The Importance of Capital Gearing Ratio To Business Financing.

 Having a great business idea without a startup capital is like wandering a vast desert in search of an oasis. You are literally going to leap in when you see one. Then gulp down the water with all the impurities.

It’s wise to understand what capital gearing is before you decide to borrow or not to borrow to start your business.

What is capital gearing?

It’s a financial ratio that shows the amount of debt of a company to it’s equity. It’s a measure of financial risk. This risk increases toward volatility as the ratio of debt to equity gets higher.

The higher the gearing ratio, the more the interest payable on debt and the lower the earnings on equity. You may end up borrowing to service debt commitments.

The risk doesn’t end with sinking deeper into more debts, your control of the company could also be threatened.

Your creditors may want to teach you best ways to run your business profitably. This may come in the form of business partnership and so called, “business support”. In most cases, their way will not be on the same level with your vision.

Before you look to lenders for funding, have an amount of equity that would guarantee a lower capital gearing. Your capital gearing should be a ratio that keeps with you, the control and the freedom to be proactive and react quickly to evolving trends.

Only borrow when you’re certain you will have a positive leverage. That is, only when projections indicate that your earnings from the application of debt are going to be greater than interest payable on debt.

But should you even borrow to start a business? The answer is Yes. Debt financing is not a bad idea if you’ve sincerely mastered strategies that guarantee favorable returns on intended investment.

You must also be ready to work hard and proceed as if you were bootstrapping.

As a takeaway, keep the gearing ratio lower than 25 percent.

First published on Ayietim Blog

Why Is Understanding Opportunity Cost Important?

 

It’s very difficult to achieve financial prosperity without puting the concept of opportunity cost to use in your spending.

It’s normal to have many wants competing for your money, which may not be enough to get all of them for you.  So, to get the best out of your spending, you must understand the value attached to the best alternative foregone.  This is opportunity cost.  

Understanding ande applying the concept of opportunity of cost to your personal finance, are going to help you achieve the following seven personal financial goals;

1.Spending  Within Budgetary Provision:

A good budget should be a financial plan that accommodates absolutely necessary expected spending within expected income.  Obviously, a good budget is not possible in the absence of opportunity cost as you wouldn’t be to put in the budget, only things which enhance personal financial health.  

So after the budget has been set up with the help of opportunity cost,  you would stay within your budgetary spending limits if you stuck to your budget.

2. Acquisition of Only Relevant Current Assets ;sm

This is possible with the aid of opportunity cost.  When the value of the best alternative is foregone, it means an alternative with a higher value is chosen.  When current assets like vehicles, and furniture are purchased on the basis of durability, most flexible usability and best maintenance option, then only relevant ones are chosen and acquisition of toxic assets are avoided.

3. Elimination of the Purchase of Toxic Assets:  

As mentioned above, the purchase of toxic assets is avoided when opportunity cost guides every purchase.

The elimination of toxic assets from your current assets is important as wasteful maintenance costs are eliminated.

Apart from the elimination of the leakages through wasteful maintenance costs, valuable space is saved for relevant current assets. And .more money is freed up to fund financial growth.

4. Money is freed up for savings:  

No money spent on toxic assets means more money saved.

As more and more potentially redundant assets are struck-off your spending list, more and more money is saved.

5. More Money Saved means significant: Capital (or equity) for investment in other streams of income.

What is the significant of this?

It gives financial health to your money because your saving begins to outweigh your spending..

6. Opportunity Cost is a good guide to good investment:

Opportunity cost if applied objectively and professionally, should help to narrow your options to the most viable investment opportunities available.  

You should be able to rank investment opportunities in terms of highest returns and quickest pay back periods then go for the one that best guarantees your investment.

7. Credit Rating / Worthiness Improvement:

A consistent application of opportunity cost to your spending should naturally help you to lower your indebtedness and consequently improve your credit rating.