What is your Capital Structure Make up A company in course of charting out its financial schema has to take into account two things. 1) The amount of capital to be raised. 2) Make-up of the capital. Decisions regarding the composition or capitalization are reflected in capital structure. Capital structure of a firm is a combination of debt and equity, which supports long term financing of the firm. The pattern of capital structure has to be planned very carefully by the finance manager in such a way that it minimizes the cost of capital and maximizes value of stocks, thus protecting the interest of the share holders. What is the right capital mix?  There needs to be a right mix of different securities in total cpaitalisation that facilitates control, flexibility and maneuverability. From a broad perspective, following are the three fundamental ways in which the schema of capital structure is finalized: Financing purely or exclusively by equity Financing by equity and preferred stock Financing by equity, preferred stocks and bonds. Which of the above most suits a firm depends on multifarious internal and external factors within which a firm operates. Equity: A firm can raise substantially large amount of fund by issuing different types of shares. The money thus raised is a permanent source of resource and without any obligation to refund to the respective owners. Small and growing companies go for equity fund raising as no banks or other financial institutions are prepared to fund these firms in lieu of poor credit worthiness. Even big corporate firms opt for issuing equities when there is a need to raise large sums. But smaller firms, whose major share of capital comprises of common stock, have to be careful, in that, some large concerns might become interested in controlling these stocks.   Picture Courtesy : GrowthFunders The one big advantage of equity shareholders is that they are free to trade the shares in the market. They can sell the shares to anybody at any time and if the market warrants, at a higher price. One has really nothing to lose, if he is planning to invest in equities. On the other hand, if the company goes bankrupt, the share holders stand a chance to receive only the residual amount, after the creditors’ claims are cleared and satisfied. What’s in it for Investors? Debt: Debt has a maturity date upon which the stipulated sum of principal is repaid. It places the burden of obligation on the shoulders of the company in the form of periodical interest settlements and principal repayments. Creditors can go for legal action if the company defaults in payment of the assured sum on the specific date. That’s why companies think twice before they go for issuing debentures and other bonds. One good thing for the company is that, it can avail tax rebate on the securities of debt, but at the other end it has to satisfy the interest payments and factorise the cost of capital. Cost and Control Principles Cost principle supports induction of additional doses of debt, but it might prove risky, if the company is not able to service the additional debt. Control principle supports the issue of bonds in order to tighten the rein of ownership, but maneuverability principle discounts this and favors issue of common stock to reduce the interest burden. Four factors are important in the purview of the finance manager, cost, risk, control and timing. He should be able to evolve a pattern that satisfactorily brings a compromise among these conflicting factors, which are then assigned weights in the wake of economic and industrial...

What forms the Basis for your Investment Decisions? Profit seeking is the ultimate aim of corporate management and the finance manager acts as the anchor point of the management structure. He has to provide specific inputs into the decision-making process, with respect to profitability. Corporate Investment Decisions Cost control What are the Cost Centres? It is the finance manager’s responsibility to have an eagle’s eye on rising costs by continuously monitoring the cost centers of his organization. Production department where there is always a need for additional resources or inflow of funds, should be his first target of contol. Costs are incurred by each and every department of an organization, namely, the production, marketing, personnel and of course finance and accounting. It is a difficult task to control the rising costs. That is the reason why, big corporate companies go for annual budget formulation at the start of the year and reformulates the finance plan by comparing actual with the projected figures. This kind of evaluation helps the firm to fix responsibilities for various centers of operation. Resource Allocation A finance manager is the first person to recognize rising costs for supplies or production, and he can make immediate recommendations to the management to bring back costs under control. While cost control talks about allocating resources to different responsibility centers in the desired proportion, cost reduction focuses on conserving the resources. Cost reduction can be achieved through modifying product and process designs, cutting down throughput time, doubling labor productivity, mass customization, standardistion etc., Pricing Price Fixation It is always a joint venture between marketing and finance departments when it comes to price fixation of products, product lines and services. Pricing decisions are important in that, they affect market demand and the company’s competitive stand in the market. Pricing strategies have to be evolved in the wake of existing competitor strategies and market preference. The demand forecast is the prerequisite factor of the production process and in-depth market analysis and understanding is inevitable on the part of the executives. Future Levels of Profit The finance manager is also responsible for charting out the future levels of profit, based on the relevant data available. He has to consider the current costs, likely increase in costs and likely changes in the ability of the firm to sell its products at the established selling prices. So, it becomes clear that, such market evaluation cannot be periodical, as the market is highly dynamic and has to be done in a day-to-day basis. Before a firm commences a project, its discounted future fund flow and expected profits must be ascertained which will serve as a basis for comparison. Risk versus Return: Investment decisions always are risky as the gestation period of invested funds is very long and not to return immediately. Further, the firm has to calculate the time period in which its initial investment can be recovered and the feasibility of the rate of return on its investment. Fund Management The finance manager is engaged in activities like, mobilization of funds, deployment of funds, and control over the use of funds and also he is to evaluate the risk return trade-off. Profit maximization is the fundamental objective of any organization and the finance manager plays a key role in restructuring the financial philosophy of a firm to take it to greater...

Debtor Management or Receivables Management Profit is directly proportional to the volume of sales, provided all your business transactions are cash based. Is it possible for a manufacturer, wholesaler or retailer to carry on his business without offering credit in this competitive business environment? The answer is a definite “no”, because extension of credit improves your sales and thus your profit. Problems arise only when a firm is not able to recover the debt within the stipulated period of time from the customers. What is receivables management or debtors’ management? It covers two aspects- one, the kind of money that is being invested in debt rotation; second, the risk factor which includes loss of money or the opportunity cost foregone by the organisation. Had these funds not been tied in receivables, the firm would have invested the same elsewhere and earned income thereon. A transaction entirely through cash is definitely a possible option, but whether it is lucrative in the long run must be subject to consideration. When customers are not offered credit, they choose concerns that extend credit facilities and thus you may lose your earlier customers and also exposed to the risk of declining sales proportions. Credit Sales In credit sales, the supplier offers credit for a specific time period, which is an investment from the angle of supplier and largest single source of short term financing from the angle of the customer. The supplier should be able to recover the amount of interest on the credit investment he has made. How? Recovery of debt within the stipulated credit period Taking interest from the customer for the period of delay Volume sales Surplus capital to offset these negative impacts on rotation of funds Proper formulation and execution of credit policies by the finance manager Discipline in collection policy and its execution. Discounts Cash discounts, quantity discounts and trade discounts are offered by many firms to the customers to encourage credit sales, favoring bulk purchases. A firm cannot be expected to survive long by pursuing the policy of cash sales while similar firms can overtake it by adapting to liberal credit policies. The main aspects of receivables management decisions are as follows: Time period of credit Credibility of the customer Cash discounts Trade discounts Learn the basics of the Income Statement, Balance Sheet and Cash Flow Statement and understand how they fit together. Credit Policy Credit policy on one hand stimulates sales and so also its gross earnings, but on the other may be accompanied by added costs, such as: 1) Clerical expenses involved in investigating additional accounts and servicing added volume of receivables, 2) increased bad-debt losses due to credit extension to less credit worthy customers, 3) higher cost of capital. Incremental earnings from increased sales should be matched with incremental costs that arise due to credit terms, to avoid funds being tied up in receivables. In course of time it would deprive you of your profits. The pivotal consideration of your credit policy would be the selection of credit worthy customers or debtors. If your funds become sticky, recovery becomes next to impossible and you need to proceed legally to claim your rights. Properly maintained accounting records and vouchers will stand as a testimony in your favor, in the court of...