Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsImpact of Financial Structure on the Financial StatementsDEBT EQUITY INTERNAL FINANCEA significant relianceon debt fundingprovides a highergearing structure for abusiness.A higher gearing reflects ahigher risk as the businesshas more commitmentsto lenders than equity. Alower gearing reflects lesscommitment to externalfinanciers as comparedwith equity funds.The use of debt canalso result in reducedprofits through interestexpense, although debtcan be more tax effectivebecause interestpayments are deductedfrom assessable income.The injection ofadditional equitycapital can provide amore balanced debtto-equityratio,a common measure ofrisk.With additional capital,the owners may be in aposition to increase otherdebt finance, as thefinancial structure of thebusiness is much stronger.Equity capital injectionshould allow the businessto generate increasedprofits, as often it doesnot have to servicefunds raised (makerepayments, interestpayments etc).Utilising internalfinance can providea more balanceddebt-to-equity ratio,a common measureof risk.Through the use ofinternal finance asan alternative sourceof financing, thebusiness should beable to generate moreprofits, as it does nothave to service fundsraised.88chapter 7-13 p79-181 Eng.indd 888/15/11 5:02:55 PM