Business financing and capital structure decisions

Business Financing and the Capital Structure

Generally, businesses need to make several financial decisions that have significant direct effects on their operations and success in the increasingly competitive marketplace. However, there are numerous varying options that are available to businesses regardless of the types and sizes. The concept of business financing has emerged as an important aspect in the modern business environment because of the various financial decisions to be made by different firms. The main aim of this concept is to generate enough capital for the business to meet its existing needs in order to promote the growth of the business. In addition to generating capital for the growth of the business, business financing helps firms to meet the recurring financial obligations.

Use of Financial Planning in Estimating a Corporation's Asset Investment Requirements:

Financial planning can be considered as a process that is used to approximate the financial requirements of the business as part of making financial decisions in advance for future operations. During this process, the financial manager should determine various sources for generating capital and the effective use of these finances in advancing the business' operations. As a result, this process may involve the use of several elements including risk management, investing, and asset allocation.

With regards to estimating asset investment requirements for a corporation through the process of financial planning, the financial manager should attempt to lessen the investment in current assets due to the associated costs of financing them (Melicher & Norton, 2011, p.430). Through financial planning, this process incorporates the administration of cash and marketable securities, inventories, and accounts receivables. The financial manager should start with estimating capital requirements through examining the need for fixed assets, determining investment intangible assets, and costs of current assets. This is followed by determining the type of assets to be acquired, their proportion, required funds, and projecting the availability of finances for acquiring these assets. Therefore, estimating asset investment requirements for a corporation through financial planning requires a constant balancing of costs and benefits linked to investment in current and future assets.

Concept of Working Capital Management:

Working capital management is a concept that can be described as the planning and management of a company's level and combination of current assets and funding of these assets. Therefore, this concept can be regarded as a managerial accounting strategy that focuses on obtaining and sustaining efficient levels of current assets, working capital, and current liabilities. This implies that financial managers should determine the necessary quantities of cash, inventories, accounts receivables, and liquid assets to be held by a business at a specific time. This process helps to ensure that a business has enough cash flow to meet its short-term operating expenses and debt obligations.

Marketable Securities:

Debt and equity investments that generate high liquidity and return on investment are basically described as marketable securities. Investment of excess cash in financial instruments used as marketable securities is a procedure geared towards balancing safety need and liquidity for invested funds with the desire to obtain return on the investment. There are several financial instruments used to park excess cash though these instruments may subject a business to probable losses. Some of the most commonly used financial instruments for marketable securities of excess cash include Treasury bills, commercial paper, negotiable CDs, and Eurodollar deposits (Melicher & Norton, 2011, p.446).

Raising Business Capital:

Debt and equity financing are concepts that are commonly used in raising business capital without a proper review and consideration of their meanings. While debt financing is generating money though loans that are usually secured by certain collateral, equity financing is investing the founder's money or raising money from angel investors, venture capital companies, and even the government. In today's economy, a business considering raising business capital through debt financing or equity options should critically examine the costs and benefits of each measure. This will help the business to avoid sticking with debts that cannot be repaid while lessening cost of capital, managing cash flow, and focusing on growth (Coplan, 2009). The other factors for the firm to consider include the stage the business is in, industry regulations for assets, receivables and inventory, amount of repayments, and overall business goals.

In some cases, a business may decide to raise capital from a foreign investor because it's a good portfolio that provides numerous growth opportunities and lessens risks. Seeking capital from a foreign investor is used because of acknowledging the significance of being diversified. This implies that a business seeks to generate capital from a foreign investor to obtain different asset classes since a selected combination of investments minimizes risks and maximizes return (Sharp & Hua, 2004). However, the process of seeking capital from a foreign investor is associated with certain risks and rewards. Some of the major risks of this process include foreign exchange rate risks and political risks while the rewards include minimal economic risk and the likelihood to access top-performing firms with a specific industry.

Relationships between Risk and Return for Common Stocks vs. Corporate Bonds:

Common stocks and corporate bonds are examples of different securities with varying levels of risk and return. While common stocks have the highest investment risks and highest probable returns, corporate bonds have minimal risks and lower potential returns. The historical relationship between risk and return for common stocks vs. corporate bonds is attributed to making the right choice regarding the company to invest in. Generally, common stock holders receive more payment because of better performance. However, in the event of a bankruptcy, these holders have a relatively weak claim to payment than corporate bond holders. Furthermore, common stock holders are the last to be paid in such an incident, which demonstrate the high risk of these financial instruments.

Despite of their differences in risks and returns, these investments require considerable risk aversion measures by the investor. One of the major ways for risk aversion or risk reduction in a portfolio or investment is diversification. Diversification helps in risk reduction in a portfolio through providing exposure to more investment opportunities. The varying investment opportunities in turn enable the investor to lessen risks through maximizing returns. Furthermore, through diversification, an investor can be able to develop a balanced portfolio that minimizes risks and maximize returns.