Capital structure of an organisation is determined through the ratio of its equity and debt. Managing capital structure in an organisation is pivotal to calculate its cost of capital for potential buyers of shares and providers of finance. Debt driven company will have higher cost of capital as compared to the company which have an optimal capital structure.
Optimal capital structure is based on a suitable blend of debt and equity financing that maximises shareholders wealth/business value and minimises cost of capital. Setting an optimal capital structure is vital for a business as it require to generate funds from various sources including shares, preference shares, leases, loans, debentures, bonds, sukuk, and other types of finances offered by financial institutions. Entrepreneurs can generate funds for their businesses at lower financing cost if they have optimal capital structure, that ultimately determines long term business stability.
Maintaining an optimal capital structure is based on below key parameters
- Effective working capital management, to avoid fund blockage in inventory and receivable & payable cycles.
- Instilling confidence of equity finance provider which have lower cost of capital than debt finance provider.
- Effective cash flow management by preventing over or undercapitalization.
- Suitable business structure, that requires least funds to finance business operations.
How our CFOs stand out the competition
Our recommendations on optimal WACC are based on thorough analysis of the existing ratio and type of capital structure to prepare report on gap-analysis with optimal WACC for our client that could lead to generate long-term funds at less cost of finance.
Being Chartered Accountants, we possess technical knowledge about the derivation of an organisation’s Weighted Average Cost of Capital (WACC) and its use to calculate business worth or shareholder’s wealth. Our professional experience working with regional large-sized conglomerates, together with our well-rooted assimilation with each component of WACC, serve an ideal combination to manage and maintain optimal capital structure of our clients.
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