategy. 

The Company’s 1 st Quarter Financial Performance 

The financial performance of Toyota Motor Corporation has been on an upward trend for the past five years. As at 2014, the company’s total assets had increased from 3247.3 billion in 2013 to 3834.1 billion yen. This increase was mainly attributed to a rise in market value of the company’s stocks among other investment securities (Nkomo, 2014). Other balance sheet items such as liabilities had increased signifying an increase in the kind of borrowing that’s tailored to finance investments. The company’s net cash flow has also been increasing throughout the years. Within this year’s first quarter financial results (April 2016 to June 2016), Toyota Motor Corporation has registered a growth in the number of units sold compared to a similar period last year. The number of vehicles sold rose by 2.8% (58000 units) compared to last year’s first quarter. Within Japan, the units sold increased by 41000 (8.8%) while overseas sales increased by 17000 units (1.1%). However, due to the volatile nature of foreign exchange rates and increased operational expenses during this year’s first quarter, the company’s net revenue has dipped by 5.7% (398,535 million Yen ) compared to last year’s first quarter results. The operating income has also decreased by 15% compared to last year’s. Effects of exchange rate caused a reduction in operating income by 235 billion yen while expenses rose by 30 billion yen (Toyota Motor Corporation, 2016). All these contributed to a 14.5% (93.9 billion yen) decrease of net income attributed to the company within this year’s first quarter. 

Expecting an exchange rate of 102 yen for every US$1 and 113 yen for every 1 euro, for this year’s first quarter financial results, Toyota Motor Company had forecasted net revenue of 26000 billion yen and an operating income of 16000 yen. All these compared to the previous year’s projections, represented a decrease of 8.5% for the net revenue and 43.9% for the operating income. The net income attributable to the company was forecast at 1450 billion yen, representing a 37.3% rise as compared to the previous year. So far, the performance of the company cannot be conclusively judged on the first quarter’s performances and projections due to the possibility of the market conditions changing favorably or unfavorably for the company. 

From the 1 st quarter’s financial results, it is evident that the corporation is still actively pursuing its financial strategy. Toyota Motor Corporation is trying to come up with ways of minimizing cost of production, improving efficiencies. These ways follow a capital expenditure budget at levels which ensures the company is cushioned against unfavorable market and economic conditions. The company still maintains its goal of maximizing its shareholders’ wealth. Its main challenge and which has curtailed its profitability is the company’s sensitivity to the volatile exchange rate in the market. The strengthening of the Yen against other major currencies plus the fluctuations of the exchange rates have negatively affected the operating costs of the company. This in turn affects the net worth of the company. 

Toyota’s Financial Strategy 

Toyota’s financial strategy revolves around three key priorities which include growth, sustainability and efficiency (Toyota, 2015). From the objective pursuit of the three priorities, Toyota Motor Company believes that it will achieve its goals of raising their shareholders’ net worth as well as a desired and sustainable growth. The company’s growth is underpinned on the financial strategy. To this end, the company is bound to continue making forward-looking investment which will strengthen its global competitiveness. More money is channeled towards research for the improvement of the productivity of the company. Areas of research include IT investment, which will ensure the development of next-generation technologies that are environment friendly (Toyota, 2015). Another research area will be on the training and development of working capacity of its workers in order to articulately adopt the new technologies. 

The efficiency priority of the company’s financial strategy aims at enhancing proper use of capital and ultimately improving the company’s profitability. This priority revolves around production areas such as, improving the strength and performance of the cars, efficient use of the existing resources i.e. plants and equipment, and the adoption of new innovative technologies. The efficiency priority also aims at applying cost reduction measure like the ‘ companywide value analysis (VA) activities’ and competent sales approaches all of which will guarantee strengthening of the company’s income (Toyota, 2015). 

The sustainability priority focuses on ensuring a strong financial foundation for the company. This strategy will be achieved by ensuring that the company maintains a sufficient amount of liquidity while at the same time having a steady shareholders’ equity. By ensuring that the company has sufficient liquidity and stable equity, the company will be cushioned against several unfavorable market conditions such as fluctuation of prices of raw material and the volatile exchange rates. As such, key capital expenditure activities such as company operations, research and development will continue ensuring growth of the company. Maintenance of sufficient liquidity is also necessary for the execution of future investments aimed at improving automobile performance and their outlook plus development of next-generation technologies. This strategy will ensure the company is able to compete well within the industry while at the same time ensuring efficient capital use and a good cash flow into the company. 

Evaluation of the Company’s Financial Strategy 

Source of finance 

Toyota Motor Corporation primarily finances its capital expenditures, operation costs, research and development from internally generated funds i.e. funds from sale of cars. Whenever market condition changes unfavorably the company partially borrows money or issue notes. In 2009, due to deflated vehicle sales attributed to the global financial recession of 2007/2008, the company was forced to borrow so as to fund its operational activities. The company borrows money through its financial subsidiaries. The company’s debts and solvency ratios for the last five years between 2010 and 2015 are as follows: 

From the table above, we can see that the company’s total debt has been increasing through the five years. The shareholders’ equity has also been increasing steadily from 2010 before slightly dipping in 2015. Debt to equity ratio has been constant between 2014 and 2015. This comes after a slight improvement from 2013 where the ratio was at 1.16 before reducing to 1.13 in 2014. In the same fashion, the corporation’s debt to capital ratio slightly improved between 2013 and 2014 before fading between 2014 and 2015. 

The proportion of the increasing long term debt has played an important role in the company’s financial strategy. Most of the monies have been directed to production and research. This has enabled the company to continue increasing their production despite the economic challenges of economic slowdown and the volatile exchange rate. Long term liability does not require immediate payment. This gives the company ample time and flexibility by cushioning it from any financial risks. 

Strategic use of funds 

One of the key priorities of Toyota’s financial strategy is on growth of the company. This priority revolves around research and development activities carried out by the company. From the table below, we can see that funds channeled to research and development increased by 10% between 2013 and 2014. This is a good indicator of how serious the company is in its pursuance of one of the key priorities of its financial strategy .

The company’s research and development has always been directed towards development of new exciting and trendy products, improvements on the existing brand of cars. This can be reflected by the increased number of cars produced and sales of the same. The company’s dedicated focus on research and development has enabled it not only to report good performance in terms of units sold but also to maintain technological leadership in most market segments. 

The other significant use of funds according to Toyota’s financial strategy is on proper capital use to sustain profitability. This involves the efficient use of available resources such as plants and equipment. Under this financial strategy priority, Toyota has not been doing well compared to other companies in the industry. The measure of efficient resource use is determined by the company’s rate of return on equity and assets (ROA and ROE). Compared to its competitors such as Nissan Motors and Honda Motors. Toyota has not been allocating its resources efficiently. It has a low ROA and ROE compared to its competitors. In 2012, Toyota posted ROA and ROE of 2.7% while Honda posted 4.8% and Nissan posted 8% (Nkomo, 2014). This indicates that the corporation did not utilize shareholder’s equity efficiently and thus generated low returns. This financial strategic goal needs to be pursued with vigor to increase the return on equity and subsequently enhance shareholder confidence in the company. 

Maintenance of sufficient liquidity is the last element of the company’s financial strategy. This financial strategy is measured using the liquidity ratios which assist in the determination of how the company has been meeting its short term cash obligations. Under this segment, the company has been doing well with regards to managing its short term cash obligation and marinating a desirable level of liquidity which cushions the company from the volatile market conditions. However, due to inefficient allocation of resources, the company has had challenges in maintaining a desired level of return to equity, a crucial element of enhancing shareholder confidence in investing into the company. 

Conclusion 

In my view, the company’s financial strategy is good and the company has tried to ensure that it keeps up with the strategy. However, external factors such as unpredictable market conditions, stiff competitions, government interferences amongst others interfere with the company’s strategy stifling their effort. Despite presence of the external challenges, Toyota needs to improve its resource use. This is a crucial area which will enable the company properly reduce its operation costs and enhance its profit margins. Proper resource allocation will improve its return on equity, a crucial performance measure of its financial strategy. 

References 

Edgington, N. (2010) . The Critical Importance of Financial Strategy, Recession or Not . Retrieved from http://www.socialvelocity.net/2010/04/the-critical-importance-of-financial-strategy-recession-or-not/ 

Nkomo, T. (2014). Analysis of Toyota Motor Corporation . Retrieved from http://scholar.harvard.edu/files/tnkomo/files/analysis_of_toyota.pdf 

Toyota (2015). Financial information . Retrieved from http://www.toyota-global.com/sustainability/csr/financial/ 

Toyota Motor Corporation (2016). FY2017 First Quarter Consolidated Financial Result. Retrieved from http://www.toyota-global.com/pages/contents/investors/financial_result/2017/pdf/q1/summary.pdf