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By Izey Odiase
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FINANCIAL MANAGEMENT PRACTICES AND THEIR IMPACT 2
Executive Summary
This research study examines the effects of financial management practices and their impact on
organizational performance. The global economy is evolving. We are faced with integrated
demands, as well as increased market competition and niche market monopolization. In order to
compete, businesses and organizations need to evolve constantly. They need to not only improve
their products and services, but internal operations as well. Efficiency is key when it comes to
increasing profitability and reducing volatility, which will either attract or deter valuable
investors.
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FINANCIAL MANAGEMENT PRACTICES AND THEIR IMPACT 3
Introduction
This research analyzes the relationship between organizational performance and financial
techniques, dividend policy, working capital management and financial performance assessment.
stockholders' equity, is a debt ratio used to measure a company's financial leverage. The D/E
ratio indicates how much debt a company is using to finance its assets relative to the value of
The Debt/Equity (D/E) Ratio offers a general insight into just how risky a firm is for investors. It
is an indication into the firm’s financial and organizational well-being. Companies considered
‘high risk’ will attract mostly short-term investors looking to profit from the volatile stock prices
and short-term gains. These companies tend to attract little to no investors at all, which limits the
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FINANCIAL MANAGEMENT PRACTICES AND THEIR IMPACT 4
finance department. Capital structure optimization is critical for short-term and long-term
growth. An organizations’ capital structure influence policies, product and service pricing, credit
terms, management structure and resource allocation ("8 Factors That Influence Capital Structure
of a Business"). Capital structure optimization reduces loan default risk, while increasing
Capital investment appraisal, a.k.a. capital budgeting, is the process in which an organization
Capital investment appraisal technique, which is highly influenced by major stakeholders and
✓ Profitability index
✓ Equivalent annuity
✓ Payback period
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FINANCIAL MANAGEMENT PRACTICES AND THEIR IMPACT 5
The capital investment appraisal techniques mentioned above are mainly used for prioritizing
projects. Organizations often have multiple projects appraised concurrently in order to study
“Financial feasibility is a projection of the amount of funding or startup capital needed, what
sources of capital can and will be used, and what kind of return can be expected on the
When the initial evaluation of a project is complete, it is compared to other similar projects. They
are classified in order of Profitability Index (PI). This is calculated by dividing the Present Value
of Future Cash Flows by Initial Investment Required. High ranking projects (PI >1) are executed
Dividend Policy
“Dividend policy is the set of guidelines a company uses to decide how much of its earnings it
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FINANCIAL MANAGEMENT PRACTICES AND THEIR IMPACT 6
Dividends is considered a form of revenue for investors. Most organizations consider dividend
policy a vital aspect of the overall business strategy. Company leaders and managers decide the
dividend amount and timing based on several internal and external factors. If revenue outweigh
expenses, an organization will continue to retain capital to finance future projects, and investors
will continue to receive residual dividends (earnings left after capital expenditures).
Working capital management is the process of managing operations and activities related to a
firm’s working capital. This ensures that cash inflow healthy enough to sustain the day-to-day
operations. It is evaluated using the company’s current assets and liabilities. ("What is working
This supervisory bookkeeping strategy monitors, analyzes and employs current company assets
and liabilities, in order to facilitate a fiscally efficient day-to-day operation. Working capital
management process may involve employing short-term strategies in order to ensure the
organization sustain adequate cash flow to meet its operation expenses and short-term debt
obligations.
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Financial performance assessment, a vital aspect of financial risk management, is the measure of
a company’s profitability, and its ability to achieve its financial goals (Verma, 2017). It is a
measure of how well an organization can use assets to generate revenue. That is, it’s financial
Federal securities laws in the United States require public companies to disclose financial
information on a regular basis. Financial performance, which is published annually (Form 10-K),
include the balance sheet, the cash flow and income statement.
“The annual report on Form 10-K provides a comprehensive overview of the company's business
and financial condition and includes audited financial statements.” ("Form 10-K")
The form 10-K is considered a reliable source of audited financial data by investors.
At some point, most companies (public or private) require a comprehensive assessment of their
financial performance and structure. Analyzing financial performance with, without a doubt,
impact decisions, as well as short-term and long-term projects. The overall financial health of an
organization can be measured through the balance sheet, the cash flow statement and income
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FINANCIAL MANAGEMENT PRACTICES AND THEIR IMPACT 8
Conclusion
Based on the information provided above, it is easy to assume the financial structure and
Capital investment appraisal, a.k.a. capital budgeting, is required for prioritizing projects.
Dividend policy a vital aspect of the overall business strategy because it is considered a form of
Working capital management ensures the organization sustain adequate cash flow to meet its
Analyzing financial performance with, without a doubt, impact decisions, as well as short-term
To summarize, businesses need capital, investors provide capital, but need profit in return. Good
and consistent returns with maintain long-term investors and attract new investment and project
An organization’s financial health is not only dependent on the goods and services it offers. It
relies heavily on the internal structure and operation efficiency. This maximizes returns, retains
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References
8 Factors That Influence Capital Structure of a Business. (n.d.). Retrieved November 18, 2017,
from https://onlinemasters.ohio.edu/8-factors-that-influence-capital-structure-of-a-
business/
http://www.capital-investment.co.uk/capital-investment-appraisal.php
Financial Performance. (2015, September 30). Retrieved November 18, 2017, from
https://www.investopedia.com/terms/f/financialperformance.asp
Form 10-K. (2009, June 26). Retrieved November 19, 2017, from
https://www.sec.gov/fast-answers/answers-form10khtm.html
I. (2017, October 10). Dividend Policy. Retrieved November 19, 2017, from
https://www.investopedia.com/walkthrough/corporate-finance/5/dividends/policy.aspx
Staff, I. (2015, August 11). Feasibility Study. Retrieved November 17, 2017, from
https://www.investopedia.com/terms/f/feasibility-study.asp
Staff, I. (2017, November 15). Debt/Equity Ratio. Retrieved November 18, 2017, from
https://www.investopedia.com/terms/d/debtequityratio.asp
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Verma, E. (2017, July 27). Financial Performance - Understanding its Concepts and Importance.
What is working capital management? definition and meaning. (n.d.). Retrieved November 19,
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