Decisions related to financing:

Investment decisions are connected with the assets of the company while financing decisions are related to the capital structure.

Capital structure of the company consists of:
(a) equity shares
(b) equity shares and preference shares
(c) equity shares and debentures
(d) equity shares, preference shares and debentures

• Capital structure is a mixture of owner’s capital and debt. Finance manager has to take decision regarding the portion to be maintained between equity and debt in capital structure. A fine balance between equity capital and debt is necessary so as to maximize the returns of the company.
• Capital structure having a proper proportion of equity capital and debt is called optimum capital structure. Optimum capital structure is less risky and ensures maximum return.

Factors affecting financing:

The factors affecting financing can be classified as

1. Internal factors and
2. External factors.

1. Internal factors: Type or nature of business, size of business, growth of business, financial requirement, nature of assets and requirement, attitude of directors are internal factors that affect financing decisions.

2. External factors: Condition of capital market, expenses of issuing securities, attitude of investors, rate of interest prevailing in market, legal restrictions, institutional investors, etc. are external factors that affect financing decisions.