Question

1. Financial management is important for small businesses to develop and expand successfully. To become successful, small business owners must understand the financial structure of the business how to plan for profit.
A. Describe in detail a firm's financial structure.
B. Discuss the steps for profit planning.

Answer 1

A. Capital structure refers to the mix of a company's capitalisation. That is a
a mix of long term sources of funds such as debentures,
preference share capital, equity share capital and retained
earnings. It is for meeting the total capital requirement.

While choosing
a suitable Capital structure various factors need to be taken into consideration like cost, risk,
control, flexibility and other considerations like nature of
industry, competition in the industry etc.

The decision in relation to the financing of firms assets is very crucial in every business. The financial manager is often in a dilemma to choose the optimum portion of debt and equity.

Importance of optimal capital structure is
1. Value maximization of the company.
2. Cost minimization.
3. Growth of the company increases.
4. Increase in the share price.

B. Steps for profit planning.
1. Established profit goals.
2. Estimate the expected sales volume and sales price to get the revenue.
3. Estimate all the expenses including cost of goods sold, interest expenses taxes etc.
4. Determine the profit as per the estimations.
5. Look for the variance or gap, try to fill the gap through alternative strategies.