Business Financing and the Capital Structure - Assignment Example

The total cost of each resource has to be determined and summarized. On the basis of the summarized reports of cost of resources, a budget will be prepared by the finance and accounts department which would help the organization to determine next course of action (Summers, 2011, pp.2-11). Working Capital Management Proper working capital management is necessary to carry out day to day business operations. It is defined as the difference between current assets and liabilities. Thus, the objective of working capital management is to maintain a balance between current assets and liabilities.

Positive difference or surplus funds can be used to make planned expenses such as payment of short term obligations and salaries. The working capital is negative or deficit when the current liabilities exceed current assets that would require the firms to borrow short term funds in order to manage the deficit (Ganesan, 2007, pp.1-2). When the working capital is positive, the firm would have surplus short term funds which can be invested in the money market instruments. The maturity of money market instruments are less than one year and hence investment in money market is less risky.

This is because, the status of any business can be more or less accurately predicted in short term whereas the same becomes uncertain as the maturity increases due to increased chances of borrower to default. Some important money market financial instruments are discussed as follows: Commercial papers (CP) – They are issues by highly rated corporate entities and classified as short term unsecured promissory notes issued at discount and redeemed at face value. Certificate of Deposit (CD) – It is similar to ordinary time deposit differing only in maturity period and interest rates.

They are issued by banks and the interest rates are generally higher than savings deposit rates. Municipal notes – Short term financial security issued by municipality in expectation of tax receipts as revenues. Treasury bills – They are debt instruments issued by the government whose maturity ranges from 3 to 12 months. Repurchase agreements – they are short term loans that are arranged by an investor to whom securities would be sold with an agreement to repurchase them back on a future date at pre-determined fixed rate.

Thus, a corporate organization may park their excess generated from efficient working capital management in above discussed financial instruments that are liquid and used as marketable securities. Financial Instruments of Securities Market Every organization invests capital in business to finance its operations and generates goods and services to meet demands and earn profit. As the business expands its operations more funds are required to carry out business objectives. The financial sources may be broadly classified into equity and debt.

Funds can be raised from these sources in the financial securities market. The securities market may be further divided into primary or secondary securities market. In the primary securities market only those securities are issued that are participating in securities market for first time and the process is known as IPO (Initial Public offering). The secondary market is a place for traders who buy or sell differ securities.