Executive Summary
Business leaders, planners, and directors should take financial management seriously. This happens to be the case since the practice focuses on the best approaches towards organizing, monitoring, and allocating monetary resources in a given business organization. It is also agreeable that the availability of funds is something that is capable of dictating the success of every department, product, or project.
This is the main reason why every organization requires adequate finances in an attempt to compete successfully in the changing global business environment. Since companies require adequate capital, it is appropriate for them to maintain consistent profits or returns in order to complete new projects and meet the changing demands of their respective investors, customers, or stakeholders. The decision to pursue competitive or appropriate business operations and financial practices can deliver such an objective. This initiative is usually reliant on the internal operations and structures of every corporation.
The research paper presented below explains why proper financial management practices tend to influence the profitability of many organizations in a positive manner. The discussion goes further to argue that leaders and managers who focus on evidence-based accounting strategies will find it easier to make informed decisions, minimize potential business risks, tackle emerging challenges, empower their workers, and eventually remain competitive in their respective industries or sectors.
The major recommendation presented in the discussion below is that organizational managers and financial experts should embrace appropriate financial procedures in order to drive performance, attract investors, become competitive, and improve their business models. Such firms will also continue to operate in accordance with the existing national or international laws and eventually achieve most of their departmental and organizational goals.
Introduction
The global business environment is changing rapidly due to different forces such as globalization, technological developments, and revolutionizing consumer needs. Companies that want to emerge successful in these unpredictable times must put in place appropriate measures and excellent internal processes. Business firms that want to achieve their potential should pursue or embrace proper financial management practices. Efficiency is something critical since it makes it easier for firms to maximize their profits and minimize volatility. The purpose of this research paper is to examine and discuss how evidence-based financial management practices impact organizational profitability and performance.
Financial Management Practices
Business managers should take financial management seriously since it revolves around the major decisions aimed at improving performance and sustainability. Brijlal, Enow, and Isaacs (2014) acknowledge that companies can put in place meaningful and accountable financial management practices in order to emerge successful. There are various processes that are considered by organizational leaders. Capital structure is the first financial management practice. Brijlal et al. (2014) define it as a firm’s debt/equity ratio (D/E). An organization with a stable or attractive capital structure decision will result in maximized shareholder returns and revenues.
Investment appraisal techniques refer to various procedures undertaken by business firms to determine their short-term or long-term investment opportunities (Gholami, Asli, Nazari-Shirkouhi, & Noruzy, 2013). Companies should put into consideration such strategies whenever optimizing or prioritizing various projects. Dividend policy, on the other hand, is a financial practice that dictates how companies share their accrued earnings with their respective shareholders.
Working capital management is another useful financial management strategy. Financial experts undertake this practice to manage various activities that are related to the working capital of the targeted company. According to Simon and Mohamed (2017), financial performance assessment measures an organization’s profitability and its ability to meet its performance objectives. Basically, it measures the readiness of a specific business organization to utilize its assets efficiently in an attempt to generate enough income or revenue.
Impact on Organizational Performance
Financial literature indicates clearly that organizations that apply sound financial management initiatives will find it easier to achieve most of its business objectives. For instance, Al-Tit (2017) believes that corporations that have positive financial management systems remain operationally competitive and efficient. It is also evident that the manner in which companies apply various financial management practices will greatly impact their attractiveness to customers and investors. The arguments presented below explain how and why the above practices can influence the performance of a given firm positively.
To begin with, the D/E ratio (or capital structure decision) gives a clear insight to investors regarding an organization’s financial status. Companies that focus on this financial practice will be able to tackle risks and challenges that can disorient business performance. Proper capital structure decisions will ensure that the targeted company reduces its risks (Simon & Mohamed, 2017). This means that more people will invest in the organization, achieve their economic goals, and eventually maximize business performance. On the other hand, inadequate or poor capital structure decisions will amount to inappropriate financial practices.
Consequently, companies associated with such malpractices will not attract enough investors. Consequently, such firms will find it hard to undertake or complete their projects. Yang, Ishtiaq, and Anwar (2018) indicate that capital structure is a powerful strategy that influences business policies, credit worthiness, pricing, resource allocation, and maximizes shareholder returns.
As indicated earlier, investment appraisal techniques are essential whenever prioritizing or selecting projects. Businesses can consider various appraisal techniques such as adjusted present value, payback period, internal rate of return, net present value, and equivalent annuity (Yang et al., 2018). Sound practices will guide project managers to identify and execute high ranking or profitable projects. This means that the targeted company will find it easier to record positive performance and achieve its goals.
Al-Tit (2017) describes dividend policies as meaningful practices that can influence the profitability or performance of a given company. According to Simon and Mohamed (2017), dividends are crucial sources of revenues for different business investors. An effective dividend policy is, therefore, an important aspect of every company’s business model or strategy. Positive financial management practices will guide organizational leaders to come up with the right dividend amounts for different investors (Al-Tit, 2017).
Timing is also critical whenever pursuing this procedure. Managers should take the existing external and internal factors seriously. When undertaken diligently, a given company will ensure that its revenues outweigh the outlined expenditures. Consequently, such an organization will be in a position to continue financing its critical projects while at the same time meeting the diverse needs of its key stakeholders.
Working capital management is a powerful bookkeeping process undertaken to analyze and monitor an organization’s current assets. Firms undertake this initiative to facilitate desirable or profitable day-to-day operations (Gholami et al., 2013). Competent accountants and financial managers will employ appropriate short-term measures in an attempt to ensure their companies maintain desirable cash flows. Consequently, such corporations will meet their debt obligations and operational expenses. Firms that fail to use this practice diligently will be unable to manage their expenditures, thereby finding it hard to sustain their cash flows.
Companies that want to emerge profitable should treat financial management assessment as an important practice. This procedure revolves around assessing a firm’s financial structure and performance. Many theorists and managers support this practice because it informs appropriate long-term and short-term organizational decisions. Yang et al. (2018) argue that shareholders use income statement, cash flow statement, and balance sheet to assess the overall financial position or health of a given company. Investors will also be keen to examine these financial documents before making their decisions.
The use of this practice is commendable because it makes it possible for organizational managers to identify and consider potential opportunities, weaknesses, and strengths whenever focusing on future projects, investments, or ventures (Gholami et al., 2013). Due to the importance of this practice, many governments across the world demand public companies to disclose their financial information annually.
Conclusion
The above discussion has indicated that sound financial management practices are essential for every business organization that intends to achieve its goals. Managers and leaders should ensure that their employees are competent and capable of utilizing every financial tool in a professional manger. It is also worth noting that such practices work synergistically to influence organizational performance. In conclusion, business leaders should be encouraged to focus on the above techniques in order to undertake appropriate projects, distribute dividends efficiently, attract more investors, and eventually achieve their business objectives. Firms that fail to embrace the above evidence-based practices might eventually become obsolete or less competitive.
References
Al-Tit, A. A. (2017). Factors affecting the organizational performance of manufacturing firms. International Journal of Engineering Business Management, 9, 1-9. Web.
Brijlal, P., Enow, S., & Isaacs, E. B. (2014). The use of financial management practices by small, medium and micro enterprises: A perspective from South Africa. Industry & Higher Education, 28(5), 341-350. Web.
Gholami, M. H., Asli, M. N., Nazari-Shirkouhi, S., & Noruzy, A. (2013). Investigating the influence of knowledge management practices on organizational performance: An empirical study. Acta Polytechnica Hungarica, 10(2), 205-216. Web.
Simon, L., & Mohamed, J. A. (2017). Effects of financial management practices on financial performance for county governments in Kenya – A case study of Mombasa County. Imperial Journal of Interdisciplinary Research, 3(9), 1097-1109. Web.
Yang, S., Ishtiaq, M., & Anwar, M. (2018). Enterprise risk management practices and firm performance, the mediating role of competitive advantage and the moderating role of financial literacy. Journal of Risk and Financial Management, 11(3), 35-51. Web.