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What Are the Best Tips for Making Capital Structure Decisions?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 23 November 2016
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    2003-2016
    Conjecture Corporation
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Capital structure is the mix of outside funds a company uses to pay for major projects in the business. The structure usually includes fund types such as short-term debt, long-term debt, common equity stock, and preferred equity stock. Capital structure decisions are therefore very important as the wrong capital structure mix can make it difficult for a business to succeed financially. The best tips for capital structure decisions include the use of several individuals to make decisions, the use of a capital structure model, and the use of trends in order to understand how the business performed in the past. As the economy changes, so will its funding decisions.

Financial decisions usually require more than one individual in a company. This is especially true for capital structure decisions, which can require a budget, financial analysis, and comparative review. A company should use several different individuals in order to prepare and review this information. Individuals who should be in on the decision process may include an accountant, corporate finance officer, operational manager, and the chief executive officer, who is ultimately responsible for making funding decisions. The use of multiple individuals to help work through this process can offer different perspectives on which decisions would work best for the business.

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A capital structure model is a good option when making difficult or complex capital structure decisions. This model may include a use of present value formulas, payback period calculations, or other financial and operational processes to determine the amount of funds necessary to pay for the project. This part of capital structure decisions can also make use of the multiple individuals involved in this process. The use of repeatable processes can also make decision making a bit easier as one individual does not have to be ultimately responsible. In some cases, working in a group takes away the uncertainty of these decisions.

Another part of capital structure decisions may be the use of trends in tracking the result of previous decisions. Companies that use trends have records of all decisions and the amount of financial return based on different capital structure uses. Understanding bad decisions on capital structure decisions can help companies avoid repeat mistakes. Looking for new funding sources after a previously disastrous capital funding project is also a good option for capital structure decisions. Trends may be most important for the accounting department when making these decisions.

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