Question

How the company’s financial policy create value to the firm? How the company’s financial policy create competitive advantages? Why do you think the company’s financial policy sustain senior management’s visions?

Answer 1

The objective of financial management or policy is to maximize the wealth of Equity shareholders. Shareholder’s wealth is represented by the market capitalization of the company. So a finance manager is supposed to take financial decisions with a view to increase the share price of the company on a sustainable basis.
There are three major financial Decisions:
a)Financing Decision ie Procurement of Funds
b)Investment Decision ie Deployment of Funds
c)Dividend Decision ie Decision regarding payout of funds

A good finance policy helps to achieve the following objectives :

• To ensure adequate and regular supply of funds.
• To provide a fair rate of return to the suppliers of capital viz. shareholders.
• To ensure effective utilization of funds by maintaining proper balance between profitability, liquidity and safety.
• To generate and build up sufficient surplus for expansion and growth through ploughing back of profits.
• To minimize cost of capital by developing a sound capital structure between various securities issued by the company.
• To coordinate the activities of the finance department with the activities of other departments in the organization.

A good finance policy helps to create competitive advantages for the firm. For instance, if the firm has made an optimum financing decision keeping balanced mix of Equity and debt, then the firm can make use of leverage and tax benefits as well as secure permanent funding from equity.

The company’s financial policy sustain senior management’s vision because the senior management are sitting at the top of the value chain having clear vision about the company. They have “Super- vision”, hence the supervisory Board takes decision about the growth track of the company and take any corrective action if it deviates from the path. They would cascade the vision down the line.Since a company is just an artificial Person and not a real person, it’s senior management is the brain of the company.

Senior management would primarily work on the following aspect in terms of finance :

Estimating the Requirement of Funds

Determining the Capital Structure

Choice of Sources of Finance

Investment of Funds

Management of Cash

Disposal of Surplus

Financial Controls