Business Financing and the Capital Structure

Business Financing and the Capital Structure

Business Financing and the Capital Structure
Businesses have to make many financial decisions that have a direct impact on operations and the ability to successfully compete in the marketplace. Failure to this, there might be a collapse of the business as witnessed in some companies that failed to make appropriate decisions. The success of a business is the goal of every company, and this is why essential decisions have to be made and applied in the business, both by the business managers and employees. This paper, therefore, discusses a number of concepts about business financing and the capital structure. These include financial planning, capital investment, working capital management, financial instruments, and bond securities.
Financial planning is an essential task in determining the requirements of estimating asset investment requirements for a corporation. The finance manager is charged with the responsibility of estimating the financial requirements of the firm. This being the case, therefore, he or she should be able to determine the sources of raising capital, as well as, how judiciously and effectively the funds are put into application in order for repayments to be completed on time. Financial planning involves the process of deciding in advance the action to take in the future. The process entails the approximation of financial resources to be raised looking for the sources of capital, as well as, the securities given for the funds receives and devising policies and guidelines of administering the application of money in the most appropriate means (Chakraborty, 2010). The first step in financial planning is the estimation of capital requirements and a number of factors are used in determining the capital. These include requirement of fixed assets, intangible assets such as copyrights and patents, amount needed for current assets such as bank balances, stocks, and cash, and the cost of establishment and the possible costs to be incurred on the new issue of debentures and shares.
After this is completed, it is essential to determine the forms of sources to be obtained and their proportion. The form in which money is to be sourced that requires decisions include equity, debt, loans from banks, and preference shares. The proportion in which they should be procured needs also to be determined. The projection of financial statements is an essential step in financial planning and these include the balance sheet and profit and loss statements’ projections. The two statements help in establishing the amount of financial resources requirements. Once projections are determined in terms of the production cost, marketing activities, and sales of products, a plan of fund requirement is drawn up based on the time factor. Through this, one can establish whether the funds are to be procures on a long or short term basis (Chakraborty, 2010). A forecast of the availability of funds is crucial after this. A corporate has a steady flow of money, and this implies that if one is able to forecast the amounts appropriately, then the funds to be borrowed may be reduced, therefore, saving on the interest payments. The process of financial planning necessitates for the establishment and maintenance of the control system. However, without sufficient planning, the control system will be ineffective. The control system is essential for effectual utilization of funds. After all this is done, the development of procedures for fundamental plans and how they should be attained is what follows.
The concept of capital management is essential in the business world today. Every company regardless of its size requires working capital in order to operate and achieve its goals and objectives. Therefore, appropriate working capital management is an essential role in the life of a company. Working capital is crucial for maintaining smooth running of a business. There is no company that can become successful without a sufficient amount of capital. Insufficiency of capital may result in insolvency of the firm. Policies on working capital have a significant impact on the profitability of a business and lead to structural health of the company, as well implemented and designed working capital management contributes positively to the establishment of the value and profitability of a firm. A company should maintain equilibrium between its profitability and liquidity. Maximization of profit is a vital objective of every business. In addition, profit is used as a technique for assessing the performance of management. Therefore, the concept of working capital management is crucial for profit maximization. Evaluating the company’s financial statements assists in making appropriate decisions on the strengths and weaknesses of the operations of the firm (Baker and Martin, 2011).
Marketable securities are debt investments and equity that offer a return on investment, as well as, high liquidity. There are certain types of financial instruments that used as marketable securities to park excess cash. This is because the management of cash cannot be isolated from financial instrument. These are classified into financial and non-financial instruments. These include commercial paper, treasury bills, and bank deposits (Margaritis and Psillaki, 2007).
Businesses have different ways of raising capital to commence operations. Some businesses prefer to use both debt and equity as a financing method. These have their advantages and disadvantages that serve as advice for business operators from a financial advisor. The advantage of using debt is that one can purchase business assets and expand the business before earning the necessary funds (aggressive growth strategy). However, the disadvantage is that one has to pay back the loan plus interest. On the other hand, the advantage with equity is that financing does not require repayment and cash flow generated can be used to expand the business (Aggarwal and Kyaw, 2008). However, a disadvantage of using equity is that partial authority of business ownership is given to the investor as compared to when debt is used that gives the operator full ownership.
Many businesses seek capital from investors to start or expand their businesses. The advantage with such investment is that one does not pay back as a loan as ownership is divided and, therefore, only earnings are shared. The cash generated from the business is used to grow the business. However, borrowing from investors has risks as ownership is divided, and if the investor controls so much from the business, he or she might take full ownership and control the business. Sharing of earnings among investors may imply little earnings for the business owner.
Share prices of common stocks highly track corporate earnings. As a result of this, prices for shares of common stocks may vary between zero and infinity over a long term period (baker and Martin, 2011). Corporate bonds have a low rate of risk because in the bankruptcy event, holders of corporate bond have a powerful claim to payments than the holders of common stocks.
Businesses use various types of techniques to reduce risks in a portfolio. Diversification is one of the methods used by businesses despite the fact that it is does not guarantee against loss. It helps in reaching the company’s financial goals while minimizing any business risks involved. Distinct types of investments do better under distinct market conditions. By investing in more than one kind of investment, a business can diversify. This can assist in reducing risk for the overall investment portfolio (Aggarwal and Kyaw, 2008). The more ways a company diversifies, the more likely it is to reduce the risk. An appropriate example would be when a firm has money in one investment, and the investment fails to perform, it makes losses. On the other hand, if the business had funds across varied types of investments it may have a better opportunity of including some of the investments that will perform.

Aggarwal, R., & Kyaw, N. (2008). Internal Capital Networks As A Source Of MNC Competitive Advantage: Evidence From Foreign Subsidiary Capital Structure Decisions. Research in International Business and Finance, 22(3), 409-439.
Baker, H. K., & Martin, G. S. (2011). Capital structure & corporate financing decisions: Theory, evidence, and practice. Hoboken, N.J: John Wiley & Sons.
Chakraborty, I. (2010). Capital Structure In An Emerging Stock Market: The Case Of India. Research in International Business and Finance, 24(3), 295-314.
Margaritis, D., & Psillaki, M. (2007). Capital Structure And Firm Efficiency. Journal of Business Finance & Accounting, 0(0), 175-196.