Financial Management

Financial Management

Introduction

This paper deals with the financial aspects of an organization, which includes financial statement analysis, modes of financing, concept of beta and types of risk. Regardless of the fact that the business is at large, medium or small scale, the correct usage of these concepts is very essential in order to sustain and grow.

Discussion

This part of the paper incorporates the above mentioned concepts in contrast with small business management, where we will be analyzing it from the prospective of a small business owner. The concepts we will be discussing are financial statement analysis, modes of financing, concept of beta and types of risk.

Comparison of Financial Ratios

Financial Ratios are important for the analysis of financial statements, regardless of the fat that the organization is large or small. However, there are certain ratios which are given high priority in small organizations, and there are certain ratios which are given high priority in large organizations. Financial ratios can be categorized as profitability, liquidity, solvency and investment ratios. If we talk about large firms, investment and solvency are of more importance to them, mainly because they want to maintain a balanced proportion of debt and equity, and also have good returns from the equity side. If we talk about small organizations, they are more interested in asset management ratios and liquidity ratios. This is because at the start, when an organization is small, their main focus is survival; this is why the focus on liquidity and asset management is higher as compared to other financial ratios

Advantages and disadvantages of debt financing

Opting for debt or equity financing depends on a lot of factors including the size of the organization, federal tax laws in the country in which it is operating, the nature of business and overall debt market of the country. The advantages of debt financing includes having total control over the business decisions and if the business is financed by using debt financing, then the interest payable on the loan is tax deductable. This phenomenon is also known as debt tax shield, which allows organizations to save on tax liability every year. Another advantage of debt financing is that profits are not shared with the debt holders. Considering the example we were discussing in the previous section, it is easier for small businesses to acquire loan on comparatively favorable conditions, by the help of micro-financing. However, if we look at the other side of the coin, there are few disadvantages of debt financing as well. One of the major disadvantages include large loan payments, which have to comply with stringent time durations. If a small business, which has acquired debt finance, and fails to repay loan payments on time, then this would harm its credit ratings a lot. The risk of bankruptcy is also associated with this type of financing, where the more you acquire finance from debt, the higher is risk of bankruptcy.

Preference of equity financing over debt financing by organization

If we consider the situation at hand, that why a firm would ...