What should financial managers consider when determining the dividend policy?

When determining the dividend policy, financial managers must consider the company's surplus and cash flow. This is crucial because generating sufficient cash flow ensures that a company can meet its operational needs and obligations while also having the capacity to distribute dividends to shareholders. A company's surplus indicates the profits available for distribution, but without adequate cash flow, even a profitable company may struggle to pay dividends.

Ensuring that the company can support its dividend policy without jeopardizing operational liquidity is essential. This means analyzing not just the current profits, but also future cash flow projections and any potential investments or economic challenges. A strong surplus combined with healthy cash flow allows for a balanced approach to distributing earnings while maintaining the reinvestment needed for growth.

Other factors, such as market competition and tax implications, do influence financial decisions but are secondary to the core requirement of ensuring that dividends are sustainable based on adequate cash reserves and profitability. Employee welfare may play a role in broader corporate social responsibility initiatives but is typically less relevant in the direct formulation of dividend policy.