business, finance

Scope of financing decisions – dividend policy decisions

Each organization has different functions and finance is one among such functions and when it comes to the functions relating to finance, it is concerned with the following types of decisions namely; financing decisions, investment decisions and dividend policy decisions.

In the case of financing decisions, the organization is concerned with the issues relating to raising of funds from different sources namely external sources and internal sources.

In the case of investment decisions, the organization deals with the utilization of funds mobilized in regard to various investments which are required for the production and manufacturing process.

In the case of dividend policy decisions, the organization is concerned with the decisions in regard to payment of dividends to the shareholders or investors.

Dividend policy decisions:

Profits earned by the organization belong to the owners of the organization and in the case of the corporate form of organization, the shareholders are considered to be the owners of the firm and they are entitled to receive the profits in the form of dividend. However, there is no specific law or statute which specifies as to how amount of profits should be distributed by way of dividend and how much amount of profits should be retained in the business. The alternatives available to the organization; i.e. distribution of the profits in the form of dividend on the  one hand and retention of profits in the business on the other hand in the business have reciprocal relationship with each other.

If the dividends paid are higher, the retained profit is found to be very less and in case the dividends are paid less, the retained profit is found to be more which can be reinvested in fixed assets. In case the organization pays higher dividends, the shareholders are very happy as they get more recurring income and the company may be able to gain the confidence of the shareholders. However, the orgaanisation can be in financial problems as payment of dividend results into the withdrawal of profits from the business. On the other hand, in case the organization pays less dividends, the organization may be in a favourable situation. However, the shareholders are likely to be offended and as such the organization is required to take the decisions regarding the payment of dividend in such a way that neither the shareholders are offended nor the organization is in financial problems. As such dividend policy decisions are the strategic financial decisions and are concerned with the answers to the questions namely;

a)            What are the forms in which the dividends can be paid to the shareholders?

b)            What are the legal and procedural formalities to be completed while paying the dividend in different forms?