Question

Do you work for a large firm or know someone who does? How could you find their financing mix? What are some red flags you should be on the lookout for?
-Have you heard of any accounts of workers losing their jobs due to their firm going out of business? Are there any financial or management lessons which could be learned from their failure?
-Do you think there are advantages to issuing more debt? Why or why not?
-If you were to open your very own new business currently what kind of financing mix would you prefer and why?

Answer 1

Financing mix refers to the mix of debt and equity that a company uses to finance it's operation.

This composition directly affects the risk and value of the associated business.

One of my friends work in big IT company as a software engineer. First, we will see the financial statement of the company and try to find the debt - equity ratio of the company.

Uses of Debt- Debt financing is little riskier. It can not meet all debt obligations. There is a possibility of risk of bankruptcy and losing the capital.

Using debt may also reduce the ability to borrow money to finance other projects and thus lead to the lost of opportunities.

This is a big concern so, this could be check first.

- Yes, I heard about the job loss of over 3000 employees in maruti suzuki due to slump in automobile industry. Contracts of temporary workers not renewed due to slowdown while permanent workers have not been impacted.

So, economic slowdown can be a threat for livelihood .

One more major failure of a company i.e. King Fisher.

By the end of March 2008 Company was under the debt of INR 934 cr and net losses continued to widen in the following financial year.

Lessons for management

- Lack of proper delegation

- Brand was grounded that it was not just into one business and trying hands on more than one business.

- The founder was taking care of different business personali without appointing proper CEO and couldn't succeed in doing so.

Every coin has two faces so, there are some advantages and there are some disadvantages of debt financing.

Advantage-

- won't be giving up the ownership of business.

-Tax deduction i.e.classified as a business expenses the principal and interest payment on that debt may be deducted from business income tax.

-Low Interest rates are available.

- Debt financing can save a small business big money.

Some drawbacks are as follows-

- You must repay the lender

-High Rates

-It impacts credit rating of borrowers

-Need Collateral security.

If I am planning to open a new establishment, I will prefer to equity financing

- No obligation to repay the loan.

- There won't be a issue of credit worthiness.

- Will have the opportunity to learn and gain from partners.