Capital Financing Financial Planning and Working Capital

Capital Financing

Financial planning and working capital management are two processes that enable capital financing in business. Financial planning uses projections and calculations to determine investment requirements where working capital management enables flexibility in business cash flow that meets the needs of the business. Marketable securities are good sources to park cash and enable that cash to raise capital to meet future business needs. It is important to consider appropriate diversity mixes in portfolios to reduce risk and raise profitability with investments.

Financial planning involves forecasting expenses, sales, and profits (Petty, 2013). Forecasting is a guessing game, but can be closer to appropriate figures when based on historical figures that show growth trends. It can also be based on market conditions for new businesses. The next step is to calculate the costs of goods sold, interest expense, and taxes on the forecasted figures. This will show a forecasted profit. A break even analysis would then need to be made to determine the amount of inventory needed to break even. The specific needs of the venture will determine is initial requirements.

Working capital management is simply managing cash to inventory to accounts receivable and back to cash. The size of an appropriate cash reservoir is determined by the volume of sales and regularity of cash inflows and outflows. The cash flows of a business should contain an appropriate flexibility and show a certain amount of liquidity. The net working capital the cash difference in current assets minus current liabilities (Rao, 2009). It determines the profitability and risk of the business. The amount of risk is determined by the profitability of insolvency. The portion of current assets financed by current liabilities and long-term funds can limit risk with the appropriate financing mix.

Marketable securities include commercial paper, municipal bonds, treasury bills, variable rate preferred stock, and mutual funds. Commercial paper is high risk, unsecured, short-term debt instruments where corporations with high quality credit ratings finance inventory, accounts receivables, and short-term liabilities. Municipal bonds are debt instruments issued from federal, state, and local governments and are considered low risk. Treasury bills, often called T-bills, are short-term debt obligations backed by the U.S. government. They are sold in terms that range from a few days up to 52 weeks at a discount and redeemed at face value. Treasury bills are considered low risk. Variable rate preferred stock pays a dividend at variable rates from time to time and are considered high risk. Mutual funds are a diversified mixture of low risk and high risk investments and can be considered high risk.

Portfolio diversity is especially important to minimize risk involved in investments. Asset allocation is investing money into different asset categories (Beginner's Guide to Asset Allocation, Diversification, and Rebalancing, n.d.). The best allocation at a given time depends on the time horizon, expected time needed to invest to reach a specified goal. The principal concern with the low risk category is inflation risks. High risk categories involve risk in market conditions that can move the different categories up or depress them. The greater risk involved with an asset, the greater return, but should be balanced with low risk categories to reduce portfolio risks. Diversification needs to be between and within asset categories to be adequate at a given time. For example, it is necessary to have more than one stock from various companies where one stock pays at this times and other stock pays at other times. It is also necessary to have a mix of, for example, bonds and stocks. Where the stocks are high risk, the bonds are low risk, but with a proper combination, the bonds offset any losses from the stock by reducing the overall risk. The portfolio needs to be rebalanced on regular time intervals to ensure the overall portfolio stays within alignment of goals.