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Importance of Capital Structure Planning

Capital structure planning is very important to survive the business in long run. After simple watching  the balance sheet of company, you see two sides of balance sheet. One side is liability side and other side is asset side. Liability side is the mixture of finance of company which company has collected from internal and external sources and it has been used or will be used for development of company.

Liability side of balance sheet is made under perfect capital structure planning. Finance manager and other promoters decides which source of fund or funds should be selected after monitoring the factors affecting capital structures. So, capital structure planning  makes strong balance sheet. The right capital structure planning also increases the power of company to face the losses and changes in financial markets. Following points shows the importance of capital structure and its planning.




1. To reduce the overall risk of company

When we make capital structure before actual getting money from money supplier, we can do many adjustments for reducing our overall risk. Suppose, we have made capital structure in which we add three sources of fund, one is equity share, and other is debenture and last is pref. shares. Because we know that we have to pay debt at its maturity at any cost and its interest at fixed rate. So, we try to get minimum debt in new business because in new business our rate of return will be less than rate of interest and for getting more loan means taking high risk of return more amount of interest even there is no profit.

But, if our business will be succeeded, at that time, we can increase estimated amount of debt by just changing the value of debt in capital structure (written just for planning) in excel sheet. We can easily pay the interest because our ROI is very high. At that, time company can enjoy the trading on equity. But finance manager should also careful watch whether shareholders are more expected regarding dividend or not. Because high expectation will also against the development of our company.

2. To do adjustment according to Business Environment

Company also adjusts different sources expected amount according to business environment. Suppose in future, if government of India cuts off his relation with China, from where our company is getting fund, it will definitely tough for us to get more money from China. But proper planning of capital structure of future sources will be helpful for us to enlarge our area for getting money. In finance, it is called maneuverability. It means to create mobility of sources of fund by including maximum alternatives in planned capital structure. Suppose, if RBI increases the interest rate, it means your cost for getting debt will be high, at that time, you can choose any other cheap source of fund.

3. Idea generation of new source of fund

Good planning of capital structure will make versatile to finance manager for getting money from new sources. If you have studied Wikipedia’s page of venture capital  or private equity sources, you would precisely understand that how finance managers of company are generating new and new idea for getting money from public at low risk. Promoters or managers do 10 minutes meeting with investors and motivate them by showing the special event which they have made in PPT.

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Accounting Education: Importance of Capital Structure Planning
Importance of Capital Structure Planning
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Accounting Education
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