Capital structure refers to the portfolio of different sources of capital employed by a business. It is the mix of capital. It is the portfolio of liabilities of business. It is the structure of long term liabilities of a business. Short term liabilities being fluctuating type, for structure analysis, which is some what long term in nature, are not considered for capital structure analysis. There is another concept viz., financial structure which studies the structure of whole of the liabilities of business including both short term and long term capital. In final analysis, capital structure analysis is considered with the equity and debt composition of capital of a business. The capital structure for a business should be planned. The debt-equity Continue reading
Financial Management
Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow, including the administration and maintenance of financial assets. The primary concern of financial management is the assessment rather than the techniques of financial quantification. Some experts refer to financial management as the science of money management. The five basic components of the Financial Management Framework are: Planning and Analysis, Asset and Liability Management, Reporting, Transaction Processing and Control.
Features of a Sound Capital Structure
Capital structure is a business finance term that describes ‘the proportion of a company’s capital, or operating money, which is obtained through debt and equity or hybrid securities’. Debt consists of loans and other types of credit that is to be repaid in the future, usually with interest. Equity involves ownership interest in a corporation in the form of common stock or preferred stock. Equity financing does not involve a direct obligation to repay the funds which is in contrast to debt financing. Instead, equity investors are able to exercise some degree of control over the company as they become part-owners and partners in the business. The goal of a company’s capital structure decision is to maximize the gains for Continue reading
Financial Accounting and Management Accounting – Similarities and Differences
Financial accounting and management accounting play an important part in accounting information system. They co-exist in enterprise production and operation of management, constituting the modern enterprise accounting system together. Much information which management accounting required is from financial accounting, while financial accounting also put the established budget, standards organizations, and such daily accounting data from management accounting as the basic premise. Management accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be “future looking” and have forecasting value to those within the company. Main function of management accounting in the enterprise is to establish a variety of internal accounting Continue reading
Basics of Cash Management – Cash Management Functions
Cash management is one of the key areas of working capital management. Cash is the most liquid current assets. Cash is the common denominator to which all current assets can be reduced because the other major liquid assets, i.e. receivable and inventory get eventually converted into cash. This underlines the importance of cash management. Read More: The Concept of Cash Management The term “Cash” with reference to management of cash is used in two ways. In a narrow sense cash refers to coins, currency, cheques, drafts and deposits in banks. The broader view of cash includes near cash assets such as marketable securities and time deposits in banks. The reason why these near cash assets are included in cash is Continue reading
Impact of Inflation on Working Capital Requirement
The term inflation refers to rise in general (on an average basis) price level of goods and services in the economy, i.e., fall in purchasing power of money. Working Capital is the money used to make goods and attract sales. During the period of rising prices, a firm needs more funds to finance working capital. Hence, it should be planned properly. Not under-standing the impact of inflation on working capital has been the cause of many business failures. Cost of financing the working capital rises because of increase in interest rates. Cash should never be allowed to remain idle (Time eats value of money, i.e., on one hand the company suffers loss of interest and on the other purchasing power Continue reading
Inefficient Working Capital Management
Working capital management is an important component of management of corporate finance; since it directly influences firm’s profitability as well as liquidity in everyday activities. In any business organization, it is obvious that there must be sufficient working capital to run day to day operation. Therefore, to operate the business activities smoothly, working capital of firm’s must be sufficient. Then, the concern of working capital management is setting sufficient (optimal level) of working capital and managing short term assets and liabilities of firms within a specified period of time, usually one year. It is obvious that, the importance of efficient working capital management is unquestionable to all business activities. Because, business capability relies on its ability to effectively use (manage) Continue reading