The financial structure and financing of a local importing and distribution company : a case study

Abstract

Purpose The purpose of this research is to assess and evaluate the financial structure of a local importing and distribution company and to determine how the entity is financed by analysing short-term borrowings, long-term debt and owner's equity. Another objective is to explore the sources of finance available to a business and to analyse the implications of such finance selected. Moreover, examine the relationship between the availability of short-term sources and long-term sources and their utilization. The importance of this research is highlighted since finance is regarded as the blood of the organization since without finance a firm cannot exist. Finance entails planning for the survival of the business. Equally important is the determination of the financial structure and it is essential that funds are provided in the best possible mix. Design Unstructured interviews were primarily conducted with the accounts personnel of the firm to discuss the financing of the firm and the financial structure of the organisation. The accounts and management department also provided financial information and general information concerning the company. The objectives were also achieved through information provided by the Malta Financial Services Authority and also through unstructured interviews conducted with the bank personnel. Findings The Company finances its operations and investments through a mixture of short-term and long-term sources. Short-term are mainly employed to ii finance the working capital requirements while long-term are used to finance long-term investments. It emerges that the company is mostly dependent on the banking institution through the use of an overdraft facility and bank loans. Thus the reliance on debt financing is very strong and one can concludes that this firm is a high geared company. Conclusion The gearing issue is not deemed to be unbearable in the circumstances of the company. One can concludes this, since the company has been using debt financing more than equity for a number of years. However further debt financing should be undertaken with certain caution and other alternatives could be implied. Nevertheless, the company is intentioned to keep financing its operations through the same mixture of debt and equity. Value The benefits of debt are clear; however debt could incur an increase in financial risk. The study has proposed a number of possible improvements and developments to the current situation like the possibility of increasing the use of retained earnings, other internally generated funds and the consideration of going public which will entail additional funds. A further research for the same firm is encouraged to be done for future years to analyse if the debt situation has been improved or not and if other types of finance are implemented.