Financial Management Practices and Their Impact

Subject: Financial Management
Pages: 7
Words: 1664
Reading time:
7 min
Study level: College

Executive Summary

Financial management is an organizational function undertaken to inform investment, dividend, and operational decisions. The discussions presented in this paper show conclusively that different financial management practices have the potential to influence business performance positively. Some approaches such as working capital management and capital structure result in desirable decisions that can guide firms to pursue their respective objectives. Proper financial planning and investment appraisal influences a wide range of organizational procedures in an attempt to add value. Dividend policy guides corporations to meet the diverse needs of their respective stockholders. The benefits of appropriate financial management practices should be embraced by organizations in an attempt to achieve their potential.


Financial literature and research indicates clearly that a company’s financial practice can impact its performance. Jain, Singh, and Yadav (2013) argue that financing mix is a powerful principle that guides firms to come up with better investment decisions. Companies that implement adequate financial and investment practices will be in a position to maximize shareholder value. Kharazmi and Teymouri (2013) encourage business organizations to strike a balance between cash outflows and inflows. This practice is capable of minimizing liquidity challenges and delivering credit support to tackle emerging financial fluctuations. This knowledge explains why financial performance evaluation has emerged as an important factor that can be applied to monitor organizational profitability. This discussion describes how financial management practices impact business performance.

Analysis of Financial Management Practices

Kharazmi and Teymouri (2013) define financial management practices as a task executed by managers and accounting officers in different areas such as asset management, supply chain, budgeting, and controlling. Institutions and corporations should embrace different financial management practices in an attempt to achieve their goals. The first practice is known as capital structure decision (Turyahebwa, Sunday, & Ssekajugo, 2013). This refers to the amount of equity and debt used to finance company’s operations. Capital structure is an integral aspect of a firm’s financial portfolio. It usually represents the major sources of funds in a given firm. The financial practice will definitely inform an organization’s financial structure whenever analyzed or done in a professional manner.

Sanusi, Johari, Said, and Iskandar (2015) acknowledge that the use of capital investment appraisal techniques can guide corporations to determine or monitor their investments. The appraisal approach will ensure both short-term and long-term investments are analyzed periodically. The technique embraces the concept of budgeting to ensure expenditures and investments are executed effectively without undermining the performance of the targeted company. Such techniques make it possible for companies to identify ventures, new undertakings, and expansions capable of sustaining business performance.

The use of dividend policies is a powerful initiative used as part of an organizational financial management. The practice focuses on the unique guidelines and procedures adopted by a specific firm to decide how earnings can be shared among its stockholders. Competent financial managers embrace the practice in an attempt to monitor financial performance and meet the needs of different stakeholders (Sanusi et al., 2015). However, evidence seems to indicate that some investors might not take the practice seriously. Such financiers can sell their equities in different stock markets (Kharazmi & Teymouri, 2013).

Working capital management is a practice used to monitor the assets of a firm. Financial experts use the financial tool differently depending on the corporation’s source of assets or income. This working capital refers to the total investment in a company in the form of assets (Jain et al., 2013). Such resources or properties tend to be liquidated within twelve months (Jain et al., 2013). The financial manager establishes the tradeoff between shortage and carrying costs.

Another critical practice is known as financial performance assessment. This is a measure used by experts to analyze how a given company can utilize its assets within its business model to come up with adequate resources or revenues (Kharazmi & Teymouri, 2013). The tool is widely used by a company to measure its financial health status within a specified period of time. The firm’s health is then used to inform various business practices that can be pursued to minimize potential problems.

Financial management practices revolve around the investment and expenditure attributes of a given firm. The leaders in a given company should consider these practices to ensure they are undertaken in a timely and efficient manner. Sanusi et al. (2015) believe that the success of most of these financial practices can ensure more companies realize their business aims. Emerging obstacles and challenges are usually identified and addressed before they can disorient organizational performance.

Financial Management Practices: Impact on Organizational Performance

Research indicates that effective financial and accounting practices tend to have a positive impact of organizational performance (Turyahebwa et al., 2013). Short-term financial practices such as working capital management can make it possible for a company to allocate resources in a timely manner and support different organizational goals. The practice guides stakeholders to pursue the outlined aims and eventually maximize business performance. Companies embracing the use of adequate short-term financial management initiatives find it easier to meet the changing needs of different stakeholders.

Investment appraisal is supported by many researchers since it promotes performance. The financial management practice is observed to guide corporations to make appropriate decisions, forecasts, and investment options. The strategy is known to create a comparative advantage in the targeted firm. Throughout the financial management process, the managers manage debts and equities. Debt remains one of the leading sources of capital for different firms. Appraisal is a practice that guides financial managers to make accurate decisions whenever acquiring new resources and identifying potential capital sources (Kharazmi & Teymouri, 2013). When the process is managed effectively, the firm will be in a position to pursue its goals and promote performance.

Jain et al. (2013) observed that capital structure was relevant in many corporations across the world. Firms can adopt different models to manage debt ratios and equities. The practice guides companies to analyze issues such as cash flows, agency costs, and asset substitutions to make appropriate decisions. Some leaders can utilize financial structures to achieve the intended aims. Research reveals that companies that use capital structure efficiently find it easier to manage debts and remain attractive to different funders (Sanusi et al., 2015). This approach can be embraced by managers to match the goals of the firms with existing financial resources.

Liquidity management is described as an effective process that can guide a given organization to monitor different obligations. Successful or functional firms must cater for their bills, wages, taxes, and loan repayments in a timely manner. Failure to meet such financial needs can disorient a wide range of organizational practices (Jain et al., 2013). These processes can be assessed and completed adequately if the targeted firm utilizes powerful financial management practices. Corporations that embrace such initiatives will ensure different functions are completed efficiently.

Financial control can only be realized through the use of valuable management practices. Effective financial management will ensure firms take issues such as profitability, growth, and liquidity seriously. The financial management tool can utilize most of the above practices to allocate resources, liquidate specific assets, and make timely decisions (Turyahebwa et al., 2013). The team can identify the best strategies to maximize share price. When such processes are implemented in a professional manner, it can be easier to enhance the long-term aims of the institution. Dividend policy can be pursued constructively to maximize the wealth of shareholders. This process will also capture the attention of different stockholders and consequently drive organizational performance.

Evidence reveals that the main objective of financial management in a company is to maximize shareholder value (Trehan & Setia, 2014). Selvanayaki, Sivakumar, Rohini, and Mani (2016) argue that the unique needs and expectations of the owners of corporation should inform most of the activities undertaken. The same reason can be used to support the role and relevance of various financial management practices. When such processes are executed efficiently, it becomes easier to support the best practices and acquisitions that resonance with the targeted goals. The initiative can guide a given firm to redefine its functions and eventually maximize performance. Profitability, for instance, is something that is taken seriously by many financial managers (Turyahebwa et al., 2013). Such leaders can use each of the above practices to control costs and prices. Capital expenditures will be matched with inventory in an attempt to deliver desirable profits. This practice, therefore, shows conclusively that the application of meaningful financial practices in a given firm will eventually maximize profits and business performance.

Selvanayaki et al. (2016) go further to support the idea that effective financial management practices will result in positive performance. Companies that utilize different financial management tools will be in a position to attract investors and sustain their operations. Different functions will be coordinated in such a way that the meet the objectives and goals of the organization. This reason describes why financial managers should pursue their roles and functions prudently (Sanusi et al., 2015).

Some scholars have gone further to explain why business managers should be aware of diverse factors that are capable of impacting organizational performance. According to Trehan and Setia (2014), variables (or factors) that affect the rate at which organizations realize their goals must be examined carefully. Managers should also be keen to match different functions and financial practices if they want to influence organizational effectiveness.


Managers in different business firms must realize and appreciate the benefits of different financial practices. When applied appropriately, most of these methods can maximize the performance of many companies and guide them to support the needs of their stakeholders (Trehan & Setia, 2014). Corporations that want to succeed should hire skilled financial managers and train them to pursue constructive financial practices. Business corporations should utilize most of these accounting processes to ensure they are on the right path towards realizing their objectives and missions. In conclusion, financial performance practices should be embraced by business firms since they have the potential to support different managerial functions and eventually improve performance.


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Kharazmi, Z., & Teymouri, M. (2013). The effects of financial management practices and their role in economical development and organizational performance. International journal of Advanced Biological and Biomedical Research, 1(6), 578-582. Web.

Sanusi, Z. M., Johari, R. J., Said, J., & Iskandar, T. (2015). The effects of internal control system, financial management and accountability of NPOs: The perspective of mosques in Malaysia. Procedia Economics and Finance, 28(1), 156-162. Web.

Selvanayaki, S., Sivakumar, S. D., Rohini, A., & Mani, K. (2016). Financial management practices and profitability of modern rice milling firms in Kangayam Cluster, Tamil Nadu. Agricultural Economics Research Review, 29(2), 297-306. Web.

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Turyahebwa, A., Sunday, A., & Ssekajugo, D. (2013). Financial management practices and business performance of small and medium enterprises in western Uganda. African Journal of Business Management, 7(38), 3875-3885. Web.