Importance of the Cash Position of a Company, Essay Example

Importance of the cash position of a company in deciding to create a divided policy

Divided policy is the company’s usual practice adopted by its directors when deciding how large a divided payment to make. Divided policy can be clearly stated, or investors may suppose it from the dividend payments which a company has made in the past, factors which restrict the company’s dividends include such as profitability, liquidity, contractual and legal.

Cash position of a company is essential in deciding dividend policy because the most common type dividends are in the form of cash, such dividends include cash dividend, which is paid in cash to shareholders out of companies current earnings or accumulated profits. Public companies usually pay cash dividends, sometimes a regular cash dividend and an additional cash dividend. A regular cash dividend is paid in cash out of quarterly earnings, while extra cash dividend is paid unrepeated due to the cash position.

Public companies have shares that can be traded on the stock exchange; investors expect a return on their investments in the shape of dividends. This means that if the company did not meet investor’s expectations, the price of a share will go down. Share trade in happens when the company has cash that is in surplus of the company’s need.

A company with temporary excess cash flow expects to share out its surplus cash for the reason that the company wishes to smooth its policy on dividends. Although some companies use temporary excess cash flow, many do not prefer it because dividends are essential tools that market use in valuing the shares of the corporation. When dividends rise because of temporary excess cash and then decrease later on, share price will become unstable, and investors will try to avoid the share of that company.

Cash position therefore, determines the rate at which the company will reward its shareholders depending on the company’s current earning and profitability.