Capital structure decision is the most critical and important decision for any business. Choosing an optimal level of the capital mix is a tricky task, mostly done by experienced professionals. Business entities, along with their shareholders, heavily rely upon these decisions. This incorporates how much debt a firm should take and how much equity to offer to the shareholders. Since the decision involves statistics and a detailed analysis of the figures, the decision is not easy. There are numerous advantages your business can have if you hire the best accounting firms in Dubai. Your business can achieve an optimum level of the capital mix, which is better for financial performance. Read this article to learn about the role of accountants in making capital structure decisions.
What is the capital structure?
Capital structure refers to the levels of equity and debt in the capital mix of a company. It is a financing decision for a firm where the levels of debts and equities are chosen. The decision is a critical one since it depends on the current financial performance of the company. A company finds itself in different positions at different times. Opting for a loan or offering equity and how much the percentage should be are the points that fall under a capital structure decision. These decisions are not easy to make, hence requiring top professionals for the task.
Key takeaways of capital structure:
Capital structure is a broad field to understand. It can be understood with detailed attention. Following are some of the key takeaways of capital structure. These points will help you understand the numerous aspects of capital mixing.
- Capital structure is a financing decision where a firm decides how it would finance its overall operations and financial activities.
- A capital mix of a company consists of two aspects; debt and equity.
- Debt is a loan that a firm borrows from creditors like a bank. The amount is interest payable and should be paid back to the lender once the debt period matures.
- Equity is the ownership of the company. Companies offer equity shares to shareholders. The company is bound to pay its shareholders the dividend. Types of equity shares differ depending on the company’s decisions.
- There are certain risks associated with opting for debt financing. Accountants use the matrix of debt-to-equity ratio to measure the risk factors.
Role of accountants in capital structure:
As discussed, the capital structure decision is a critical one and must be made with experienced professionals’ help. Since it requires a detailed analysis of all the financial aspects, it is hard to sort out. Things that are to be covered are financial statements, financial ratios and analyses. Without the help of an experienced financial accounting firm, making a capital structure decision would be difficult. Following are some of the roles of accountants discussed.
1. Financial statements analysis:
To make an optimal capital structure decision, a detailed assessment of all the financial statements is mandatory. A company’s management needs to hire the best accounting firms in Dubai to make the process easy. Financial statement analysis helps the top management decide which financing option to take. A firm can either go for debt financing or equity financing, based on accountants’ decisions.
2. Knowledge of company’s assets:
If you have an accounting firm in place, they will know all your assets and their worth. They also have a record of cash and debt used to acquire these assets. Nothing would be more helpful than a fair record of all the transactions made during a business cycle. Accounting firms make decisions like capital structure and capital budgeting keeping in view the previous and current records.
3. Cash position:
Since an accountant prepares all the financial statements, he will have an idea of all the cash inflows and cash outflows. For any decision to be effective, it must be made in light of all the facts. An accountant is the only knowledgable person who knows all the necessary aspects. Knowing the cash position of a company will enable the accountant to make an informed decision. He can also inform the top management about key financial decisions.
4. Debt-to-equity ratio:
The most important determinant used in capital structure is the ratio of total debt to total equity. It explains the position of a company concerning debt and equity. The ratio tells about the riskiness of a firm’s borrowing practices. How much risk would a company bear if it opts for debt financing? The D/E ratio provides the answer to this question.
An accounting firm is a key player in financial decisions:
Financial decisions are the basis for a company to perform well on financial fronts. These decisions must be made with the help of accounting firms. They know how to play financial games since they have vast experience in the field. For a better financial landscape, companies must hire these professionals.