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Financial Challenges in Companies Expository Essay


Introduction

Though managing an organisation involves long-term thinking and careful consideration of the organisational dynamics, many corporations cannot handle untimely alterations of the business environment. This is because the global monetary crisis comes at an unprecedented time, making it difficult for some organisations to put their operations in a manner that helps them cope with such financial challenges.

Despite the reality that financial challenges have hit global business operations in one way or the other, and at different times, the horizon at which the companies operate has not been so proactive (Gustavo, Michaely & Swaminathan 2002, p. 379).

For instance, the corporate finance and agency problems have created monetary conflicts that exist between the management of the company and their stockholders, an issue that has really affected the decisions at the corporations (Gustavo, Michaely & Swaminathan 2002, p. 389).

The conflicts are relevant to corporate finance since the managers of the company, who are meant to act for the best interest of the shareholders, often fail to do so as expected of them. These managers, who act as agents of the shareholders, are meant to make decisions that are geared towards maximising the stockholders’ wealth. However, they fail to do so due to their desire to maximise their own wealth.

In essence, these agency problems are related to the corporate finance in the sense that they help in understanding and analysing the stockholder’s equity, corporate governance, and agency costs. Contemporary studies demonstrate that the non-responsive nature of the management to information related to the eventual financial crisis lead to compromised decisions about the specific monetary problems.

Literature review

Corporate stakeholders are often faced with the conflict of interest to pursue personal goals other than the intended objectives of the company. This makes it difficult for them to formulate guidelines, which might help the company avoid the impacts of financial crisis through pre-empting the market situation and other financial environment of the company (Gustavo, Michaely & Swaminathan 2002, p. 389).

Therefore, there is a need to put in place appropriate mechanisms so as to effectively deal with the potential conflicting issues in the organisation. Research attributes the ignorance of the management to offer advisory opinion about looming financial crisis as it depicts the pursuit for personal interests, rather than that of the company.

The conflict of interest among the stakeholders of the company might make the shareholders pass a vote-of-no-confidence on some of the board members during the members’ board meetings (Gustavo, Michaely & Swaminathan 2002, p. 397). The presidents of the company are awarded bonuses due to their hard work in order to motivate them.

However, when the performance is dwindling, as witnessed in the Coca-Cola Company, the stakeholders might be forced to terminate the contracts of the top management team of the corporation, if it is assumed that their roles would compromise the productivity in the company.

Indeed, the dividend policy of any firm can be regarded as irrelevant owing to the fact that the corporations that often pay many dividends to the shareholders give little price appreciation (Gustavo, Michaely & Swaminathan 2002, p. 389).

However, this must offer the same sum of revenue returns to the investors, depending on their risk characteristics as well as the cash flows generated from the investment ventures (Jackall 1988, p. 55). In fact, since there are lack of taxes, but if there is any, both the capital gains as well as the dividends are often taxed under a similar rate. Therefore, the investors ought to be indifferent to get their expected returns in both the price appreciation as well as in dividends by adopting an effective property management strategy.

Property management is critical in the success of any given company. The relationship between the two has been explored through the SWOT analysis, which helps business to assess whether a particular strategy is viable for business operations, as well as to establish ways of moving forward.

Carrying a SWOT analysis for property management helps the management adopt ways of getting cash out of price appreciation. It also provides a strategy that facilitates provision of dividends to the stakeholders without involving the transaction cost and floatation, thus resulting to fair prices for the stakeholders (Jackall 1988, p. 61).

Gustavo, Michaely, and Swaminathan (2002, p. 389) have found out that analysing property management helps the company increase effectiveness and efficiency in the management system. Through an analysis of threat, it is clear that the management is able to refrain from taking chances on the company’s financial status since it gets into a position of assessing the dividends payable to the stakeholders as well as the amount of capital resources required to run the business.

Thus, it is imperative to note that management of property in a company is highly influenced by the decision making process adopted. For case in point, when a company adopts satisficing decision making without a careful analysis, then it is bound to fail. This stems from the fact that satisficing decision making entails adopting the readily available decision to address a particular problem facing the company.

For case in point, a company is bound to fail when it takes the readily available decision and makes a decision that results in conflict of interest among the stakeholders, information asymmetries, and taxes levied (Sunder & Myers 1999, p. 219). Despite the fact that the stakeholders prefer large sums of dividends, satisficer decision-making model can play a critical role in wasting the resources of the company, leading to higher taxes for the company (Sunder & Myers 1999, p. 219).

It is for this reason that an organisation should find ways of adapting effectively to the dynamic organisational changes, as this would facilitate a suitable avenue for establishing a positive feedback on the future of the company’s prospects, as well as future declaration of dividends (Lyandres & Zhdanov, p. 54).

Achieving a financial target for a firm has been highlighted as one of the major divers to organisational changes, as it helps to avert financial crisis with respect to internal and external stakeholders of the firm. In this regard, Sunder and Myers (1999, p. 219) have found out that if a company takes a positive approach towards organisational changes and announces dividends, it gets into a position of increasing its stock prices.

However, Sunder and Myers (1999, p. 220) have also considered a number of barriers that may hinder a given company to adopt the dynamic organisational changes, which would facilitate management of capital resources. Key amongst these barriers is capital for compensating the shareholders. This barrier creates a challenge for the company, making it seek for funds elsewhere.

And in a bid to curb the change management crisis, the company might decide to include new investor’s board, and this, in turn, may adversely affect the company’s culture. This stems from the fact that organisational changes are not only characterised by financial improvements but also a change in people attitudes as well as their behaviors.

Moreover, Sunder and Myers (1999, p. 221) have emphasised on the relationship between time and effective change management process, stating that it is not a worthy venture for a company to issue new stocks in order to pay dividends in the same financial year. More so, the authors have added that a company should not pay dividends to shareholders immediately after a financial crisis in an effort of creating a positive attitude for the firm.

Property management is not only affected by barriers to organisational changes but goal setting with regard to defining short, middle, and long term strategies to be adopted by the firm. This has elicited a study on establishing the management approach that should be adopted by diverse firm following an analysis liquidity and credit worthiness, among other factors (Sunder & Myers 1999, p. 222).

As such, it has been established that payment of dividends should not be classified as a short-term strategy since dividends have a high possibility of causing additional problems during the period of financial crisis (Lyandres & Zhdanov 2007, p. 61).

Additionally, managerial functions, such as planning and evaluation, have influenced the manner in which property management of a given firm is handled. Proper planning is crucial in property management since it facilitates a good cash flow for the firm after subtracting the capital expenditure (Thompson & McHugh 2002, p. 48).

Additionally, proper planning plays a critical role in projecting whether the company could be faced with a financial crisis in future; hence, it analyses how the company is able to counter such financial risks by assessing the possibility of mergers and acquisitions (Thompson & McHugh 2002, p. 52).

As such, the managers involved in the planning process should ascertain whether the planning process is in line with the organisation mission and vision. In doing so, the company gets into a position of coping with the upcoming business challenges without involving many outsiders, who have the capacity of changing organisational culture.

In addition to this, Thompson & McHugh (2002, p. 52) have found out that implementing proper planning with regard to cash flow projection is critical since it helps in understanding the motives behind adopting a merger and acquisition by availing sufficient amount of cash to carry out such transactions.

The theory of planning recommends that it is paramount to come up with a cash hypothesis that helps in understanding the periods that the company is likely to be sold out to other investors’ companies (Timmer 2011, p. 102). The leverage buy-outs is imperative in the planning process since it helps firms that are in big debts to obtain sufficient funds for settling their outstanding debt through collateral from the company in order to secure loan.

Though this often comes with interest, it is beneficial in the sense that the company is able to set cash from the secured loans in order to carry out some of is intended activities during and after the financial crisis ( Timmer 2011, p. 103).

Evaluation is also a managerial function that helps to establish that financial crisis has the probability of halting the operations of a given company. Timmer (2011, p. 104) has found out that countering financial challenges through mergers and acquisition can create a disadvantage to the company that has succumbed to failure as it involves transferring most of its assets to the acquiring firm. The acquiring firm partially settles the debts of the failing firm, creating room for goodwill for the acquiring firm.

In his study of performance evaluation, Watson (2001, p. 224) points out that debt is a cheaper option of handling financial crisis than equity simply because equity involves holding partnership with the shareholders, who share in the company’s productivity.

And even though the shareholders are instrumental in facilitating the success of the company, they do not offer some technical expertise and knowledge in running the business since their work is to contribute capital to the business, not decision making on management of capital (Watson 2001, p. 225).

Therefore, this can be regarded as an added cost in the management of property because in case of losses, the business bears it alone since the investors are only involved in sharing the returns, which are given in the form of dividends.

On the other hand, Watson ( 2001, p. 225) has found out that inasmuch as the company would want to adopt a long term goal for debt repayment, it is sometimes unable to do so as debts are always periodic and have time limits for completion. This leaves the company with only one option that does not require time limit: dividends paid on the equity. Assessing the financial status of a company is critical in the planning process as it helps to ensure successful Implementation of business strategy.

Watson (2001, p. 226) has pointed out the rationale of evaluating bankruptcy cost in regards to the firm’s capital structure and its response to financial crisis. This demonstrates that the management should note the role played by Bankruptcy costs since they form the foundations of financing policies of the firm.

Thompson & McHugh (2002, p. 53) have also demonstrated the role of bankruptcy costs, stating that these costs act as the counterweight to those taxes that have been deducted on the interest payments. Moreover, Thompson & McHugh (2002, p. 53) ascertain that the costs associated with the bankruptcy, such as the reorganisation costs and tax credit losses, directly impact on the capital structure of the firm, since they demonstrate poor managerial practice with regard to planning and evaluation.

By using the SWOT analysis, the organisation should be in a position to identify the threats in property management. More so, this analysis facilitates an understanding of the management strategy that should be adopted since the manager gets information on the unknown information through a cost-benefit analysis.

In this regard, the management should note that when leverage of the company is on an upward trend, the firm is bound to suffer losses due to negative present value (NPV), as this makes the managers under invest in such projects (Watson 2001, p. 227).

Additionally, the management should note the opportunities within the strategy, and key amongst them is the fact that the equity holders are attracted by the net benefits of the project; this creates an avenue for passing the rest of the costs to the bondholders.

Capital structure is the strategy in which a corporation finances its own assets through combining equity, debt, or through hybrid securities (Baker & Jeffrey 2002, p. 4). Management of capital structure will not only facilitate the management of financial resources but also the human resources, the company’ s assets, as well as the structure of the business. A vast majority of managers adopt external financing by issuing shares to the public, thus creating room for external ownership of the company (Baker & Jeffrey 2002, p. 5).

However, Myers & Majluf (1984) argue that equity is not a preferred method of raising capital that could help the company during financial crisis and in the post crisis period. This stems from the fact that the practice threatens the values and norms of the company, creating a conflict between the managers and the new investors.

While the new investors may tend to think that the company has value, the management takes this advantage to raise capital for the firm, and this may result in low company’s shares after sometime (Baker & Jeffrey 2002, p. 7).

Thus, the management should be in a position to choose a control system that has less risk in long-term basis. However, sometimes, the management faces challenges emanating from lack of knowledge on previously made decisions and the actual occurrence when the financial problem arises (Baker & Jeffrey 2002, p. 15). In this case, the management should adopt traditional approaches, as they help to choose a capital management that has the lowest probable cost of capital for the company.

Myers & Majluf 1984 ( p.188) have described how management should use organisational controls that facilitate a reduction of debt ratio, while making sure that leverage-increasing actions like stock repurchases and debt-for-equity interactions are employed.

This creates a differentiation between the management approach that should be adopted before and after the financial crisis faced by the management (Myers & Majluf 1984, p. 194). As such, Knights & Willmott (2006, p. 22) recommend focused management in controlling future financial crisis.

Conclusion

In sum, the practical monetary managers will try to retain financial flexibility while making sure they attain long-term survival of their companies even after financial crisis. This will also help the company in planning for the possible financial problems. The research indicates that through improved and effective administrations of the organisation, the managers have to dedicate their time to work, which involves long-term thinking and vigilant consideration of the company changes.

In this regard, many corporations are perceived to be unable to make alterations of the business setting so that the organisation could implement most of the fiscal strategies prior to, or after, a monetary crisis. This shows that such financial problems could effectively be realised only through the practice of objective and focused management.

The justification was that since the global monetary crisis reaches at an untimely situation, thus, not quite practical for a number of companies to realign their manufacturing and administrative processes to match the predicted financial positions and the global trends that might be in order with their operations. Such attempts might help the companies cope with such financial challenges.

Regardless of the realism that the fiscal challenges have had gross affects on global business operations in a number of ways and at different instances, the magnitude at which the entities operate has not been so hands-on to deal with increasing affects of financial crises.

For instance, large business finance and organisation tribulations have resulted in monetary shortfall that exist and affect the link between the management of the company, customer base, and the suppliers. This situation has really compromised the choices, which the corporation could arrive at.

Finally, the standoff could be relevant to corporate changes since the management of the entity that should make the decision in the best interest of the entire parties involved in its management often fail to execute their duties.

Literally, these managers, who should act on behalf of the board as a watchdog of the financial alterations in the company, end up disappointing the shareholders. In fact, they are meant to make choices, which should be in favor of the shareholders. Essentially, Managers fail to act appropriately owing to their mixed interest and desire to maximise their own gain.

References

Baker, M & Jeffrey, W 2002, “Market Timing and Capital Structure“, Journal of Finance vol. 57 no.1, pp. 1–32.

Gustavo, G Michaely, R & Swaminathan, B 2002, “Are Dividend Changes a Sign of Firm Maturity?”, The Journal of Business, vol. 75, No. 3, pp. 387-424.

Jackall, R 1988, ‘Looking up and looking around excerpt from Moral mazes: the world of corporate managers’, Oxford University Press, Oxford.

Knights, D & Willmott, H 2006, ‘Management and Leadership: Introducing Organizational Behaviour and Management’, Thompson, London.

Lyandres, E & Zhdanov, A 2007, ‘Investment Opportunities and Bankruptcy Prediction’, Harcourt College Publishers, Fort Worth.

Myers, S & Majluf, S 1984, “Corporate Financing And Investment Decisions When Firms Have Information That Investors Do Not Have“, Journal of Financial Economics, vol.13, no. 2, pp. 187–221.

Sunder, L & Myers, S 1999, “Testing Static Tradeoff Against Pecking Order Models of Capital Structure”, Journal of Financial Economics, pp. 219-244.

Thompson, P & McHugh, P 2002, ‘Work Organizations: A Critical Introduction’, (3rd Ed.), Palgrave Macmillan, Basingstoke and London.

Timmer, J 2011, ‘Understanding the Fed Model, Capital Structure, and then Some’, Fort Worth, Harcourt College Publishers.

Watson, T 2001, “The Emergent Manager and Processes of Management Pre-Learning”, Management Learning, vol. 32, no. 2, pp. 221-235.

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