| Financial strategy is critical on the survival and development of enterprise and the correct decision can only be made when comprehensively looking at the enterprise general performance at the strategic level. The establishment of financial strategy on one hand based the forecast of enterprise prosperity from the financial analysis on its performance, on the other hand based on the decision on financial strategic models.This paper, introducing the Harvard analysis model, based on the annual accounts between 2004 and 2008 from FAW Car Co.,Ltd and the compare analysis with Shanghai Car Co.,Ltd, tries to analyze accounting and finance of FAW. Based on the analysis together with FAW, EVA and sustainably growing financial strategic matrix, this paper would put forward financial strategy suggestions for the development of FAW, according to its development trend.We try to evaluate the impact of key accounting policies and their changes on the quality of accounting information during the accounting analysis. We discovered: 1. Cash, receivable bills, stocks and permanent assets took up most the asset of FAW Co.,Ltd. 2. The stock level of FAW was appropriate. The bad preparation for price falling of the goods before 2006 has been compensated by optimized preparation in 2007, which has resulted in earning smoothly. 3. Since the permanent assets was in appropriate level, the depreciation accelerating method first applied in 2004 had a great impact on profit afterwards, improving the quality of permanent assets and profit between 2004 and 2008. 4. The new accounting rules of allowing capitalizing some qualified developing cost in 2007, weakened the profit quality of 2007 and 2008 by around 15%.During the financial analysis, trend analysis, compare analysis, ratio analysis and element analysis methods were introduced to evaluate the debt paying ability, operating ability, earning ability, developing ability and financial flexibility; while the Alexander Wall system, ROE element analysis and EVA element were introduced to evaluate performance comprehensively, with financial forecast under reasonable conditions. We discovered: 1. The dept proportion of FAW was low, mainly current liabilities, which mostly used for short term credit financings, instead of non-current liabilities. Among the assets of FAW, the current asset took up a large proportion and was able to turn into cash soon. The good ability to pay debts has enabled FAW to debt finance. 2. Under current circumstance, the best way to increase profit was enlarging sales volume instead of bigger profit rate in the price. During 2004 and 2006, the sales volume of FAW was not as good as predicted, and the earning ability was limited by sales volume. In 2007 and 2008, the sale volume enlarged, but the earning ability was held back by the production capacity. Therefore, it's critical whether FAW was able to seize market chance to enlarging production capacity. 3. The operating ability of FAW was good, while operational efficiency of some individual assets were bad, for instance, the turnover rate of some receivable accounts were not high, compared with leading rivals, leaving much room for the improvement of stock control and management. 4. The FAW grew mainly in a intension way, with stable growth scale. During 2004 and 2006, the developing ability of FAW was week, while in 2007 and 2008 the sale volume growth brought rapid growth in profit and new expansion. The forecasted sales volume should be considered rationally and try to avoid blind expansion, as only technology innovation, stable quality and low cost can together keep stable growth in sales. 5. The financial flexibility of FAW was not flexible, and cash flow was very tight. During 2004 to 2007, the cash flow in operating activity was low, resulting in little self-sufficiency in investments, leading to hard to seize the mark chance for investments or hard to overcome market adversity 6. Financing of the FAW was mostly domestic. Comparing with its rivals, the debt rate was relatively low. The financing effect was not sufficient. The high percentage of equity capital has restricted the growth of ROE, The high equality capital has resulted in high cost, which was the major cause to restrict the EVA growth. On the premise of keeping company earning ability, it's suggested to finance in different way, in order to increase the debt rate.In the financing strategic analysis, based on financing forecast, current performance and enterprise strategy, judging by the profit maximum-oriented strategy, EVA and sustainable growth finance matrix, FAW was supposed to in the quadrant of value creating financial strategy matrix and lack of cash. Meanwhile, we put forward suggestions as follow: 1. FAW Car co.,Ltd choose developing investment strategies as its investment strategy, putting investment on permanent asset to increase its production capacity, covering middle and high-end products as well as popular products. To judge from financial matrix, FAW was supposed to be in the quadrant of value creating and lack of cash. Therefore, it should accelerate its investment, in order to create new productivity. Before that, FAW should optimize its product mix; focus on the marketing of middle and high-end products, and eliminate the low profit products and their production lines. In order to avoid blind expansion, FAW should improve marketing efficiency, at the same time, actively carry out international cooperation to bring in advanced technologies. Meanwhile invest in the development of own brand product to ensure product performance improvements, product quality while maintaining a low cost. And try to keep a stable sales growth when the potential for enlarge profit rate of single product was low. 2. Refer to the financing strategy, due to the high equity capital has restricted the EVA growth of FAW and low efficiency financing effort has been the major cost of holding back the ROE, they have led to large room for FAW to improve its financing efficiency to solve the cash shortage issue and improve ROE. The domestic financing can no longer meet the need of FAW under new circumstance. Thus, in 2009, liabilities should be the major strategy instead of previous one. As the bargaining power of FAW increased, appropriate business credit financing by received deposit and payable accounts would be better choices. However, this finance should be affordable by both purchasers and providers, otherwise would have negative impact on FAW's reputation and long term development. As for dividend distribution strategy, in 2009, the cash flow would reach a balance when FAW didn't pay dividend distribution, and the balance would break if FAW paid dividend distribution, leading to shortage of cash. Therefore, there are 2 choices for FAW: 1. When FAW focused on domestic financing, it had to reduce dividend distribution payment or even no payment otherwise the issue of cash shortage cannot be solved. 2. FAW should choose the liability financing strategy. It can not only maintain a stable high dividend distribution level, but also increased EVA. Obviously, Choice 2 is more suitable for the development of FAW. Therefore, maintaining high dividend distribution level strategy and liability financing strategy are recommended to FAW Car Co.,Ltd. |
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