Friday , October 19 2018

Bonus shares or cash?

“It doesn’t matter how you came up with the idea, the important thing is where you will apply it,” Linda Moore.

In the budget departments of major companies, especially during the annual financial audit, the management boards of such companies decide on profit distribution as they determine the percentage and whether it will be in cash or what is known as bonus shares.

Some companies settle for distribution of profit in cash, whereas others distribute bonus shares. This process is determined through conformity of the financial management and accountants in the company in the sense that the current situation of the company is taken into consideration. In this article, I will focus on bonus shares in a bid to determine if this distribution is better than settling for cash distribution.

In brief, bonus shares are distributed by a company to its shareholders as fully paid shares free of charge and it is usually based on the number of shares that shareholders own.

This means the issuance of bonus shares increases the total number of shares owned but it does not change the value of the company. To put it into perspective, issuing bonus shares is the same as making smaller slices of the same pie – the total size of the pie does not change no matter how many slices you make.

In my humble opinion, avoiding the issuance of bonus shares has a positive impact on the financial status of the company in all aspects, even in the long run.  This is due to the fact that maintaining the value of the capital gives more weight to the share, in addition to increasing its value – assuming that the company is successful. Distribution of profits in cash will not affect the financial status of the company and it will make the stakeholders happier.

Nonetheless, the distribution of profits in cash should be based on rational projection that benefits the stakeholder and does not affect the company’s budget or financial status, which is the most important.

Focus should be on earning assets with financial flow which should be incorporated in the overall plan and avoid spending it, because it is the main pillar that the company stands on and from where it obtains financial security.

Therefore, it is preferable to have a technical financial sector which manages such assets separately from the executive management and it should be directly under the company’s board.

The objective of this measure is to distance the company’s valuable ‘pearl’ from the executive management’s plans and strategies. This is in addition to excluding it from profit and loss considerations, as well as investing earnings of such assets in the form of bank deposits or spending them on low-risk bonds among other reserved solutions.

For a company to sustain its success, it needs a prudent financial management with a high standard of performance in executing its mandate and handling assets professionally. This management needs to preserve the financial status of the company and provide financial solutions for any problem or emergency crisis. This is the proper mixture of financial and risk management. For such management structure to exist, there should be an administration board characterized with integrity at work and protects the welfare of the company in balancing its budget and earnings, as well as proper management of its capital assets.

Twitter@alzmi1969

By Yousef Awadh Al-Azmi

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