Question

Briefly explain any five factors to be considered while preparing a suitable capital plan.

Answer 1

1. Nature and Size of Business: The type of business (manufacturing, trading, or service) and its scale of operations determine the capital needs.
   • Manufacturing requires more fixed capital for machinery.
   • Large-scale businesses need more funds than smaller ones.
2. Financial Needs of the Business: The capital plan must consider both fixed and working capital requirements based on the nature of operations, expected growth, and future expansion plans.
3. Sources of Finance: The business must evaluate different sources of funds equity, preference shares, debentures, loans, and their availability, cost, and suitability.
4. Cost of Capital: Choosing sources with the lowest possible cost (e.g., loans at low interest or issuing shares at fair terms) is important to reduce the financial burden and maximise profits.
5. Risk-Return Consideration: A balance between risk and return is crucial.
   • Equity financing reduces financial risk but may dilute control.
   • Debt financing increases fixed obligations but can improve returns through leverage.