Importance Of Financial Policies

An investment decision involves utilizing capital on assets that will produce the highest profit for the organization. The company needs to find a balance between its short-term and long-term goals. In the very short-term, a company needs money to pay its bills, also company need to invest in assets to help grow in the future. Therefore companies needs to find the right mix between long-term and short-term investment.

The according Brealey and Myers (2003).investments must meet three main criteria:

1. It must maximize the value of the firm, after considering amount of risk involved in the investment.

2. It must be financed appropriately.

3. If there is no profitable investment opportunity, the cash must be returned to shareholder in order to

Pension and Other Post-Employment Benefits.

Importance of Financial Policies

There are a variety of reasons why an organization should have financial policies:

1. Financial policies can provide the management with the oppor¬tunity to review the present approach to financial management taking into consideration the overall, long-range perspective.

2. Sound financial policies may improves the credibility of an organization and the fund providers has confidence in management and these improve credit rating of an organization.

3. Financial policies can save time and energy of the management of the organization as the decisions that the management make relating to finance reduces if financial policies are in place, the amount of time spent at management meetings on financial issues can be minimized.

4. Financial policies also allow the management to make prompt decision with waiting for directives from board of directors if the financial matters fol¬lows the adopted financial policies.

5. Formulating financial policies may prove training for board of directors as the process of developing financial policies provides them the op¬portunity to become educated on the various aspects of financial man¬agement an

A budget is quantitatively stated: The figures in the budget are expressed in monetary terms. However, the monetary figures are supported by non-monetary information such as units to be sold, units to be purchased and others.

2. A budget is prepared in advance: A budget must be drawn up before the period to which it refers. Figures produced during or after the period may be important, but they are not part of a budget.

3. A budget relates to a particular period: Generally, the budget is prepared for one year. However, in the case of a seasonal business, there may be two budgets for each year – a slack season budget and a peak season budget.

4. A budget is a plan of action: A budget is a plan because it concerns actions to be taken rather than a passive acceptance of future trends. Planning is the establishment of objectives and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve the objectives. Like all plans, budgets seldom turn out to be totally correct predictions of the future. Conditions may change during the budget period, which renders the budget to be inaccurate. Even so, budget is useful in guiding the actions of