Question

What is a financial policy, how does it differ from a financial procedure?  What is the board’s responsibility in terms of financial structure? What are the areas for board pursuit in terms of finances?

Answer 1

Starting point of any organization is money and end point of any organization is also money. Hence policy maker need to be very aware for preparation of financial policy.

Financial Policy: -In simple language Policy that govern financial related major decisions called financial policy. This policy includes regulation, monitoring and supervision of inflow and outflow of funds.

Major areas covered in financial policy

1. Source of Finance
2. Capital Structure
3. Dividend decision
4. Authority on financial decision
5. Responsibility for financial decision
6. Asset management
7. Security and Insurance
8. Budget

Financial Procedure:-Financial procedure elaborates and answers how to initiate process and complete finance related transaction. Simply it answers of question of member of organization who wants to do financial transaction.

For example:-

1. Who is authorized to do any type of transaction?
2. Which document should be used?
3. How to record the transaction?
4. What is budgetary limit?

And many more question answered by a good financial procedure.

Difference between financial policy and financial procedure are as under:-

1. Policy shows how to regulate financial transaction whereas procedure shows how to perform.
2. Policy shows vide area of limitation whereas procedure related with day to day routine transactions.

Financial Structure: - Financial structure indicates structure of long term and short term finance. This structure includes debt/equity also. It is board responsibility to take care of following issues to decide financial structure:-

1. Tax rules and regulation
2. Dividend decision
3. Interest rates and principal payments

Other

Area to pursuit by board:-

1. Wealth maximization
2. Proper payout to finance providers
3. Follow of finance related regulations