Financial Management Practices and their Impact on Organizational Performance

Financial Management Practices and Their Impacts on Organizational Performance
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Financial Management Practices and Their Impacts on Organizational Performance
Executive Summary
Financial management practices significantly affect organizational performance. Companies are not operated blindly, and proper planning and organizing ought to be done. The primary financial management practices discussed in the entirety of this paper include the capital structure decision, dividend policy, financial performance assessment, investment appraisal techniques, and working capital management. Capital structure decisions comprise the equity and debt ratio that help investors determine the risk associated with investing in a specific company. The investment appraisal techniques are the payback period, net present value, profitability index, internal return rate, and accounting return rate.
In addition, the dividend policy entails the guideline that a firm uses to calculate the amount of money that shareholders will get. Working capital management involves managing activities and operations that promote the smooth running of a company. Financial performance assessment help to identify an organization’s assets and liabilities. In that light, the failure of proper financial management can lead to numerous issues. For instance, a company might be unable to pay its employees, give dividends to shareholders, fail to allocate resources accordingly, and halt operations due to insufficient funds. That is why an organization should be concerned with managing its finances well to ensure that it meets established short and long-term goals and objectives. A firm should balance its focus on maximizing profitability and its engagement in other activities, such as corporate social responsibility, which help in building a good reputation. Additionally, assets and liabilities should be well-managed to ensure that an organization has enough resources to facilitate its daily operations. Stakeholders, such as employees, customers, and suppliers should not be forgotten since they play significant roles in a company’s success. The paper shows how financial management practices influence organizational performance.
Proper financial management is critical to the success of any organization. Financial management practices involve organizing and planning resources available in a company. Making good financial decisions enable an organization to have feasible short and long-term goals. That way, a company knows how much money to invest in different activities and takes appropriate strategies to get profits. Organizational performance entails how a firm is doing and all activities involved to achieve the vision, mission, and goals. The paper focuses on how financial management practices, such as the capital structure decision, dividend policy, investment appraisal techniques, financial performance assessment, and working capital management, impact organizational performance.
Financial performance assessment is one of the ways that determine the effectiveness of the management. In that light, it significantly affects organizational performance. A firm cannot operate without assessing its finances to know its financial position. Some of the crucial financial ratios are the return on equity (ROE) and the return on assets (ROA). Managers use both financial and non-financial performance to measure and assess organizational performance (Saad & Zhengge, 2016). For example, before a company invests in a new product or service, it must assess its finances to ensure that it has enough funds to push its objectives. If the firm finds out that the available finances cannot meet its goals, it borrows loans from financial institutions or welcomes potential investors. Besides, without assessing finances, it can be difficult to know when an organization is making profits or losses. As a result, financial performance assessment facilitates proper planning, ensuring the productivity and profitability of an enterprise.
Capital structure decision influences an organizational performance. In particular, capital structure refers to the combination of equity and debt, which a company uses to finance its growth, assets, and operations. An organization cannot meet its stakeholders’ needs without making proper capital structure decisions. Some of these requirements include investments, payment of dividends, salaries, and debt on time (Mudany, Letting, & Gituro, 2020). A firm’s capital structure affects its service and product pricing, policies, resource allocation, management structure, and credit terms. For instance, capital structure decision enables a company to know how much debt it owes and develop effective strategies to repay its loan timely. When a firm is looking for investors, it must show available resources and its potential to succeed in its operations in the future. The equity to debt ratio shows potential investors the risk associated with investing money...