Financial Policies
Financial policies may be regarded as the most important business policies of the organization. It depends on the entire success and failure of a business unit of the organization. Proper and careful framed financial policies help to the effective utilization of the resource like men, machine, market, method, materials and long term survival of the business while improper framed financial policies are ruining to the business activities of the organization.
Financial policies are essential to the organization. They are as listed below:
- To know the capital requirement of the organization in terms of short, medium, and long term-and know the how-to procurement and effective utilization of finance in the organization.
- The method of raising funds and the ratio between the various types of sources of funds, particularly the proportion of owning funds to borrow funds.
- Utilizations of the funds and the ratio between different types of assets.
- The credit policy, declaration, and distribution of dividend to the shareholder.
- Profit policy, provisions for taxes, renovations, and modernization of plants and machinery.
Costing policy includes the policy for selecting the method of cost, the method of allocating, apportioning, reapportioning, and absorbing overheads.
Accounting policy includes the following areas:
- The basis of valuation of stock in trade at the year-end; whether at a total cost, or at direct cost or at works costs.
- The issue price of the raw material; whether to follow first in first out method or last in first out method or average cost or any other methods of issue of raw materials
- Depreciation policy; whether the straight-line method or reducing balance method or mileage method or any other method.
- The treatment of deferred revenue expenditure, intangible assets, fictitious assets, and preliminary expenses.
- Capitalization of expenditure during the construction period
- The policy for the provision of bad and doubtful debt, investment losses, etc.