Business Financing and the Capital Structure

The process of financial planning is used to estimate asset investment requirements for a corporation and involves a number of steps. One such step is the need for a projection of financial statements, where profit and loss accounts, as well as the balance sheets of the company, are prepared. The manager is able to estimate the investment requirements for the corporation after this since he will be able to interpret the financial statements (Horngren et al., 2010). Another important step is the need for the finance manager to draw up a plan based on the time factor, and once the projections have been done. Once the availability of funds has been estimated, a company is likely to have a steady flow of funds; hence, reducing money borrowing and in turn saving on the interest charges. This helps in future planning, and in ensuring a continuous flow of funds. Proper financial planning also calls for effective control systems to be put in place. Working capital management entails the management of cash, accounts payable, accounts receivable, and inventories. It ensures that there is continuity of operations in a company and that the company has the ability to cater to its forthcoming short-term debts and expenses (Bachrach, 2000). Financial instruments are legal documents used to represent some form of monetary value. These can either be virtual or real. They represent ownership of an asset and can be classified as equity-based. When there is a reduction in the funding instruments, the excess funds are accumulated in marketable securities. There are different subcategories of financial instruments, for example, share equity and common share equity (Bachrach, 2000).

As a financial advisor, I would advise my client to go for the equity option as a form of raising business capital. This option is better than debt financing in that it does not require any investment repayment, and there is no interest charged as is the case with debt financing. With equity financing, therefore, a business is able to save a lot of funds that can later be used to run other errands (McLaney, 2009). Additionally, equity financing promotes good decision-making since the agreements made are worthwhile. However, in debt financing, the said loans could have unfavorable agreements that could result in bad decision making, and that could be unfavorable for the business owner (Horngren et al., 2010).

A business may decide to seek capital from foreign investors because this mode of acquiring capital is quite advantageous and has some rewards. Some of the advantages of this option are that technology is shared and the companies get a chance to expand their businesses globally, job markets in both countries are promoted, there will be an increased demand and supply from and to the other countries. One major risk involved is that the company that attracts foreign investment may entirely become dependent. There is also a possible risk of inflation and if a company is not competitive enough, it may suffer severe losses (McLaney, 2009).

When dealing with common stocks a businessperson buys stock shares that grant him partial ownership to a company. An increase in the potential return further increases the risk. Corporate bonds are when investors make loans to companies. People who hold bonds do not have a share in the company’s profits. One major risk with the bonds is that the payments made may not be complete, or maybe made late; hence, shareholders expect to receive more returns rather than risks (McLaney, 2009).

Diversification entails investing in more than one investment. It helps in risk reduction because some investments are likely to be profitable depending on the existing market situations. When one makes a single investment, there might be the risk of losses within that one investment. Diversification entails a well-balanced portfolio whereby one makes different investments such as in form of cash, real estate, and bonds. With this, risks are greatly reduced since the possibility of all the investments failing is minimal (McLaney, 2009).

References

Bachrach, B. (2000). Values-Based Financial Planning: The Art of Creating and Inspiring Financial Strategy. Stamford: Aim High Publishing.

Horngren, C.,Sundem, G., Elliott, J. & Philbrick, D. (2010). Introduction to Financial Accounting. NY: Pearson Pub.

McLaney, E. (2009). Business Finance: Theory and Practice. NY: Prentice Hall.

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