Question

Discuss the advantages of a cash distribution policy. What are the tax consequences of cash distributions? Identify the most widely used cash distribution policies.

Answer 1

Solution :

Meaning : CASH Distribution --- Cash Distribution is one of the important area of working capital management and Dividend policy as we know that in conducting business there must be a sound Distribution Policy Because without Properly Distribution of cash, Business cannot run Smoothly , Cash is a life Blood of business so in order to Run Business Efficiently Business Men Must Properly Distribute cash among Various Stakeholders.

Advantages of a Cash Distribution Policy

1. It helps to build trust among stakeholder.

2. It helps to secure supply of Raw material that is smoothly flow of raw material If we not distribute cash on time it will possible that supplier of raw material may stop Supply of good because of non payment.of cash

3. it help to create more Fund from market as we distribute cash regularly to Investor like Debenture holder , equity holder , other securities holder with a proper cash distribution policy   

4. Its also help to build trust between salary or wage earner and Employer as through cash distribution policy business men cash pay ON TIME payment to wage or salary earner.

5. It will help in saving of fund so that in future when needed it may capitalized in the form of New asset or for giving advances to outsider to get good amount of interest.

Thus there are many advantages of Cash Distribution policy but the most important among is It help business to work properly .

Tax consequences of cash distributions

As we know cash distribution policy set with consideration of tax payment

First of all if businessmen distribute cash more in the form of dividend , then it have to pay more in

Form of Tax to Government because reason being distribution of cash not treated as expense it was

One of the portion on Net Earnings and also they have to pay corporate dividend tax.

If company decided to hold large portion of cash and invest the same in purchasing Asset this will help

Business to grow fast and also these amount treated as expenses i.e they are not going to taxed But it has its own consequences it will going to reduce the amount which will otherwise distributed as dividend ,thus creating problem from investor side.

Most Widely used Cash distribution policy

There are many policy related to cash distribution

Like Conservative policy , Liberal policy and Stable or Sound policy

Among above Stable or Sound policy regarded as most widely used policy to distribute cash

As we know Too much CONSERVATIVE that is distribute very less among shareholder OR Too Much

LIBERAL that is Distribute more Both are on the Extreme Side. Both are Dangerous for business thus

Business have to follow STABLE Policy In order to run Business Properly.