Imagine the way Amazon. com, the most successful e-company besides e-Bay, financing their operation. In the end of 90s, the Amazon. com have been known as a huge online book stores worldwide although we got surprised to see that the company continued recording financial losses for several years. During the end 20th century, the company recorded losses amounting of millions to thousands of millions dollar. How could the company resist the storm before finally making profits commencing the 21th century?
Jeff Bezos, the CEO and founder of Amazon. com, is the person behind the implementation of financial strategy we know as budgeting and forecasting that make the Amazon. com still exists today. By definition, Capital budgeting is a business tool that allows any company to create budget amounts and then find out how well the company holds those amounts (“Forecasting and Budgeting,” n. d. ). For this reason, budgeting becomes an important skill for any people conducting business to prevent a company experiences cash shortage.
According to Jane Smith, the reason of conducting budgeting is to anticipate times when a business needs to incur a great amount of expenditure before the company was paid by customers. Any shortage of cash will put the company in a dangerous situation. This situation refers to the need of providing enough working capital for a company to fund their day-to-day activities. The appropriate working capital also helps the company to finance their product and services improvement, technological invention, network expansion, and so many other things that help them to strengthen their presence and hence position in the markets.
As explained above, company needs to provide enough working capital to ensure that the company is able to finance their activities. The main sources of working capital are the current assets since this kind of assets are short-term in nature so that a company could convert this capital easily into cash (Working Capital,” n. d. ). In addition to current assets, the company also has current liabilities as the results of the company expenses when investing some machines or gadgets to help the company conduct their activities.
Therefore, a company’s working capital can be written as following: Working Capital = Current Assets – Current Liabilities In which current assets equals to stock + debtors + cash In order to ensure that a company could finance their activities appropriately while preventing the company from financial collapse, therefore, they need to plan careful plan their capital structure. A hospital has to pay attention to three important elements: efficiency, equity, and quality.
The situation suggests that hospitals although some of them appeared to be non-profit need enough working capital to ensure that hospital could continue their activities. In facts, the hospital will need a huge amount of working capital since the nature of hospital that show a vast outflow of cash due to their huge spending on medicine, health care equipments etc.
This situation strengthens the need to appropriately manage capital structure. According to Investorwords.com, capital structure is defined as the permanent long-term financing of a company, including long-term debt, common stock and preferred stock, and retained earnings. It differs from financial structure, which includes short-term debt and accounts payable (“Capital Structure”). In addition, capital structure also defined as methods for the firm to raise its required funds through the issuance of the most basic and important instruments such as stocks or bonds (Harvey, n.d. ).
As company’s capital might come from different resources that are debt and equity, we might be tempted to question what the optimal debt-equity ratio is and whether the mix of the two instruments will affect the company’s valuation or not. For example, if a company needs $200 million for financing a project, should all this money be raised by issuing stocks, or 75% of stocks and 25% of bonds (debt-equity ratio equals 1/3), or some other ratios will work better? Roy L.
Simerly and Mingfang Li develop an idea that an appropriate capital structure is a critical decision for any business organization. The decision is important not only because of the need to maximize returns to various organizational constituencies, but also because of the impact such a decision has on an organization’s ability to deal with its competitive environment (Simerly & Mingfang, n. d. ).
Reference
Bethesda. (2004). Guidance for hospital capital expenditure plans. Capital Structure. Retrieved July 4, 2005 from http://www.investorwords.com/733/capital_structure.html