The relationship between the performance of an organizationand the financial management activities such as dividend policy,capital structure decision, assessment of financial performance,management of working capital and techniques in appraisal are a focusof this essay. In this regard, various sources that containinformation in many sectors in business are to beconsidered with a review ofliterature from different opinions likefinancial analysts, executives and financial managers are to bedeliberated. Most of the sources display a significant andpositive relationship between organizationalperformance and practices of managing finances (Hunjra, Butt, &Rehman, 2012).
The corporate sector is vital in the development of a nation’seconomy. Financial research has proved that the structure of capitalplays a significant role in any system of the economy and managershave to establish the appropriate corporate structure for theenterprise ("Financial Performance Analysis,"2016). Primarily, the value of decisions of dividends isfound critical in the progress of a company as well. Thedecision on investment of a company changesits effect on the prices of shares through the policy of dividends.Thus, the contribution of dividends to a company’s futureperformance on earnings is evident in this literature(Hunjra, Butt, & Rehman, 2012). The technique of investmentappraisal is among the most studied areas offinance. The inception for management is the type of appraisaltechnique. Thus theconstraints and objectives that affect the project selection areimportant. Projects are opted basing oninternal rates of return (IRR), net present value (NVP), a periodof payback and accounting rate of return.The management of working capital handles the management ofliabilities and assets that are short term in between a one-yearperiod of maturity (Hunjra, Butt, & Rehman, 2012). It ismainly founded on the daily management of cash that flows inand out, thus handling the rates of interests and surplus. In thisregard, companies need to have a cash flow balance in anticipation ofpossible problems of liquidity, and theyalso need to have a backup plan of credit to help in adjustingfluctuations that are short term. Moreover, the assessment offinancial performance is the basis of decision making and devising aplan of action for the company (Kramer, 2012). Therefore, variousliteratures areused to examine the relationship between these practices and theperformance of an organization in thispaper.
Financial literature suggeststhat maximum application and commitment to the practice of financialmanagement enhances the performance of a company. The enterprisesthat are managed well financially haveefficiency in their operation. Authorities of regulation andinvestors look up to this as a positive sign. According to Kramer ina study done in India, managers who are attached to an open and largecorporation and are assigned to make decisions are compensated highly(Kramer, 2012). Moreover, the nature of contracts of the publiclyheld company issues specialization betweendecision-management specialized managersand risk-bearing specialized owners. Again,it found that most of the modern Indian corporations separated theownership and management to enhance the financialaccountability and ultimately improve the performance of theorganization. Moreover, the owners boughtshares that assured them of residual returns after the payment of theobligation. It was a privilege that came witha risk as they would either get negative or zero returns (Zaheer,Imran, & Kashif-Ur, 2016). Dividends, corporate investment,financial policies and compensation areintertwined with equity and debt substituted structures ofgovernance rather than structures of finances (Hunjra, Butt, &Rehman, 2012).
A corporation that has large assets findsfinancing of debt very incurring. The board of directors did not justsupervise the team of management, but itwas also a way of cutting down capital costs on the projects thatwere involving less redeployed ability. Restructuringof a corporate changed a company from a system of internal governanceinvolving less bonding and monitoring investment and huge residuallosses in the form of massive diversification to an equilibrium thatis new and characterized by high costs of monitoring and low residuallosses (Zaheer, Imran, & Kashif-Ur,2016).
One of the vital areas of management is investment appraisal. Thereare a number of ideas in it constraintsand objectives in the selection of a project and the appraisalmethod. It has been a big challenge for companies’ betterperformance that gives rise to quality. Ithelps a corporation to develop a comparative advantage as far asforecasting in the future is concerned. In the corporate sector, itis important that major focus in overtaking the challenge of financesbe placed on restructuring and corporatemanagement of debts. Using debts is one ofthe most utilized sources of financing inthe business world (Valmohammadi &Ahmadi, 2015, p.131). Another study confirms that companies with highcosts by the use of debts represented their production commandmentseven with no profits (Valmohammadi & Ahmadi, 2015, p.140).Corporates takeovers did not have an extremeeffect on the stock value of the firm, as some previous studies hadsuggested that taking firm shareholdersoversaw a profit that was normal in afive-year span. However, it contradicted with the current study byseeing the dividend of shareholders going down. On equity offering,firms put their initial public offering (IPO) prices down to enhancebusiness progress because it was a practice of goodfinancial management. Financial information was important for firmsto have details on the offering of equity(Valmohammadi & Ahmadi, 2015, p. 159). They concluded that theinternal gap of financing in countries that are developing should beentirely filled or lowered by the net imports on capital thatenlarged the country’s external debt. These are investmentappraisal strategies.
Capital structure is a topic that interests many managers,and it is vital in ensuring organizationalperformance (Serfling, 2016, p. 2239). In managing debt ratios,firms adopt the tradeoff theory. Another one is the Pecking ordertheory. A study in the US showed that companies view financialflexibility with high regard but the vitality has nothing to do withoptions of growth stipulated by Pecking theory or information that isinappropriate (Serfling, 2016, p.2240). Some other issues like thecosts of the agency, substitution ofassets, signaling, worries of the productmarket and free cash flows have some effects on the selection of thecapital structure. To market financialoptions, managers utilized some techniquesthat are informal like the intensity ofearnings per share and rating of credit. Companies that aligned theircapital structure well saw a remarkablerise in their profits and general expansion. Serfling and othersstudied practices of financial management in the USAand realized that the US corporate sectorwas adopting new and modern methodologies (Serfling, 2016, p.2256).Moreover, they said that it is relevant to sort diversificationperspectives of both related and unrelated components in multimilliondollar businesses. In analyzing theirfindings, we can note that the level of specializationof the product and the direction of diversification culminate invaried corporate behaviorsin finance. It indicates that the best corporate sustainabilityperformance (CSP) companies are bigger and have huge growth levelsand returns on equity as compared to others. Thisis an indicator that capital structure determines theperformance of a firm (Serfling, 2016,p.2286).
Working capital management ensures a firm is positively perceivedand is successful in its operations (Ruhwedel, 2012, p.382). Thebalance between short term assets and liabilities ensuresthat the company satisfies the upcomingexpenses of operation and the growing short term debt. In a researchin India, companies that had poor management of working capital grewin debt and eventually collapsed (Ruhwedel, 2012, pp.383-384).Ultimately, the financial performance analysis entails theidentification of the financial weaknessesand strengths of the company by the properestablishment of the relations between the profit and loss andbalance sheet items. It involves three steps,and they are the reorganization of thewhole financial information in the statements, evaluation by use ofthe financial tool and then a final remedy for implementation.Studies have it that firms that engage in the continuousfinancial assessment are likely to advancetheir strategies for investment andcustomer service. Ultimately, they develop into big corporations andmeet their objective of profit realization(Ruhwedel, 2012, p.385).
Conclusion and recommendations
It is recommended that enterprise managershave to be taught the importance offinancial management practices through seminars and mentorship fromexperienced colleagues. Firms have to hire more or update theircurrent employees on the financial management skills, especiallyregarding the quantitative and qualitative techniques of investmentappraisal and maximization of decisions on capital structure becausethey are paramount financial management practices. Financial managershave to focus on the techniques of investment appraisal and policy ofdividends among other practices since a positivepolicy of dividends contributes to thewealth of shareholders and draw theinvestor’s attention thus, improving the performance of a firm(Ruhwedel, 2012, p.385).
The practice of financial management influences the performance of anorganization, and this paper has exploredsome of the literature that substantiatesthis fact. Based on studies done in India and the United States,decisions on capital structure, investment appraisal techniques,policy on dividends, management of working capital, and theassessment of financial capital are vital in ensuring a positiveoutcome of a firm. Moreover, evidence shows some of the enterprisesthat have failed due to the weakutilization of the financial management strategies. The discussedliterature proves how practices of financialmanagement can influence the performance of a firm.
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SERFLING, M. (2016). Firing Costs and CapitalStructure Decisions. TheJournal Of Finance, 71(5),2239-2286. http://dx.doi.org/10.1111/jofi.12403
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Appendix A: The summary ofcompany finance
AppendixB: Profit maximization as anunderlyingobjective of financial management
Exhibit1: Role of a financial manager in an organization