How Much Debt Is Right for Your Company?
Since after the FM’s financial stimulus package, Business man will have to undergo a complete transformation Financial Budget. Since the choice left with business man is either to increase the debt or infuse the equity for the operations. Now it’s time to tread this path more cautiously. Since the forecasting of sales will be inaccurate and more volatile. If a future sales forecast is slightly lower than the actual, this could lead to a huge discrepancy between actual and budgeted cash flow, which will have a significant effect on a firm’s future operating ability. The company has to take right infuse right amount of debt or equity for long term survival.
Companies will have to observe the balance sheet and profit and loss more accurately. No company will be able to take more pressure of increasing debt and yet at the same time face the risk of not able to restart their working operations effectively.
The question of how much is right debt becomes more pertinent and important. Companies will need to find the right capital structure mix to fulfill the strategic goals of the business and managing the working capital effectively.
Establishing sound debt & equity infusion plan policy:
During the course of business we sometimes forget the importance of financial planning and forget the distress it can cause to the future of business. Before going further we need to ascertain good, bad and worse scenarios of working capital and capital budgeting decision as per the required business growth of the company and ascertain financial requirements.
Below is proprietary tool of our company which is established. This is used by PDS Global Company CFO’s Ravi Jain, who heads the finance and treasury function of 600 US Million conglomerate a textile based company in HongKong.
The next 5 questions will determine the soundness of financial plan
- Find out current operations and cash conversion cycle of the company. Where do we stand as company in terms of financial reading of balance sheet?
- Can business model of the company be changed for managing the operations of the company?
- Assess the current debt capacity of the firms in current position & post debt capacity of the firm in good and bad situations of the firm so we don’t face any solvency issues
- Can the funds needed during the next five years be raised in a manner consistent with the target capital structure
- What is the company’s real financing requirements? How much additional money will it have to raise during the next three to five months and in next 1 to 2 years to carry out its portfolio of product-market strategies?
The easy accessible Debt at lower rate of interest ever than before will make entrepreneurs to plunge in vicious circle. They make it also to shrug off external factors and pressures. However debt always comes at cost i.e. repayment. So it’s advisable to consult, take proper advices & doing the financial planning more rigorously.
Conclusion:
The financial-planning teams will inevitably begin to establish a range of new capabilities within the finance function—for instance, rapid planning and forecasting; cross-functional collaborations; and dynamic dashboards, KPIs, and triggers. In the next normal, companies should consider ways to build on these capabilities and embed them into day-to-day forecasting and performance-management processes.
They may want to shift permanently to shorter financial planning cycles, more frequent review of KPIs, or the use of zero-based budgeting models. New dashboard in every function of business needs to be established and will become new normal to take effective decisions and faster.
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