Business Financing and the Capital Structure - Research Paper Example

Concept of working capital management Working capital management is fundamentally described as a managerial technique to preserve the financial health of a company in repaying its short-term debts and simultaneously, sufficing the need for short-term operating expenses. Advantages of working capital management can be viewed in terms of increased earnings of a company. Contradictorily, the conceptual framework is often criticised to offer only short-term financial planning assistances to the users.

Notably, working-capital ratio and inventory-turnover ratio can be regarded as the two vital instruments to assess the viability of working capital management strategies applied by a company (Rehn, 2012). Financial instruments that are used as marketable securities to park excess cash Marketable securities are mostly favored by investors owing to their high liquidity benefits. In this regard, Treasury bills, commercial papers, bankers’ acceptances and other forms of government bonds as well as common stocks can be noted as the financial instruments used as marketable securities by investors to park excess cash (Chudson, 1945).

Question 2 Selection of equities and debts to raise business capital depend on diverse factors, which mainly include the micro-economic performance of the economy and the liquidity position along with the risk taking ability of the company. Equities raise the liability of the company to repay investors, but only if the total liabilities of the company are accounted to be inferior to the assets held, i.e. when profit is obtained. Another advantage of using equities is that the interests paid by the company to its equity shareholders are accounted as an organizational expense, which further allows a certain percentage of tax leverage to the company.

However, concerning the shareholders’ interests to invest in equities, various factors can be identified as disruptive (Komaromi, 2006). For instance, the purchase decision of equities often depends on the probability of business earning profits, and hence, investors tend to purchase equities when businesses are at their growth stage. Again, current fluctuations may also be identified to impose significant effects on the investors’ behavior towards purchasing equities. Concerning the current market scenario in the US, fluctuations can be apparently observed in the equities market, owing to its macro-economic volatility (Reuters, 2013).

Therefore, a company must ensure its growth phase as well as preserve good liquidity position to market its equities and obtain adequate capital. On the other hand, debts do not involve uncertainty on the basis of investors’ decisions and behaviors. Therefore, businesses may not be required to ensure a growth phase while obtaining debts through short-term or long-term modes. It is worth mentioning in this context that although a business need not face the risk of uncertainty in capital allocation, it might require ensuring healthy liquidity ratio (Komaromi, 2006).

Additionally, interest rate fluctuations observed in the current performance of the US may also have a negative implication for a company to opt for fund raising through debts. To be precise, the interest rates in the US are observed currently as rising and are further expected to rise in the near future, which might increase liabilities of the company deciding upon raising funds through debts (Conerly, 2013). Apparently, both the fund raising options have certain