Business Financing and the Capital Structure

Business Financing and the Capital Structure

Part I

Financial planning

Financial Manager should make planning for company's future. As such, financial manager have to cooperate with managers from different departments in corporate so that feasible whole company strategic planning can be implemented. For example, financial manager make forecast of cash need in future. With the existence of efficient planning, financial manager can estimate company cash requirement in future. The Financial planning process involves the capital structuring,working capital management, capital budgeting and the relationship between risk and return. Financial planning can be short term and long term depending on the goals of the organization.

Working Capital Management

Working capital also known as gross working capital is defined as the short-term investment i.e. in assets like marketable securities, stock, accounts receivables and even cash (these are the four main components of working capital). Other terminologies of working capital include: net working capital which is current assets less current liabilities, net-operating working capital which is current assets less non-interest bearing current liabilities (marketable securities, inventories, cash, and account receivables less accruals and account payables. (Gill,Et.al, 2010).

In analyzing the components of working capital, a common underlying thread can easily be observed in the management of current assets. Current assets are necessary in conducting business, the higher the holding of current assets, the lower the risk of running out of business this means low operating costs. However, it is costly to hold working capital, holding extra large inventories means that the firm's assets are earning zero or even losses in case of high storage and spoilage costs. Usually, firms must generate capital to buy assets (inventories), this is at a cost, thus excessive cash and receivables are risky. Thus, firms strive to keep working capital at minimum where the business is running smoothly.

Financial instruments used as marketable securities

The money market is an integral part of the financial markets more specifically for short-term borrowing with maturity periods not exceeding one year. The type of securities traded in the money market include; T-bills, commercial papers, federal funds, commercial papers, cash deposits, federal funds, short-term mortgage and asset backed securities. The money market offers liquidity for firms. In the United States (as it is in developed countries), participants in the money market include-financial institutions, lenders and borrowers.(Gill,Et. al,2010)

PART II

Capital structure represents the percentage of capital that is financed through equity and debt. Financing through debt and equity both has advantages and disadvantages and the preferable way would be choosing a structure that would maximize the value of the firm. Financing decisions would also depend on the tradeoff between the risks and return that the company is willing to take. Capital structure includes financing through debt, preferred stock and common stock. The amount of debt that is used to finance is called leverage and the firms with no debt are called unlevered firms. Corporations should choose an optimal structure that would maximize the value of the firm.(Itenberga,2013)

Equity capital is the money that is put in by the shareholders by ...