In earlier lesson you have learnt about the how financial decisions will depend on the capital structure or vice versa during mobilization of funds for any investment. Development of financial structure also depends on the product and the labour market. Further creditors and agency cost will also affect the financial structure of any corporate.
Product Market & its Effect
The effect of product market on the debt will be as follows:
- Basically, it is product in any investment matters. Nature of product and its market set the path for its demand for the product.
- Based on the demand the corporate has to decide the level their product at a future date, this in fact gives anticipated market share of the corporate for that product.
- Once the future market share for the product is decided, and then you can decide level of investment as a financial manager.
- Level of investment will give the path to decide what infrastructure is requires by the corporate to meet this demand.
- Further it also sets the path for deciding the holding level of raw material, semi-finished goods or finished goods.
- This will decide what must be the cost required at the initial stage in terms for its machinery or holding level of inventory.
- Accordingly, as a financial manager you have to have clarity in regard to product & its market.
Labour Market & its Impact
Another important aspect, which will affect the cost of production which in turn effect the profitability and return on investment is the labour. Broadly, labour requirement in any investment is classified into.
- Skilled labour
- Unskilled labour
Factors affecting the labour market:
- Place
- Availability of skilled & unskilled labour
- Cost of living of that particular place.
- Other labour oriented activities in that place (determines the demand for labour which have bearing on the cost of labour.
- Facilities like water, health services, education, etc., availability in that area (more so for the skilled labour)
Based on these various factors of the market, the cost of labour gets changed. This in turn affect the cost of production and thereby the profitability and return on investment. So as a finance manager you have look into various aspects during the financial decision. This in fact will affect the financial structure of the corporate.
Creditors
You will notice that during creating a financial structure for any financial decision on any investment creditors plays a vital role. Creditors may be of two types capital creditor and operational creditors. The creditor is defined as the entities, which provide funds, and helps in mobilization of funds for a fixed period of time at a fixed rate of return.
Capital Creditor
The entities which provide funds for the creation of capital which will be used as a long-term source, this is nothing but debt capital like preference shareholders or bondholders. The provide funds with an anticipation of fixed dividend or interest. Other creditors who provide funds and facilitate funds mobilization for any investment are fixed deposit holders and financial institutions. Normally, the funds mobilized thorough the fixed deposit will be utilized as a long-term source. There will also be the commitment for the corporate in terms of payment of interest on FDs regularly or at the end of maturity period as per the agreed rate for the period along with the principal amount for which the same has been kept. However, the corporate has to incur costs for raising such funds, due to various norms to be complied by the corporate as per SEBI guidelines.
Operational Creditors
Apart from the creditors, who provide funds for the long-term investments and fulfill the fund requirement of corporate, you also require funds for the operational aspects. These funds are made available either from suppler credits or the financial institutions. You as financial manager may also look into the various aspects in raising funds from this route. They are as follows: –
- Rate of availability of funds.
- Quantum of availability.
- Time for which available.
- Terms & conditions of getting the funds.
- Time taken for getting the funds.
- Level of restrictions on freedom of the corporate.
The cost of getting these funds will affect the cost of production in turn the profitability, which ultimately decides about the return on investment.