IMPACT OF FINANCIAL MANAGEMENT ON PERFORMANCE OF ORGANIZATIONS

A CASE OF NATIONAL WATER AND SEWERAGE COOPERATION – KAMPALA BRANCH

INTRODUCTION

1.0 Introduction        

This chapter will present the background of the study, statement of the problem, purpose of the study, objectives of the study, research objectives and questions, scope and significance of the study.

1.1 Background to the study

Financial management acts as an essential part of the economic and non-economic activities which leads to decide the efficient procurement and utilization of finance with a profitable manner. Nowadays, financial management has been enlarged with innovative and with dimensional functions in the field of business with the effect of industrialization. Financial management deals with the procurement of funds and their effective utilization in the business and the preferred practices are applied at different decision making organizational levels; institutions can achieve resource utilization (Babar and Ahmed, 2010).

Financial management is directly related with various functional departments like personnel, marketing and production. Financial managers must make proper use of financial management in planning, allocation and control activities of the organization (Horne, 2000).

Gitman (2007) defines financial management as the area of business management, devoted to a judicious use of capital and a careful selection of sources of capital, in order to enable an organization to move in the direction of reaching its goals. He further states that a good financial management system has got four main components which include , a clear finance strategy, a plan for generating income, a robust financial management system and a suitable internal environment, this helps in ensuring efficiency in the organizational financial management system.

The scope of financial management involves financial management and economics, financial management and Accounting which includes accounting records like financial information of the business, financial management or mathematics, financial management and production management, financial management and production, financial management and marketing, financial management and human resource. Financial management helps in financial planning in an important aspect of business concern, helps in acquisition of required funds and proper use of funds. It also takes sound financial decision in the business concern. Financial decision will affect the entire operation of the concern because there is a direct relationship with various department functions such as marketing, production, personnel and departments of organizations’ sector including new financial management (Hood, 2001).

Effective performance of the organization requires people to determine their information needs, implementing processes and systems to collect the right data and turning the data into information and insights in the context, financial management comprises of planning, controlling, implementation, and monitoring of budgets policies and activities (Barata and Clain 2000)

In developing countries, budget execution and account processes are done manually and supported by very old and inadequately appreciated. The complexity of financial management landscape, the problems of lack of strong leadership and political support, staff shortages, training and retention, poor reward systems and lack of public financial management infrastructure mean that the issues are more acutely felt in developing countries and emerging economies (Dr. Bouasy Lovauxay, 2009).

For over years, there has been an introduction of the Integrated Financial Management System (IFM’s) as one of the most common financial management practice aimed at promoting efficiency effectiveness, accountability, transparency, security of data management and comprehensive financial reporting. In July 2009, the International Federation of Accountants (IFAC), G20 summit in London, and the World Bank emphasized the need to develop and strengthen the finance profession in developing countries to achieve stable and stronger financial management.

In Uganda, financial management is carried out and covers the core modules of the application namely Budget management, general ledger, purchase order, Accounts payables, accounts receivables, cash management and financial reporting. The software package is essentially accrued based and provides a facility to allow the generation of cash based year ended financial statements to meet the audit requirements. Integrated financial management system (IFMs) implementation was motivated by the Ugandan Organization’s desire to improve efficiency in budget preparation and since 2003, the IFMs has been extended across all 22 ministries and central organization agencies. This implementation of IFMs has enabled the organization address many of fiduciary issues faced prior to 2003 (Lawrence Ssemakula and Robert Muwanga, 2012).

According to Parasuraman, (2008), organizational performance is determined by numerous factors and some of them are determined by the quality of the workforce that an organization has , he further recommends that organizations must pay keen interest to employees to enable them be productive to increase on organizational performance. Organizational better performance reduces costs increase out put which helps the organization to reduce on its over head costs, however the technological advancement in different areas has enabled organization to be able to improve on the better performance of their organization and reduce costs, ((James & Roberts, 1997).

Organizational performance is in most cases affected by challenges of technology and competition in the modern world , however in most cases there most of the organization donot take technology as a key component of organizational development and improved performance, (Chaffey, 2010).

National Water and Sewerage Cooperation (NWSC) stands out a model utility in the African region because of its exemplary achievements. The water coverage is estimated at 78% which translates in 3.8 million people served in gazetted urban town country wide.

Financial management in National Water and Sewerage Cooperation has been administered through tariffs set by the minister of water, land and environment based on proposals made by NWSC. Its internal audits promote effective and efficient use of resources and ensure application of the corporations systems of internal control. The NWSC Act requires the board to prepare financial statements for each financial year using suitable policies and the board must state the accounting standards that have to be followed and maintained for effective financial management (Dr. William. T. Muhairwe MD NWSC, 2003).

NWSC is currently carrying out strategic plans which are a guide to continued improved financial management, financial sustainability and risk management. A good risk management plan should contain a schedule for control implementation and responsible persons for those Actions (Edward, 2005). These strategic plans are anchored on four strategic themes namely Revenue growth, cost optimization, asset management and efficient and stakeholder management.

1.2 Statement of the problem

For organizations to gain competitive advantage over their competitors, they have to ensure that financial management is correctly formulated carried out and well understood at all levels of the organizations. It allows management to maintain proper standards of the bank loans to avoid unnecessary risks and correctly assess the opportunities for business development (stoner and Nzotta 2004). Financial management is a prerequisite for organizations stability and continuing profitability. However despite the financial management carried out, performance among organizations remains low characterized with delays on collection of cash from debtors, increase in bad debts, low Labour turnover, affects customer relations and low profitability. Profitability is the measure of the overall performance and success of an organization. The test of profitability focuses on measuring the adequacy of income by comparing it with one or more primary activities that are measured in a financial statement (Sheffrin, 2003). National water and sewerage Corporation has been performing well for the last three years , there is an increase in its new profitability for the years of 2013/2014 was UGX 9.2 billion  this can be attributed to good financial management practices , the study will therefore undertake to establish the impact of financial management on the performance of an organization.

1.3 Purpose of the study.

The purpose of the study will be to examine the impact of financial management on performance of an organization.

1.4 Research objectives

1. To examine the different components of financial management used by organizations.
2. To investigate the impact of financial management on organizational performance.
3. To discuss the indicators and measures of performance in organizations.

1.5 Research Questions

1. What are the different components of financial management used by organizations?
2. What is the impact of financial management on organizational performance?
3. What are the indicators and measures of performance in organizations?

1.6 Scope of the study

The scope of the study will include the content scope, geographical coverage and time coverage as may be seen below;

1.6.1 Geographical scope

The study will be conducted in Kampala at National Water and Sewerage Cooperation located on plot 39, Jinja Road, P.O Box 7053 Kampala.

1.6.2 Content Scope

The study will be focused generally on examining the financial management and performance of organizations. Specifically the different components of financial management, the users objectives and functions of financial management and the indicators and measures of performance in an organization.

1.6.3 Time scope

The study will be carried out between February 2017 to August 2017. The period of data to be considered will be between 2012 and 2017. The period of body of knowledge will be longitudinal in nature from 2000 up to-date 2017.

1.7 Significance of the study

The study will help various organizations to identify their areas of weaknesses as far as credit management is concerned.

The organizations will also use the findings of this study as ground to negotiate appropriate financial management that will not constrain their performance.

The study will also add to the existing literature on financial management and performance of organizations.

Like any other research, the findings will be used as a reference as far as further studies are concerned and spark off further research in financial management and performance of the organization.

DEFINITION OF KEY TERMS

FINANCIAL MANAGEMENT

Financial management refers to the process of managing financial resources, including management decisions concerning accounting and financial reporting, forecasting, and budgeting, as well as capital budgeting decisions, which include decisions whether to lease or buy, and whether to issue debt or equity (Lightbody, 2000). Financial management framework comprises the processes, systems, internal controls and practices relating to the way the department manages its revenues, expenses, assets, liabilities and contingencies. It also includes its systems for managing risk and monitoring its financial and operational performance, including budget performance and reporting on these functions, both internally and externally.

Organizational performance refers to how well an organization achieves its market-oriented goals as well as its financial goals. Organizational performance means attainment of ultimate objectives of the organization as set out in the strategic plan. In general the concept of organizational performance is based upon the idea that an organization is the voluntary association of productive assets including human, physical and capital resources for the purpose of achieving a shared purpose (Barney 2001).

Gitman (2007) defines financial management as the area of business management, devoted to a judicious use of capital and a careful selection of sources of capital, in order to enable an organization to move in the direction of reaching its goals. This definition points to certain essential aspects of financial management namely prudent or rational use of capital resource and achieving the goal of the firm.

According to Oduware (2011), financial management entails planning for the future of a business enterprise to ensure a positive cash flow. Financial management involves planning, organizing, directing and controlling the financial activities such as the procurement and the utilization of funds of the enterprise. From an organizational point of view, the process of financial management is associated with financial planning and financial control.

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter presents what other scholars have written about financial management in relation to performance and it’s arranged in accordance to the objectives of the study which are the key components of financial management, users’ objectives and functions of financial management and key indicators of performance.

2.1 Financial management overview

2.1.1 Financial management

Financial management refers to the process of managing financial resources, including management decisions concerning accounting and financial reporting, forecasting, and budgeting, as well as capital budgeting decisions, which include decisions whether to lease or buy, and whether to issue debt or equity (Lightbody, 2000). Financial management framework comprises the processes, systems, internal controls and practices relating to the way the department manages its revenues, expenses, assets, liabilities and contingencies. It also includes its systems for managing risk and monitoring its financial and operational performance, including budget performance and reporting on these functions, both internally and externally.

Gitman (2007) defines financial management as the area of business management, devoted to a judicious use of capital and a careful selection of sources of capital, in order to enable an organization to move in the direction of reaching its goals. This definition points to certain essential aspects of financial management namely prudent or rational use of capital resource and achieving the goal of the firm.

According to Oduware (2011), financial management entails planning for the future of a business enterprise to ensure a positive cash flow. Financial management involves planning, organizing, directing and controlling the financial activities such as the procurement and the utilization of funds of the enterprise. From an organizational point of view, the process of financial management is associated with financial planning and financial control. Financial planning seeks to quantify various financial resources available and plan the size and timing of expenditures. This study will specifically focus on annual budget process, internal control, financial reporting and tracking and how they affect organizational performance.

Financial management resonates with the management of finance of the organizations to achieve its present objectives (Cod Jia, 2012). Commercial businesses are the most common organization structures in place. Financial management in business entails the financial planning, financial control and financial decision making. Financial planning is identified with making sure that enough business funding is available at the time of need. This is the planning of money to invest in stocks, pay the salaries and wages, pay the house rents and fund the sales made on credit (Mc Namara 2012).

2.1.2 Organizational Performance

Organizational performance can be judged by many different constituencies, resulting in many different interpretations of successful performance. Each of these perspectives of organizational performance can be argued to be unique. Further, each organization has a unique set of circumstances, making performance measurement inherently situational (Cameron & Whetton, 2001). Performance outcomes result from success or market position achieved (Gitman, 2007).

Organizational performance refers to how well an organization achieves its market-oriented goals as well as its financial goals. Organizational performance means attainment of ultimate objectives of the organization as set out in the strategic plan. In general the concept of organizational performance is based upon the idea that an organization is the voluntary association of productive assets including human, physical and capital resources for the purpose of achieving a shared purpose (Barney 2001).

Specifically, performance measurement and control systems are the formal information-based routines and procedures managers use to maintain or alter patterns in organizational activities (Simmons, 2000). A typical performance measurement helps businesses in periodically setting business goals and then providing feedback to managers on progress towards these goals. The time horizon for these goals can typically be about a year or less for long term goals (Simmons, 2000).

Dorothy (2009) indicated that numerous measures of corporate performance could be used as dependent variables. However, more important than a specific measure chosen is the use of multiple measures, because different criteria of performance are likely to be differentially affected by the various independent variables. Efficiency relates to how well resources are used to achieve a goal while effectiveness focuses on the appropriateness of the goals chosen. Since performance is a reflection of an organization’s goals and strategic objectives, performance measures have to be tailored to the conditions and needs of the firm. Conceptually therefore, organizational performance has been viewed as the comparison of the value created by a firm, measured through the three general elements (efficiency, effectiveness & relevance) of organizational performance, with the value the owners expect to receive from the firm (Chen & Dodd, 2001). Performance in this study will be measured by employee turnover rate, enrolment and retention of students, timeliness of client service, customer satisfaction index and success as compared to industry averages.

2.2 Components of financial management used by an organization

Taking a commercial business as the most common organizational structure the key objectives of financial management would be to, to create wealth for the business, generate cash and provide an adequate return on investment bearing in mind the risk that the business is taking and the resources invested.

Financial planning in the organization; Management need to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit. In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions (Brigham, 2002).

According to chartered institute dictionary of business and management (2003) financial planning is the estimation of objectives and the formulation, evaluation and selection of policies, strategies, tactics and action required to achieve them. It comprises of short term rearing plan and long term /strategic planning. According to ICS A Management accounting, to compete effectively in today’s competitive market, organizations must continually redesign their products with the result that production lifecycles have become much shorter. The planning, development and design of a product is therefore critical to the organization’s cost and financial management process.

According to ICS A Management accounting (2003) there basically two basic approaches to cost reduction as part of ensuring that there is enough funding at the right time to meet the needs of the business. The two approaches include crash programmes to cut spending level. If an organization is having problems with its profitability or cash flow the management might decide on an immediate programme to reduce spending to a minimum. Some current projects may be abandoned, capital expenditures, capital expenditures deferred, employees made redundant or new recruitment stopped and so on. The absence of careful planning might give such crash programmes the characteristics of panic measures and authoritarian dictatorship from the top management. Cost reduction measures may be too little or too late or misdirected. Poor planned crash programmes to reduce costs might result in decisions which seriously reduce operational efficiency -without the effects being immediately noticeable. The decisions may be the firm to reduce the size of its internal auditing or organization and methods sections might cut off staff costs in the short term but increase costs in the long term.

There can be use of planned programmes to reduce the costs, many companies tend to introduce crash programmes for cost reduction in times of crisis and ignore the problem completely of the organization’s entire products, senders and internal administration. The accountant will normally be involved when compiling reports on the costs and providing cost benefit analysis of the cost reduction schemes themselves, however the author only considered management accountants ignoring the importance of a financial management accountant who does budgeting and financial reporting (Tamari, 2000).

2.2.1 Different ways of financial planning in an organization.

Analyzing of organizational budget, A budget is a set of interlinked plans that quantitatively describe an entity’s projected future operations. A budget is used as a yardstick against which to measure actual operating results, for the allocation of funding, and as a plan for future operations. The budgeting process typically begins with a strategy planning session by senior management. The management team then applies the agreed strategic direction to a series of plans that roll up into a master budget. The plans include a budget, production, direct materials budget, direct labor budget, manufacturing overhead budget, sales and administrative budget, and fixed assets budget. All of these plans roll up into the master budget, which contains a budgeted income statement, balance sheet, and cash forecast. There may also be a financing budget in which is itemized the debt and equity structure needed to ensure that the cash requirements of the budget can be met, (woods, 2006).

Consultation with top management, top management has the responsibility of determining both the future and the present needs of the organization, management is a process of planning, organizing, leading & controlling the efforts of organizational members by using all other organizational resources to achieve stated organizational goals.

Analyzing user needs in an organization, End user initiate procurement and disposal requirement, According to PPDA ACT 2003 end user are part of the PDE they have the powers to; initiate procurement and disposal requirement hence this will make suppliers supply what is needed by end users leading to procurement effectiveness .According to lysons (2003) procurement should ensure that items/ services provided by suppliers meet the requirements and expectations of the end users.

Procurement planning is essential in financial planning ,  According to procurement news (2005) it was reported that were procurement planning is inadequate; it has resulted in short comings of poor procurements made. Sakire & Unit (2006) in their analysis of the public procurement procedures in Turkey singled out more specifically that the first step as an important activity of procurement planning or procurement law is determination of needs. Therefore procurement planning has to be done after knowing needs of end-user. Law is determination of needs. And that procurement carried out under appropriate conditions and timely manner leads to efficiently use of resources. LGDP reports and guidelines (2001 to 2005) also support the above view. Never the less procurement planning does not only involve needs determination or what to procure.

Organizational invoices, When end user certify invoice for payment it helps to promote transparency and value for money is achieved this will therefore promote procurement effectiveness According to World Bank (2004) it spells out that, “A public procurement process can be said to be well functioning if it achieves the objectives of Transparency competition, economic development by ensuring elimination of corruption.

Customer needs and expectations are essential in determination of organizations financial needs both in the present and the future, means understanding the customer’s needs and wants and identifying ways to meet or excel them. Customers are satisfied when they receive the total product they desire at a price they can afford and accept (Noor and Radford, 1995). The level of customer satisfaction is the result of a customer’s comparison of expected customer service quality with perceived service quality (Ossel, 1998). A customer will be satisfied if the perceived overall service level meets his or her expectations. If an organization fails to do, this, and customers have other means of satisfying their needs, the customers will migrate and the firm will fail. Customer service will also lead to Customer satisfaction leads to customer loyalty, which is crucial for long term profitably (Noor and Radford, 1995).

Financial control of assets; This is also one of the key elements to the process of financial management. Financial control is a critically important activity to help the business ensure that the business is rree::r.g its objectives. Financial control addresses questions like, are assets being used efficiently?, are the businesses assets secure, whether management act in the best interest of shareholders and in accordance with the business rules (Scott, 2002).

The concept of financial control is the heart of financial management (Alin, de Boer, Freer, Ginneken, Waasen, Mbane, Mokoette, Moyniham, Odera, Swain, Tajuddin and Tewodrors (2006). Financial control ensures that the finances of an organization are well handled. Without financial control assets are at risk, funds may not be spent in accordance with the organization’s objectives or donors’ wishes and the competence of managers and the integrity of the organization may be called into question (Alin et al 2006).

Financial control is achieved by designing systems and procedures to suit the particular needs of an organization (Alin et al 2006). For the purpose of financial control and accountability of organizations, it is vital that an overall financial policy be put in place. The policy should include individual policies pertaining to the donors, income and the operation of bank accounts.

The concept of “financial control” forms the core of financial management. Financial control is a state that ensures that the finances of an organization are handled properly. Without financial control, assets are put in jeopardy; funds may not be spent in accordance with the organization’s objectives. Financial control is achieved by designing systems and procedures to suit the particular needs of an organization (Hendrickse, 2008).

2.2.2 Types of financial controls

Petty Cash, Petty cash is a small amount of cash on hand that is used for paying small amounts owed, rather than writing a check. Petty cash is also referred to as a petty cash fund. The person responsible for the petty cash is known as the petty cash custodian. When the cash in the petty cash fund is low, the petty cash custodian requests a check to be cashed in order to replenish the cash that has been paid out, (Woods, 2006).

Bank Reconciliation, This is an important process for any organisation to go through to ensure that the amount in the bank account agrees with what you expect there to be, A Bank reconciliation is a process that explains the difference between the bank balance shown in an organization’s bank statement, as supplied by the bank, and the corresponding amount shown in the organization’s own [accounting] records at a particular point in time. Such differences may occur, for example, because a cheque or a list of cheques issued by the organization has not been presented to the bank, a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the organization’s books, or either the bank or the organization itself has made an error. (carl, 2010).

Cash Income, If you receive lots of cash there are risks that not all of it will be deposited in the bank therefore controls need to be put in place over who counts, banks and records it

Bank Mandate, You need effective controls over who has authority to make payments of the bank account, the level of authority and rules over cheque signatories.

Expenditure Authorisation, You need to ensure that people have sufficient authorisation to spend the organisations resources. Expenditure incurred in formative and launch stages of a firm, such as startupcosts, attorney’s fees, incorporation or registration charges

Salaries, this can be a significant area of fraud without strong financial controls in place over new staff, leavers, and changes to salaries and who calculates and pays the salaries, when an organization is to manage its finances very well then the salary of the employees has to be given priority.

Financial decision making among members; This is another key element to the process of financial management. The key aspects of financial decision making relate to investment, financing and dividends. Investments must be financed in some way -however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers. A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profit further (Altman, (2008).

According to chartered institute dictionary of business and management (2003) decision making is the process of choosing between alternative course of action, decision making can take place at an individual or organizational level. The process involves establishing objectives, setting criteria for the decision and selecting the best option.

According to ICS A Management accounting (2000) decision making situations involves limiting factor, the CIMA official terminology as “any thing which limits the activity of an entity”. An entity seeks to optimize the benefit it obtains from the limiting factor and it may change time to/time for the same entity, thus when raw materials are in short supply , performance can be expressed in terms of per kilo of material. An organization may be faced. Just one limiting factor but there might also be several scarce resources, with two or more of them putting an effective limit on the level of activity that can be achieved.

According to ICSA Management accounting (2000)  shut down problems involve decisions about the following; Whether or not to close down to a factory, department, production line or other activity, either because it is making losses or because it’s too expensive to run. If the decision is to shut down, the closure should be permanent or temporary. In practice shut down decision will involve longer term considerations and capital expenditures and revenues. A shut down should result in savings in annual operating costs for a number of years into the future. Closure will probably release unwanted fixed assets for sale, some assets might have a small scrap value but other assets in particular property might have a substantial sale value. Employees affected by the closure must be made redundant or re-located, perhaps after retraining or else offered early retirement .there will be lump sum payments involved which must be taken into account in the financial arithmetic. However for shut down problems to be simplified into short run decisions by making either of the following assumptions, fixed assets sales and redundancy costs would be negligible, income from fixed asset sales would match redundancy and so these capital items would be self canceling. In such circumstances the financial aspect of shut down decisions would be based on short run relevant costs.

Record keeping and financial Analysis of data; Book keeping and financial analysis in organizations has been a challenge over the years. Majority never keep records of their operations. This indicates that responsibility in the organizations is highly compromised. Record keeping is critical for the financial management of organization. The business income and transactions are computed to indicate a detailed financial health of the organization. This essential considering that proper records enable easy financial management models and expansion of business (Amram, 2005). This is mostly essential in looking back at what has not worked (CodJia, 2005). Repeat of mistakes is discouraged and encourage a culture of saving money.

Business records acts as a plat form of references organizations can enhance businesses record keeping by making sure that day to day operations are recorded down. Records on accounting, permits, applications, contract documents, insurance policies, certificates of membership, addresses and names of all the stakeholders, operating agreement laws among others documents (Henke, 2006). Proper documentation ensures that the company is always on track. Success in financial management in organizations relates to keeping track of the sales, proceeds and turnover of the organization (Taylor, 2012).

Proper book keeping enhances financial statements, business analysis, monitoring of cash flow and enabling tax returns. Financial statements in the business financial management are crucial in the auditing of books. Records enhance business by constantly checking the finance health status of the business (Mc Namara, 2012). This is crucial in identifying the sectors that make more cash the others, losses are identified in time and corrected hence protecting the business from a possible collapse.

2.3 Users, objectives and functions of financial management

2.3.1 Users of financial management

Creditors or lenders uses the accounting information to find out the ability of the borrower to repay the loan, the amount of assets and liabilities of the borrower, evidence of income, economic position etc. before he or she lend the money to the economic entity, (mack, 2003)

Investors are the capital providers of a business. Before investing, an investor sees the financial report for figuring out the possibilities of the business in future. Financial information is important for an investor for making sure that the investment is secure, (Areman, 2005).

Investment analysts are an important user group – specifically for companies quoted on a stock exchange. They require very detailed financial and other information in order to analyse the competitive performance of a business and its sector. Much of this is provided by the detailed accounting disclosures that are required by the London Stock Exchange. However, additional accounting information is usually provided to analysts via formal company briefings and interviews, (Riley, 2015).

2.3.2 Objectives of financial management

Wealth maximization; The financial management has come a long way by shifting its forces from traditional approach to modern approach. The modern approach focuses on wealth maximization rather than profit maximization. In wealth maximization, major emphasis is on cash flow rather than profit so, to evaluate various alternatives for decision making cash flows are taken under consideration. For example, to measure the worth of a project, criteria like “present value of its cash inflow – present value of cash out flows” (net present value ) is taken . This approach considers cash flows rather than profits into consideration and also use discounting technique to find out worth of project. thus maximization of wealth approach believes  that money has time value .Brealey and Myers 2003 , Brigham and Ehrhard 2002 , Mayer , MC Guigan and Krethow 2003 Jensen 2001 forcefully argue that maximizing the market value of the firm provides the most purposeful , single –valued objective function which is necessary .

Profit maximization; Profit maximization is the main aim of any business and therefore it is also an objective of financial management. Profit maximization in financial management represents the process of the approach which profits of the business are increased. in simple words , all the decisions whether   investment , financing or dividend  etc are focused to maximize the profits to optimum levels .profit maximization is the traditional approach and it implies that every decisions relating to business is evaluated in the light of profits . All the decisions with respects to new projects, acquisition of assets, raising capital, distributing dividends etc are studied for the impact on profits and profitability. The present analysis suggests that the choice setting is significantly diminished social categories. In these cases, individuals self –categories themselves in terms of their social category membership (Hogg 2000).

Dividend Decision, Dividend decision is concerned with the amount of profits to be distributed and retained in the firm. Dividend: The term ‘dividend’ relates to the portion of profit, which is distributed to shareholders, of the company. It is a reward or compensation to them for their investment made in the firm.

The dividend can be declared from the current profits or accumulated profits. Which course should be followed dividend or retention, normally, companies distribute certain amount in the form of dividend, in a stable manner, to meet the expectations of shareholders and balance is retained within the organization for expansion. If dividend is not distributed, there would be great dissatisfaction to the shareholders. Non-declaration of dividend affects the market price of equity shares, severely. One significant element in the dividend decision is, therefore, the dividend payout ratio i.e. what proportion of dividend is to be paid to the shareholders. The dividend decision depends on the preference of the equity shareholders and investment opportunities, available within the firm. A higher rate of dividend, beyond the market expectations, increases the market price of shares. However, it leaves a small amount in the form of retained earnings for expansion. The business that reinvests less will tend to grow slower, (Kemp and Dunbar 2003).

Liquidity Decision, Liquidity decision is concerned with the management of current assets. Basically, this is Working Capital Management. Working Capital Management is concerned with the management of current assets. It is concerned with short-term survival. Short term-survival is a prerequisite for long-term survival.  When more funds are tied up in current assets, the firm would enjoy greater liquidity. In consequence, the firm would not experience any difficulty in making payment of debts, as and when they fall due. With excess liquidity, there would be no default in payments. So, there would be no threat of insolvency for failure of payments. However, funds have economic cost, (Kruger 2005).

Increasing Profitability: Profitability is necessary for every organization. The planning and control functions of finance aim at increasing profitability of the firm. To achieve profitability, the cost of funds should be low. Idle funds do not yield any return, but incur cost. So, the organization should avoid idle funds. Finance function also requires matching of cost and returns of funds. If funds are used efficiently, profitability gets a boost, (Simon and Hatherly 2003).

Proper Utilization of Funds; Raising funds is important, more than that is its proper utilization. If proper utilization of funds were not made, there would be no revenue generation. Benefits should always exceed cost of funds so that the organization can be profitable. Beneficial projects only are to be undertaken. So, it is all the more necessary that careful planning and cost-benefit analysis should be made before the actual commencement of projects, it is therefore imperative for proper utilization of funds.

Long-term Investment Decisions: The long-term capital decisions are referred to as capital budgeting decisions, which relate to fixed assets. The fixed assets are long term, in nature.

Basically, fixed assets create earnings to the firm. They give benefit in future. It is difficult to

measure the benefits as future is uncertain. The investment decision is important not only for setting up new units but also for expansion of existing units. Decisions related to them are, generally, irreversible. Often, reversal of decisions results in substantial loss. When a brand new car is sold, even after a day of its purchase, still, buyer treats the vehicle as a second-hand car. The transaction, invariably, results in heavy loss for a short period of owning. So, the finance manager has to evaluate profitability of every investment proposal, carefully, before funds are committed to them. (Nigro 2003)

Short-term Investment Decisions: The short-term investment decisions are, generally, referred as working capital management. The finance manger has to allocate among cash and cash equivalents, receivables and inventories. Though these current assets do not, directly, contribute to the earnings, their existence is necessary for proper, efficient and optimum utilisation of fixed assets.

Finance Decision, Once investment decision is made, the next step is how to raise finance for the concerned investment. Finance decision is concerned with the mix or composition of the sources of raising the funds required by the firm. In other words, it is related to the pattern of financing. In finance decision, the finance manager is required to determine the proportion of equity and debt, which is known as capital structure. There are two main sources of funds, shareholders’ funds (variable in the form of dividend) and borrowed funds (fixed interestbearing), (Fitzgerald 2002).

Financial control should be aimed at determining whether the planned course has become a reality and whether any adaptations are needed. Critical observation, assessment and corrective action should form an important cornerstone of school financial control. The following four steps in the school financial control process are important (Van Deventer and Kruger 2005)

Borrowed funds are to be paid interest, irrespective of the profitability of the firm. Interest has to be paid, even if the firm incurs loss and this permanent obligation is not there with the funds raised from the shareholders. The borrowed funds are relatively cheaper compared to shareholders’ funds, however they carry risk. This risk is known as financial risk i.e. Risk of insolvency due to non-payment of interest or non-repayment of borrowed capital.

On the other hand, the shareholders’ funds are permanent source to the firm. The Shareholders’ funds could be from equity shareholders or preference shareholders. Equity share capital is not repayable and does not have fixed commitment in the form of dividend. However, preference shares, (Van Deventer and Kruger 2005).

2.3.3 Functions of financial management

Fiscal management and expenditure control; Financial management has a responsibility to improve operational controls and workflow. Financial managers often review information from several divisions or departments within their company. The focus of this review process ensures company employees are operating within standard company guidelines. Financial managers can make suggestions to business owners for improving the company controls and business operations.  Managing planning and budgeting systems for revenues and expenditure envelopes. Establishing systems for preparing, reviewing and consolidating medium-term financial plans and budgets. Their presentation to Parliament. Implementation and monitoring of authorized policies and amendments thereto (Otley, 2005).

Provide Decisive Information; Business owners often require financial or accounting information when making business decisions. One objective of financial management is to provide business owners and other individuals with information for making business decisions. Information must be useful, relevant and accurate. Financial managers are usually an intermediary between the business owner and other operational managers. This saves the business owner time and effort from wading through extensive information with no relation to the decision at hand. In other wards more optimal resource allocation decisions to achieve clearly articulated public policy objectives through enhanced identification of the costs and benefits of alternative expenditure decisions. Planning and prioritizing investments and their funding. Establishing and managing systems for identifying policy priorities, cost and benefits of decision alternatives, presenting information and implementing monitoring and reporting on outcomes (Oliga, 2002).

Risk Management; Risk management is often a primary objective for financial management functions in larger business organizations. Risk management ensures companies do not face undue pressure or risk from various financial situations. Financial rooms can result from business opportunities providing inadequate financial returns, debt financing with unfavorable loan terms, lack of available business credit and unstable financial investments. Financial managers often spend copious amounts of time reviewing their company’s financial activities to ensure the least amount of risk is absorbed by the company (Most 2007).

Risk management is an essential component of strategic management of an organization. It is an ongoing process  of risk management through different tools and methods which identify all possible risks, determine which risks are critical to solve as soon as possible and then execute strategies to deal with these risks (Tariqullah and Habib, 2001). Current risk management system based on the Basel Accord has consequently appeared as an attempt to protect banking systems all around the world from the effects of financial crises and structures it by using a set of rules which allows for systematic risk management (Makwiramiti, 2008).

An efficient and effective risk management boosts the performance of an organization. The past financial crises uncovered shortcomings in the performance and risk management practice taking on excessive risk with too little regard for long run performance (Sitanta, 2011)

Transparency and accountability; Recording, accounting for, analyzing and reporting on the financial transactions, assets and liabilities of organization. This is important for two purposes: as a basis for external accountability, and so that management has accurate, timely and relevant sources of information with which to manage its resources. In fact financial management supports the company’s accounting department. Financial managers do not usually complete everyday accounting functions. They typically review the information from the accounting department and review this information for accuracy and validity. Corrective measures or suggestions can be made to improve the company’s accounting information. Accounting information plays an important role in small business. Business owners often use accounting information to secure external financing from banks, lenders and investors (Weston & Brigham, 2001).

Reduction in the levels of corruption and leakages; Protecting and enhancing the rights of organization to receive money or money’s worth. This entails the management of both income flows and assets (eg. forests, fishery resources) so that the organization and the country as a whole receive as much benefit from them as possible. Controlling expenditure and the exercise of financial authority. This is to ensure that transactions involving finance or with important financial implications (particularly matters such as contracts and procurement where large sums are at stake which may be vulnerable to manipulation) are correctly undertaken by reference to laws, regulations, applicable management guidelines and established controls (Stevens.  2003).

Carrying out the necessary financial business of organization: organization has bills to settle, staff to pay and revenue to collect. This aspect of financial management is often forgotten. It is of paramount importance because of the need to conduct efficiently the everyday financial business of organization. Ensuring organization’s financial reputation among customers, investors etc. The terms on which an organization conducts its financial business with the outside world depends upon its standing. Thus the cost and availability of funds to organization depend on the organization’s reputation. Good financial management can enhance an organization’s reputation and therefore improve the terms on which funds are available (Stevens. 2003).

Enhanced resource mobilization; Managing the collection of domestic revenues and other receipts to ensure that the highest feasible level of collection is attained within the legislative framework. Provide information to identify the most effective domestic revenue mobilization policies. Managing the receipt of external resources, including loans and official development assistance, through proper procedures and controls which comply with requirements of lenders and donors (Evanson, 2007).

Technical efficiency in an organization; Ensuring that expenditures and other resources are applied to the maximum advantage of organization, i.e. ensuring that resources are properly utilized with regard to efficiency and effectiveness. Directing resources out of lower into high priority uses, involving analysis of costs, actions to achieve higher productivity by changing the cost-mix, and the transfer of resources to places where they are most needed (Taylor 2000).

Effective liquidity management of inflows and outflows; Anticipating the liquidity needs of organization and planning for and deploying surpluses. This is to achieve maximum use of liquid funds which are temporarily available and which can be invested in short-term markets, without endangering the funding of normal operations (Singh & Whittington, 2008).

2.4 Indicators and measures of performance in organization

Measuring and analyzing organizational performance plays an important role in turning organizational goals to reality. The performance is usually measured by estimating the values of qualitative and quantitative performance indicators (e.g., profit, number of clients, costs). It is essential for a company to determine the relevant indicators, how they relate to the formulated company goals and how they depend on the performed activities. Nowadays many managers recognize this and put conscious effort in defining company-specific goals, performance indicators and evaluate them. However in practice such analysis is usually done in an informal, ad-hoc way and will benefit from a more systematic approach (Benner and Tushman. (2003).

The first step towards an improvement in this area is to make explicit the available knowledge on performance indicators and how they are related. In order to use this knowledge in a modern framework for organization modeling it is necessary to formalize the concept of a performance indicator together with its characteristics, relationships to other performance indicators and relations to other formalized concepts such as goals, processes and roles. This will not only contribute to the design and analysis of organizations and the evaluation of their performance but will also enable reuse, exchange and alignment of knowledge and activities between organizations (for example supply chains) (Garengo and Biazzo 2005).

Many companies have implemented tools for measuring their performance in order to stay in business and come in contact with tough competition. Organizations must face not only to more demanding conditions but in the current period to the world financial crisis as well. Due  to these reasons, the organizations are forced to measure performance of the organization and contribute to the stability of the organization in today´s competitive environment. Organizations try to measure performance according to the financial drivers but in the recent period top leaders attempted to find new performance indicators which would take the “wind from sail” to their rivals in the market (Skibniewski. & Ghosh, 2009).

One of these competitive advantages is human capital. As the Tootell et al. (2009) stated “since 1980s there has been an increasing emphasis on the importance of HR measurement.” Yeung and Berman (1997) declared that “HR measures should be impact rather than activity orientated, forward looking than backward looking, and should focus on the entire HR system not just on individual practices.”

Key performance indicators are assigned to each perspective in strategy map and lately KPIs on HR level became significant benchmark in the entrepreneurial sector. Bean and Gerathy (2003) presented that according to their experience; KPIs are valid and effective when applied in a consistent and comprehensive manner. Further, they declare that financial performance must be respected as the critical measure of the success for every business but financial KPIs are closely related set of operational metrics i.e. on HR level, too.

Bauer (2005) stated that once KPIs have been indentified, defined and formalized, Financial, Customer, Internal/Business Process, Learning and Growth, Return of Capital Employed, Customer Loyalty, on – time delivery, Process Quality Process Cycle Time and Employee Skills.

Business leaders may feel that KPI battle is won. Where possible, KPI targets must be based on concrete data and non-manipulative formulas. Griffin (2004) pointed out that there should be a direct link from KPIs to goals, from goals to objectives and from objectives to strategies.

Skibniewski and Ghosh (2009) defined that all KPIs should impact a business decision in some time scale, depending on the window of time available. That makes the decision process difficult from the decisions made under no time constraint. Organizations should identify areas of business processes that are the most critical to the financial success of the organization.

Further, KPIs can be divided into lagging and leading. Kaplan and Norton (2007) explained the difference between them. Leading indicator is a metric that mainly refers to future developments and drivers/causes. Lagging indicator is a metric that mainly refers to past developments and effects/results, e.g. reflects history and outcomes of certain actions and processes.

Bauer (2004) emphasized that one of the key concerns during implementation of KPIs is the ability to differentiate more important strategy-driven metrics from the plain vanilla metrics.

Selection of the wrong metrics for KPIs can significantly damage or even submarine a performance management initiative. Eckerson (2007) in his paper claimed that metrics are powerful force that can drive change in an organization – but only if the right metrics are developed and applied. The wrong metrics can wreak havoc on an organization processes and demoralize employees.  Hursman (2010) defined next five criteria for effective KPIs: Specific, Measurable, Attainable, Relevant and Time bound

“S-M-A-R-T” is a fine way to spell KPIs, as this is a solid framework for making decisions about KPI selection. Anderson (2011) quoted Weller in his paper who presents the importance of KPIs uniquely: “If you don´t measure and benchmark, you won´t know how you are doing now, which areas of your process need the most attention, and how well your changes are working down the road.”

Hursman (2010) briefly characterized a process about establishing KPIs: Determine your corporate goals. Identify metrics to grade progress against those goals. Capture actual data for those metrics. Jam metrics into scorecards. Jam scorecards down throats of employees. Cronin (2007) declared other important issue regarding the KPIs. KPIs, both financial and non-financial, are critical element of effective communication of a company´s progress towards its goals. Choosing relevant KPIs requires thinking to be aligned with the strategies and objectives; once this is done, the choice of measures of success is often obvious one. Further Cronin (2007) said that it is inappropriate to specify how many KPIs company should have – but his experience suggests that there is a key for most organizations between four and ten measures.

Harvey (2000) confirmed that no matter which KPIs are used, they should mirror the business strategy and be reformulated periodically to adapt to the changing entrepreneurial environment. The priority for organizations is to use KPIs in a business context at all times, to measure customer and service margins, make effective business decisions and offer exciting customer propositions to drive business forwarding and leading were based on the impact.

Maximizing shareholder wealth; The primary objective of a profit seeking organization is to maximize shareholder wealth. This is based on the argument that shareholders are the legal owners of a company and so their interest should be priotized. Share holders are generally concerned with current earnings, future earnings, dividend policy and relative risk of the investment. Griffin (2004) pointed out that indicator to goals, from goals to objectives and from objectives to strategies. Therefore shareholders use the legal owners of an organization should follow that link.

Growth and survival. The objective of wealth maximization is usually expanded into three sub categories that is to say; to make profits to continue in existence (survival). Survival is the ultimate measure of success of the business. Without survival then obviously there will be no fulfillment of other objectives. In order to survival in the long term successful business, a business must be financially. And to maintain growth and development. Growth is generally seen as a sign of success; provide it results in improvement of financial performance. Growth can be identified in a number of ways both financial and non financial. Financial growth is recognized in form of profitability Revenue, return on investment and cash flow. The objective associated with financial management directs to creation of wealth for the business, generation of costs and provision of Return on investment. Non-financially, growth is recognized is recognized in form of market share, number of employees and number of products (Amran 2005).

Profitability; Profits are when the firm maximizes gains as it maximizes costs. According to Pandy 2001, the following concepts of profits are noted that is to say, gross profit which refers to the differences between sales and cost of goods. Operating profit (OP) which refers to difference between gross profits and operating expenses. Profit before taxes (PBT) which refers to differences between profit before interest (PBI) and taxes and interest charged, PBT = (PBIT-INT) and profit after taxes (PAT) or net profit (NP) which refers to differences between profit before tax and taxes (NP=PBT-Tax) (pandey, 2001).

According to Pandey, profit maximization is the competitive market conditions and profit is considered as the most appropriate measure of a firm’s performance (Pandey 2001). The measures and indicators  of profits include;

Gross Profit Margin (GPM)

The GPM gives the value of gross profit earned by an organization over sale. It also refers to a financial metric used to asses a firms financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source of paying additional expenses and future savings (.Peavler 2001)

Cost of GPM = sales –goods sold

Sales

A high GPM is a sign of good management

Operating Profit Margin (OPM)

The operating profit margin gives the business owner a lot of important information about the firms profitability. Particularly with regard to cost control. It shows how much cash is thrown off after most of the expenses are met. A high operating profit margin means that the company has good cost control and that sales are increasing faster than costs which is the optimal situations of the company. Operating profit will be a lot than the gross profit since selling administrative and other expenses are a long with the cost of goods sold. Peavler the operating profit margin formula is calculated simply using

Operating profit margin =Operating Income

Total Revenue.

Whereby;

Operating Income = Gross Profit –Operating Expenses

Return on Equity

Return on Equity measures the rate of return on the ownership interest share holder’s equity of the common stock owner. it measures the firm’s efficiency of generating profits from every unit of share holder’s equity  also know as net assets or assets minus liabilities  return on Equity between 5% and 20% are considered desirable . The amount of net income returned as a percentage of share holder’s equity.

Return on equity measures a corporations profitability by revealing how much profit a company generates with the money share holders have invested

Return on equity = Net income

Share holder’s equity

Return on assets

It tells how the assets of the firm are used most effectively to earn profits. Return on assets is an indicator of how profitable a company is before leverage, and is compared with companies in the same industry. Since the figure of the total assets of the company depends on the carrying value of the assets, some caution is required for companies whose carrying value may not correspond to the actual market value.

Return on assets is a common figure used for comparing performance of organizations because the majority of their assets will have a carrying value that is closed to their, actual market value. Return on assets is not useful for comparisons between industries because of factors of scale and peculiar capital requirements (such as reserve requirements in the insurance and banking industries (Philip Kefler, 2005)

The mathematical formula for return on assets is .

Return assets =Net income

Total assets

Profitability can also be established depending on the costs of operation in the organization. While it is usually unclear that revenue each customer generated. It is often clear that all what costs the firm incurred serving each customer. Activity based costing can sometimes be used to help determine the cost associated with each customer or customer group. For components of cost not directly related to serving customers. The calculations of customer profit must use some method to fully allocate these costs to customers if the total of customer profit is to match the operating profit of the firm. If the firm decides not to allocate these non customer profit will be greater than the operating of the firm (Kaplan 2001).

2.4.1 Impact of financial management on performance

Proper financial management is essential in compensation of employees in case of health and any other challenges that an employee might face in the course of his work, Compensation and performance management, Compensation is the money that someone who has experienced a loss or suffering claims for in an organization, the human resource management has the duty to determine the amount of loss an employee has suffered and accordingly determine how much she should be paid.(Thornton, 2008) .

The way an organization compensates its employees determines the level of performance of employees and their output in line with organizational corporate objectives, companies with poor compensation schemes to employees tend to fetch low output in its work force. ( wire et al, 2007).

Protecting of the organizational corporate culture, Human resource practitioners are the keepers of the flame when it comes to corporate culture, team building and change management processes. Growing and adapting to the changing marketplace necessitates that firms pursue significant behavioral shifts from time to time. Sometimes organizations require the outside assistance of change management professionals to help them identify an appropriate strategy when they are attempting to create significant behavioral change, but in the end, culture shift can only be achieved and sustained if it is driven and sponsored effectively internally, (Ashridge, 2008).

Employee involvement and participation, As mentioned earlier, employees are among the key stakeholders for the development of any organizational strategy or program involving employees makes them feel part of the team and an organization which does not include employees in its programm is bound to fail. A critical first step in mission, vision, values and strategy development is to understand the key concerns, priorities and perspectives of all key stakeholders, particularly employees. It is a truism that employees consulted and engaged in the development of new programs and approaches are likelier to follow through with their implementation (Moulden et al , 2007). Often companies consult and engage their employees in the development and delivery of their community involvement, new product development, organizational plans and what is expected of employees this therefore is the one of the major functions of employees so that employees feel part of the organizational future, (Farrington et al 2006)

Workforce planning and recruitment is possible through better financial planning in an organization, Workforce planning consists of analyzing present workforce competencies; identification of competencies needed in the future; comparison of the present workforce to future needs to identify competency gaps and surpluses; the preparation of plans for building the workforce needed in the future; and an evaluation process to assure that the workforce competency model remains valid and that organizational objectives are being met so as there is correlation between the organizational goals and the work done by employees,( lee et al, 2008). Workforce is the most important part of the organization as they are the processers of the products especially in the manufacturing sector, organization like General, motor with clear ways of workforce planning recruitment have seen their quality output reach its been with zero defect,(hand field et al, 2006).

2.5 Conclusion

This chapter reviews various articles related to financial management and performance in an organization. The review has demonstrated the various components of financial management users, objectives and functions of financial management. it also reviews that performance measurement should be an integral part of financial management and should be based on measurement of accountability of means of assessment of effectiveness , efficiency and economy. This emphasizes the interrelationship between financial management and performance measurement .the need to measure performance and a critical element of financial management is emphasized in this chapter. The use of performance indicators should strike a balance between financial and non financial indicators.

The resource based view (RBV) offers critical fundamental insights into why organizations with reliable, rare, immutable and well organized resources may enjoy superior performance. Financial literature suggests optimal application and commitment towards financial management practices result in an increased company’s performance. The financially well managed companies are operational efficient. Most of these studies are done in other countries whose strategic approach and financial footing is different from that of Uganda. This study therefore seeks to fill the gap of focusing on the effects of financial management on performance of organizations.