Financial policy of a corporation defines the company’s overall approach when it comes to handling its financial decisions. Most companies will have in place a financial strategy which is made up of dividend policy, financing and capital budgeting. Despite the fact that many corporations make use of these three strategies when settling financial policies, it is important to also examine unique factors to the business. This action should be performed before a corporation decides to set up its overall policies.
Trends in settling corporate financial policies have been undergoing transformation over the past decade. In today’s fast changing business world, investors are considering using short-term methods as opposed to the outdated long-term financial strategies. This is mainly because they want to get a good return on the equity investment in the form of investor value (Dividends). They have therefore become more active in defining corporate fiscal policy while at the same time examining personal short-term benefits.
There are many ways in which an organization can plan and implement corporate financial policies. Ever since the introduction of financial policies, corporations have been putting their focus on both long-term and short-term strategies. However, companies are still having hard decisions on how to finance and develop their operations without encountering any problem whatsoever.
To be successful, corporations should be looking at long-term financial policies. What this basically means is that companies must have a solid projection concerning their debt service and cash flow in the near future. If the organization makes use of strong cash flow, then there is a high chance of acquiring target companies present in the industry. In addition to this, the company can also be able to improve existing operations and fund capital projects.
Some well-off companies may end up not having any acquisition targets and thus turn their effort to distributing cash to shareholders or investors. This is made possible through purchasing back undervalued stocks or simply paying dividends for overvalued dividends. Unfortunately, companies which are not doing well have to take debts for them to survive in the market.
Indeed, the greatest risk that hinders the success of a company’s business strategy and operations is bad capital structure as opposed to financial leverage and tax. Instead of depending on capital structure when creating value, companies should opt for their own business strategy. To do this, the corporation must be ready to create a balance between the flexibility of their equity and tax savings delivered by debts. Corporate financial policies are a necessity for any organization that wants to make it easily by gaining a huge market share.
Therefore, it is necessary for every corporation to make use of strong corporate fundamentals if they are to attract investors from within or outside the country. This is mainly because most investors rely on favorable credit ratings and solid balance sheets when looking for a company to invest in. Any corporation that has these policies in place will therefore benefit from huge investments thus achieving their goals easily.