8. Problem of ascertaining optimum allocation of business earnings between retention and dividends because of the diverse investment goals, tax brackets and alternate investment opportunities of the current and potential investors may prompt management to rationalize the soundness of such other factors as influence dividend policy as risk avoidance or maintenance of market price. For example in India, Industrial Policy Resolution 1956, spells out clearly the industrial fields in which the Govt. Size of Business: Large size of organization invests more money to acquire fixed assets due to its huge capital. Likewise, tax liability of a firm fluctuates depending upon method of inventory valuation. This is why management in the smaller organisations has to arrange capital from closely held circles. It may be argued in this regard that tax savings generated in the initial years because of charging depreciation at higher rate will be compensated by the increased tax liability in the subsequent years when depreciation will be charged at lower rate. Because of difficult access to external sources of financing, smaller organisations have to depend on internal sources of financing and for that matter the management may pursue conservative dividend policy to retain larger proportion of business earnings. Is the organization retain the money or declared the dividend to shareholders depend on the nature of business. Some internal factors which are the influencing the financial decisions are: 3. Tax policy. In times of economic turmoil and business depression even venturesome investors would like to hold senior securities while during the period of economic prosperity shares receive premium even at the hands of those investors who are not so venturesome. Factors influencing financial decisions are discussed in two different ways. | Blog Guides Trends News Work Culture All categories . Various alternate sources are available and businessmen have a freedom to decide about the optimal financing mix so that cost of capital is reduced. In such a state of affairs, policy of internal financing is pursued so as to enable the firm to draw upon its resources in times of need for funds. 2. There can be plenty of factors influencing policy making in a country. From the stand point of taxation, Straight Line method is very useful since in this method depreciation is charged at twice the normal depreciation rate which ultimately reduces the tax liability. will enter and those where private sector will have freedom to operate. 7. DECISION MAKING. Economic Factors Affecting Businesses. Thus, a new firm will have small share of debt in its total capitalisation. Where earnings of the firm have been irregular in the past but when averaged over a period of years give a fair margin over the preferred stock dividend, the management may issue preferred shares to raise funds. So firm should keep both long term and assets for enjoy financing from the possible sources. Concept of Financial Decisions: ... A wise management adopts policies that will be most suited to the present and prospective socio-economic and political conditions of the country. They also draw upon a part of the reserves built out of the past earnings for covering their additional financial needs. The finance manager will have, therefore, to examine into the expediency of getting loans from the institutions under the afore-stated condition. But in public limited companies having large number of shareholders with varying desires the finance manager must insist on the pursuance of liberal dividend policy. Impact of nature of business activities on make-up of capitalisation should also be closely examined. Approach to the management: Is the management approach is aggressive or conservative towards the business decision is another important factor of financing decision. Natural of business: Natural of business impacts on financial and dividend policy decision. However, if company borrows more than what can be serviced by it; there is every risk of losing all control to creditors. During boom periods, jobs tend to be plentiful, since companies need workers to keep up with demand. In private companies whose ownership is concentrated in a few hands the management can find it easier to persuade the owners to accept strict dividend policy in the interest of the firm. They have to raise capital from closely held circles. Even if new enterprises are in comfortable position to garner funds by issue of debentures, a finance manager should, as far as possible, avoid bringing in heavy dose of debt, for in that case a large chunk of business income might be eaten away by interest on loans leaving a little amount for dividend distribution and retention for further financing. Internal factor dynamics consist the all significant elements to boost up the total organization financing policy. This helps in maximisation of the market value of the firm. Government control. Needless to say, finance manager should make available to the Board of Directors a brief of all contractual provisions that affect the capital structure and dividends in any way. Confident consumers tend to be more willing to spend money than consumers with low confidence, which means businesses are more likely to prosper when consumer confidence is high. For instance, financial corporations in India usually insist on maintenance of debt-equity ratio for medium and large scale project as 1.5:1 and promoter’s contribution of 20-25 percent of the project cost while considering loan application of a firm. Accounting for trends in the overall economy can help business managers make better decisions. For example, public utilities and steel companies can depend heavily on debentures for raising capital as they can mortgage their assets for securing loan. Home Economics JSS1. Further, while deciding about the sources of funds that have to be tapped for raising capital, lending policy of the financial institutions should be carefully examined. While taking financing decision a finance manager should also give due consideration to the requirements of potential investors. This tendency is widely prevalent in India. In different stage it reflects differently and decision has according to this stage. 3. Likewise, finance manager has to take decision regarding disposition of business income without consulting other executives since various factors involved in the decision affect ability of a firm to raise funds. On the contrary, larger concerns find it easier to procure needed funds from different sources of capital and money markets. Generally, dividend is distributed in the form of cash and shares. These are: 1. There may be, on the other hand, investors who are not as liquidity conscious, venturesome and who have greater preference for profitability. Save my name, email, and website in this browser for the next time I comment. Availability of large surplus does not always mean the availability of cash in the firm particularly when a large amount of sale has been done on credit. Under such a condition, a firm seeking loan from the financial institutions must maintain the ratio of debt to equity at a level desired by them. It would, therefore, be in fitness of things to take the decisions in the light of external and internal factors. The following external factors enter into decision making process: At a time when the entire economy is enveloped into state of uncertainty and there is no ray of hope of recovery in the ensuing years, and considerable amount of risk is associated with investment it would be worthwhile on the part of a finance manager neither to take up new investment activities nor to carry further the expansion programmes. 8. The management is, therefore, constrained to declare dividend at higher rate. Investors who are conservative and liquidity conscious would like to hold such securities as may assure them certainty of return and return of principal amount after the stipulated period of time. Structure of assets: Structure of assets is another element to receive finance from the financial institutions. multiculturalism. 6. Plagiarism Prevention 4. Above all, financial decisions are influenced by the attitude of the management. In such circumstances too the management must not be liberal in dividend distribution at least for some years even though a sizeable profit has been earned. In a socialist country like India, entrepreneurs are not free to take up any venture they like. In financial management managers decisions in the light of three corporate decisions, Investment decision, financing decisions and asset management decisions. Inflation can reduce the purchasing power of consumers unless employers increase wages based on the level of inflation. 10 crore. In the absence of organised capital market entrepreneurs find it difficult to procure large amount of resources from the market. Very often the government in its bid to promote corporate savings levies special tax on those companies who declare dividend at a higher rate. Instead, he must call on the expertise of those in charge of production and marketing. Content Filtrations 6. Accordingly, common stock must be issued. Further, investors’ psychology changes with the variation in economic and business conditions. What Causes Business Expansion & Contraction in the Business Cycle? Similarly, public utility concerns and industrial concerns manufacturing essential products because of their steady and slow rising earnings may pursue liberal dividend policy to declare higher dividend rate. Manager should be judicious and visionary to take such types of decision. This would consequently increase cost of capital of the firm. Read this article to learn about Financial Decisions. 9. Economic condition of the country influences financing decision also. Finance manager should, therefore, be well aware of the prevailing temper of the investing class. While dividend received by shareholders in cash is subject to tax in their hands, bonus shares are exempted from the tax. Where institutional structure of capital and money markets is well developed and organised with a multitude of financial institutions supplying long-term as well as short-term financial assistance and investors are venturesome evincing keen interest in security dealings in stock market, business entrepreneurs will not have to encounter much problem in procuring even substantially large amount of capital. Accordingly, common stock must be issued. Decisions regarding magnitude of funds to be invested to enable a firm to accomplish its ultimate goal, kind of assets to be acquired, pattern of capitalization, pattern of distribution of firm’s income and similar other matters are included in financial decisions. 1 ISSN: 2330-1236. A finance manager must ascertain in advance as to which method will be helpful in minimising the tax burden. Dividends are generally paid out of cash. Personal factors!