Optimal Capital Structure

One of the recent concepts applied in financial management is the effective utilization of resources and choosing the optimal and most appropriate capital structure. In a resource constraint situation, the importance of financial management is especially highlighted as financial strategies are required to get the company or organization pass through several constraints that it may confront in the day to day functioning. The reasons leading to these sources constraint situations could be lack of demand, scarcity of raw materials, labor problems, liquidity control, lack of technological awareness, prejudiced policies about management and finance, etc. If the problem is not taken into consideration during the initial stage itself, then it will lead to severe bankruptcy and sickness. Under these circumstances, the role of financial management is to decide upon whether a particular organization can be a viable one or not. But during these situations, viability itself is in doubt, and then the alternative of winding up the business operation should be explored. But before a decision to winding up is taken it should be considered whether these problems could be solved through proper strategies.One of the major functions being performed by the finance manager is to take a decision regarding the capital structure. After making an estimation of the requirements of funds, it is essential to identify and evaluate various sources from where these funds could be raised. For this, it is imperative to analyze about a proper mix of the possible sources. because sources of funds should be differentiated from one another. In this context, the finance manager has to carefully look into the existing capital structure and also consider the raising of funds properly. Under these circumstances, the finance manager should maintain a proper balance between both long term and short term funds. The raising of appropriate long term funds.

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