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7 FACTOR AFFECTING FINANCING DECISIONS (Class 12th financial management)

7 FACTOR AFFECTING FINANCING DECISIONS. 

While taking financing decisions the finance manager keep in mind the following factors:
7 factors affecting financial decisions

1. Cost : 

The cost of raising finance from various sources is different and Finance manager always prefer the source with minimum cost. 

2. Risk : 

More risk is associated with borrowed fund as compared to owner's fund securities. Finance manager compare the risk with the cost involved and preferred securities with moderate risk factor. 

3. Cash flow position : 

The cash flow position of the company also helps in selecting the securities. With smooth and steady cash flow companies can easily afford borrowed fund securities but when companies have shortage of cash flow, then they must go for owner's fund security only. 

4. Control considerations :

If existing shareholders want to retain the complete control of business then they prefer borrowed fund securities to rise further fund. On the other hand if they do not mind to lose the control then they may go for owner's fund securities. 

5. Floatation cost : 

It refer to cost involved in issue of securities such as broker's Commission, underwriters fees, expenses on prospectus, etc.  Firm prefers  securities which involve least floatation cost. 

6. Fixed operating cost:

If a company is having high fixed operating costs then they must prefer owner's fund because due to high fixed operational cost, the company may not be able to pay interest on debt securities which can cause serious troubles for company. 

7. State of capital market : 

The conditions in capital market also help in deciding the type of securities to be raised. During boom period it is easy to sell equity shares as people are ready to take risk where as during depression period there is more demand for debt securities in capital market. 

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