Financial Management Practices and Their Impact on Organizational Performance

The study seeks to establish the relationship between financial management practices and organizational performance. Some of the practices which were put into consideration were dividend policy, investment appraisal technique, financial performance assessment, working capital policy and capital structure decisions. These methods have been proven to impact the growth of organizations. The performance of a business is pegged on how well the administration can strike a balance between the five identified techniques. Case study methodology was employed by reading through the journal articles and other media publications. This is because the method is explorative and provides a wide range of data to support the research question. The secondary sources were searched based on certain search words on the topic of consideration. The paper concludes that all the techniques are the core for any business to grow. However, the managers place a lot of weight on financial performance assessment. One of the recommendations is to promote a culture which embrace all techniques of financial management practices. Additionally, organizations should train employees on the best commercial practices. Finally, institutions should focus on dividend policy since it influences stay or exit of its shareholders.

Financial Management Practices and Their Impact on Organizational Performance

Introduction

The global form of conducting business is changing at an alarming rate. The operations of organizations are becoming apparent through the employment of proven financial management techniques, which guarantee the business owner continuous returns. Managing the finances is one of the important strategies that mitigate the chances of business closure (Dekker et al., 2012). One of the primary reason the top management resort to appropriate financial plans is to curb the stiff competition in the market. If an organization fails to understand its economic position well, it might lead to risky ventures (Ernstberger et al., 2010). Financial management is defined as the corporate decisions which are arrived at by an organization, using various tools of analysis to project future and current performance of the overall institution. It is subdivided into two sections of long-term and short-term financial decisions. However, both of them converge at one common point of exceeding returns on capital.

According to Thabet (2017), financial management is correlated to time, money as well as risk. The three forms the basis on which financial management concept is defined in an organization set up. All institutions aim to make the profit after every trading period (Pindado et al., 2015). They employ the considerable amount of efforts and capital to achieve this objective. According to Thabet (2017), succeeding in any business would require the management to venture into new areas, and afford to risk. The risk comes in the form of deploying the necessary human labor that is rewarded by remuneration. He further confirms that a business can only gain significant return through incorporating the three elements that have been identified (time, money and risk). The modern financial management is both conceptual and analytical. For example, before any business makes financial decisions, a panel of experts in the different field have to meet to champion the process (Dekker et al., 2012). The preliminary stages involve seeking ideas from the employees and other stakeholders on areas of interest. The views are used to make certain decisions by analyzing all the responses. This is whereby the financial experts can extrapolate necessary information from various respondents and use it to make progressive choices.

Corporate sector plays a vital role in developing the economy. According to Thabet (2017), businesses owned by private industry creates employment to the significant number of people in the country. It is therefore essential to note that the economic outlook of a nation is solely dependent on how well the organizations are managed. The type of financial management technique is the priority before deciding on the estimated returns (Ernstberger et al., 2010). Managers have a relevant role in assisting the business to choose an ideal technology that would lower the cost and maximize profit. Continued reliance on a past financial management practice might fail to advance the organization to the expected goals. There are myriad of methods that can be embraced to foster organization performance. The managerial team in any business can choose one or even amalgamate all of them, to boost the overall growth (Dekker et al., 2012). If the practices are employed in every department, proper resource utilization would be witnessed and consequently profit maximization. Research suggests that optimal adherence to the financial management practices have the direct benefit to the organization (Thabet, 2017). It was discovered that commitment towards managing the finances was linearly related to the performance (Thabet, 2017). Large corporations invest a lot in controlling what they have to reduce the chances losing. They invest heavily on practices that guarantee their money security. They end up operationally efficient. Choosing to adopt any or all of the following measures is the start of progress.

Financial Management Practices

According to Pindado et al. (2015),financial management practices are defined as all activities performed by the accounting and the managerial team in budgeting, asset and supply management control. The various departments intertwine their roles in ensuring the organization’s performance is top notch and also operate under the required standards. They guarantee all the requirements needed to produce goods and services do not lack (Ernstberger et al., 2010). Moreover, the extend their decision making to establishing the best way to channel the final products into the market. The study reveals that there is a relationship between financial management practices and the performance of an organization. Performance is defined as how well the business can meet operational cost and generate enough profit. The following paragraphs discuss the various practices.

Capital Structure decision

Capital structure is the different sources that a business can get the financing. It should be understood that many companies cannot expand by just relying on what they make as profit. The managerial team has to look for ways of sourcing for external funding. Making such decisions is not easy since one might end up in the wrong direction. According to Dekker et al. (2012), organizations can get funds either from debts or equity. Irrespective of the source, it should be clear that anything that is borrowed earn interest and might finally impede the net returns gained by the business. Organizations which are heavily financed by debts are exposed to more risk than those who find internal means to operate (Pindado et al., 2015). Debt is expensive and therefore right decisions should be made before making any move. High levels of debt might accrue beyond the profits which the business could be making at a given time.

Investment Appraisal Technique

It is critical to determine whether your investment is worthwhile. The central role of doing business is getting profits and sustain the investment for long. Investment appraisal is defined as financial estimates of any business (Dekker et al., 2012).  One of the methods under the appraisal technique is payback period. It is defined as the time taken for an investment to repay the amount injected. This is one of the methods which is effectual especially when dealing with small businesses. An entrepreneur should consider the time it would take to pay all the capital that was used to start the business (Pindado et al., 2015). It makes it easy to identify areas of weakness, hence improve on them. Additionally, accounting rate of return enables the owner of the company to estimate the performance annually. He or she can evaluate to know the worthwhile of the business. According to Thabet (2017), the efficiency of business is controlled by how well an individual can make succinct projections. Ability to plan for the time ahead prevents surprises in economic trends. Moreover, analysis of risks is also covered under this technique. The assessment of possible challenges is the core for any institution to survive. The first measure is to determine the disruption it can cause in the market compared to the competitors in the same field. Performance of any organization is witnessed when the above methods are employed to latter.

Dividend Policy

It is defined as the guidelines which stipulate how to distribute to the shareholders. There are three approaches adopted when deciding how to issue the dividend. The first one is residual dividend. According to Dekker et al. (2012), residual is always distributed after the company meets all the operational expenses. The shareholder is not guaranteed of the return since it is subject to performance. Second, dividend stability policy advocates for quarterly dividend. It reduces the uncertainty among the shareholders hence become motivated to be associated with the organization. The final policy is Hybrid. It is a combination of residual and divided stability policy (Pindado et al., 2015). The company can decide when to choose any of the policy based on the economic cycles. Thabet (2017) affirms that the performance of an organization is determined by how well it treats its shareholders. For example, any business adopting divided stability policy is likely to grow faster due to trust. Shareholders are demotivated in cases where they are not guaranteed of regular divided.

Working Capital Management

The goal of managing working capital is to ensure the business can satisfy expenses and debts. Any business that is not able to maintain working capital has less capability to survive.  With changing forms of doing business in the world, the new invention in technology has made it possible for the institutions to manage their working capital (Pindado et al., 2015). The move has exposed the small business into a significant risk due to stiffened competition. The only way is to adopt an exact procedure to manage any activity in the industry. Working capital management involves managing the cash, payables, and inventories. These are critical components of accounting since they are used to give actual figures that are used for future planning. Indeed, well-kept books of accounts are instrumental in gauging the performance of any organization (Ernstberger et al., 2010).

Financial Assessment Performance

Financial performance is a measure of how well an organization can utilize its resources. This term is used to signify the general health of a company. It can be used to conduct a comparison of two or more industries in the same sector (Dekker et al., 2012). Assessing the financial states is a critical element in any organization. There are various methods which are employed to track the finances within the institution. The first one is balance sheet which gives an impression of liabilities and assets. Additionally, income statements provide a snapshot of income flows on an annual basis (Thabet, 2017). For a business to thrive in the complex market, it has to embrace the methods which are provided by various accounting policies for financial assessment. It mitigates the chances of misappropriation of funds.

Conclusion and Recommendations.

The study reviewed the impact of financial management techniques on the performance of an organization. It was clear from the literature that working capital policy, capital structure decisions, financial performance assessment, dividend policy and investment appraisal techniques have a significant impact on the general performance of an organization. Continued reliance on this systems affects the business positively. In the current form of running the business, managers perceive assessment of finance and working capital policy to be more effectual than others. It is recommended that more effort should be employed to promote a culture where all the five financial management techniques should be given equal weight for better performance. Additionally, the business should absorb new trained employees or train already existing staff to exercise high value of managing finances. Finally, the institutions should direct their focus on dividend policy which attracts more shareholders and ultimately organizational growth.

References

Dekker, H. C., Groot, T., Schoute, M., &Wiersma, E. (2012). Determinants of the Use of Value-based Performance Measures for Managerial Performance Evaluation. Journal of Business Finance & Accounting, 39(9-10), 1214-1239.

Ernstberger, J., Egger, F., &Giebelstein, M. (2010). Determinants and consequences of applying value-based performance measures: the German evidence. International Journal of Accounting, Auditing and Performance Evaluation, 6(2/3), 224.

Pindado, J., Requejo, I., & De la Torre, C. (2015). Does Family Control Shape Corporate Capital Structure? An Empirical Analysis of Eurozone Firms. Journal of Business Finance & Accounting, 42(7-8), 965-1006.

Thabet, A. A. (2017). Theoretical Framework Measures Management Accounting Systems and Credit Risk Management Policies and Practices towards Organizational Performance in Palestinian Commercial Banks. Account and Financial Management Journal.

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