Business growth is dependent on the ability of the management to control internal factors such as finances. The major objective to be achieved by the paper is to determine relationship between financial management practices and their influence on performance of an organization. Collective use of the current measures to deal with uncertainties has placed most organizations on a better side of managing the pressures from the external environment. Some of the financial management practices are; capital structure decision, dividend policy, financial performance assessment, working capital management and investment appraisal. The decision makers have found the importance of including the practices in the corporate world. The efficiency of services rendered by any company is dependent on how well the manager is able to handle the five management practices. Literature will be reviewed to determine the influence of the mentioned practices on general performance of the company. The paper concludes by affirming that existence of direct relationship between incorporation of management practices and business performance. It is therefore recommended that the organizations consider probable improvement of the financial management practices to achieve high returns. Further, financial managers should shift their attention to dividend policy since constructive policy contributes to the wealth of the shareholders. This attracts the investors and therefore improving the performance of the business.
Financial Management Practices and Their Impact on Organizational Performance
Financial management is described as the techniques which are employed by an organization to make decisions regarding the capital and assets within the premise (Beck et al., 2008). Constitution of this discipline is paramount in the running of the business to avoid making unnecessary loses which could be averted through employing the right financial skills. The nature of the market is complex which forces most of the organizations to resorts to modern methods of conducting analysis as well as projecting possible outcomes in the line of operation. Bruggen (2013) asserts that for a business to thrive in the myriad of unpredictable competition, right measures are needed to curb the rivals. Subsequently, he notes the need to embrace the right experts to conduct financial management which is the heart of any business. Financial management as a discipline is split into long-term and short-term decisions.
The two converge at the main idea of maximizing returns on capital. Essentially, financial management practices is defined as the overall activities of accountants and managers to ensure budgeting and procurement services are conducted in the right manner. Depending with the structure and nature of the business, the actualization of the practices might differ in some instances (Maryland, 2011). The startup business are operated in a different manner compared to large corporations which have a strong financial base. However, management of the finances is paramount and cannot be negated at whatever cost. Bruggen (2013) asserts that a business which is able to manage its finances can be able to stand the various turmoil in the economy. Considerable amount of efforts is required to engage the right practices which spearhead the organization to another level. Eventually, a business is able to enjoy full market command if it can manage internal issues such as the current assets. The following paragraphs will discuss some of the financial management practices and their relationship with the overall business performance.
Capital Structure Decision
Capital structure is referred as different sources that a company get its finance to enhance the growth and normal operations (Mohsin et al., 2016). The complexity of the market renders companies to seek for alternative methods to add more capital to their businesses. Notably,Maryland (2011) also indicates that a business cannot rely fully on its profits for expansion. Secondary options are sought to ensure the objectives of serving more customers and diversifying the services are achieved in a timely manner. Coming up with a succinct decision to make the right choice is sometime challenging and could result to inappropriate ideas. Understanding the nature of the market and sources to take less risky financing requires guided exchange of thoughts among various parties (Mukherjee & Rahahleh, 2013). The capital structure is broken down into short term and long-term debts. When analyst are investigating the performance of the business, they consider debt to equity ratio. Usually, a company which has invested more on debts has an aggressive capital structure which can scare away the investors. In many instances, businesses are financed by debts rather than equity. It is important for the management to find the optimal ratio which cannot harm the business negatively (Maryland, 2011). As it was alluded earlier, more debts than equity is not healthy for the organization. Ideally, it drains the capability of business growth. Striking the right balance can sustain the operations in the market.
Investment Appraisal Techniques
The process aims to identify areas to channel the investment within the organization (Ngniatedema & Illia, 2014). It is used to determine the suitability of improving the long-term investment with a focus to boost returns. There exist various techniques employed to appraise an investment. The first one is payback period. Basically, this method is normally employed by small businesses to determine the time it would take for the investor to get the full amount of finances used to set up the business. In other words, it concentrate on cash flows rather than the profits. Second, accounting rate of return is another embraced method.According to this technique, it compares the expected profit for the first investment year and the capital used (Singla & Swarnkar, 2017). The ratio is used to make the decision on whether to invest or not. Additionally, investment risk analysis is also taken into consideration. It is termed as the amount of disruption that a business can cause in the market. Determining the right option for any business is the first strategy which any management considers before execution. For an organization to perform, the right idea on where to invest should be arrived at. Channeling funds to projects which do not promise future returns could be the background of business closure (Strithongrung, 2017). Besides, the best choice of the techniques saves the business on loses. Importantly, a large organization cannot use the same method as a startup hence the need of critically evaluating available choices.
According to Bruggen (2013), these are guidelines which are followed by the organization in distributing its profit to the shareholders. Determination of the right percentage to give to the shareholders is regulated by the performance of the business. Companies which embrace payment of divided have three approaches to accomplishing this. One is residual dividends which are paid after the business has financed all its projects. The remainder is distributed to the shareholders. Adding to that, the stability dividends are paid on quarterly basis to guarantee certainty for investors. The final one is hybrid dividend policy which is a combination of the two. Evidence suggest that a business can decide to reinvest back its profit instead of sharing with the shareholders (Beck et al., 2008). This is witnessed with small businesses which are growing and adapting to the changes in the economy. Choosing to pay the dividends when the profit margin is too low risks the performance and sustainability of the business in future. Moreover, dishonoring the agreement to pay dividend to the shareholders places the organization at a risk of losing to its rivals. There is a linear relationship between the dividend paid and performance (Maryland, 2011). High payout is a reflection of increased sales hence more profit. Consequently, making the correct calculation when establishing the best payment is core to avoid errors that might cost the business heavily.
Working Capital Management
Short term liabilities and assets are important for the continuous flow of activities of the company (Mohsin et al., 2016). The two are the major concerns on the day to day basis since they revolve for a short period of time. Managing of accounts, inventories and cash forms part of this group and hence it is the central nerve for the business. When an organization has a system to manage the above, it is possible to direct any activity that takes place within the organization. Flaws are mitigated and quality is achieved to satisfy the client (Beck et al., 2008). One of the recent invention which is being introduced in the field of working capital management is robotic technologies. The machines are coded to perform some of the tasks which are done by human beings. The wake of new technology is evolving and institutions are finding it important to incorporate the same. Analysis of the records for working capital are used to establish the growth curve for any business hence the need to have serious plan to trace every capital. Performance is affected by this practice in two ways. One, if the accounts are not well maintained, the auditing report would degrade the image of the organizationresulting to losing customers.Second, if the accounts are well filed and managed, the brand of the business could face acceptance hence boosting the performance.
Financial Performance Assessment
Financial performance is the ability of the business to use its assets to generate revenue (Singla&Swarnkar, 2017). This is the primary role for any organization which provides service to humanity. The idea behind every service offered is to get a return. Assessing the activities performed within the business is a good lead in determining the alignment of set objectives alongside the normal activities performed. Regular meeting with the departmental heads and consolidating the employees to brainstorm for the best way to offer services is regarded healthy (Beck et al., 2008). Continuous engagement with all staff helps to identify the weaknesses in the line of production and correct any mess before proliferation.
Financial management practices are embraced in the current form of conducting businesses. There is a direct link between this and performance of an organization. Capital structure decision is needed to determine the cheapest way to finance the business. Additionally investment appraisal gives direction on what to focus on to maximize the profit hence distribute the returns in terms of dividends to the customers. Finally, working capital management combined with assessment of financial performance contribute to growth of the company.
Beck, T., Demirguc-Kunt, A., & Martinez, P. M. S. (2008). Bank Financing for SMEs around the World: Drivers, Obstacles, Business Models, and Lending Practices. Washington, D.C: The World Bank.
Bruggen, A. (2013). Capital Rationing for Capital Budgeting. Capital Budgeting Valuation, 95-109.
Maryland. (2011). Financial management practices performance audit report: Dorchester County Public Schools. Baltimore, Md: Office of Legislative Audits.
Mohsin, M. I. A., Dafterdar, H., Çizakça, M., Othman, A., & Razak, S. H. A. (2016). Financing the Development of Old Waqf Properties: Classical Principles and Innovative Practices Around the World. New York: Palgrave Macmillan.
Mukherjee, T. K., & Rahahleh, N. M. (2013). Capital Budgeting Techniques in Practice: U.S. Survey Evidence. Capital Budgeting Valuation, 151-171.
Ngniatedema, T., Li, S., & Illia, A. (2014). Understanding the Impact of Green Operations on Organizational Financial Performance: An Industry Perspective. Environmental Quality Management, 24(1), 45-59.
Singla, D. S., & Swarnkar, R. (2017). Working Capital Management and Rajasthan cooperative dairy federation Profitability. International Journal of Management and Economics Invention.
Srithongrung, A. (2017). Capital Budgeting and Management Practices: Smoothing Out Rough Spots in Government Outlays. Public Budgeting & Finance.
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