The Economics of Capital Structuring

One of my favorite school subjects was Economics, because it teaches you the science within decision makers based on human nature and fallibility impacts the real world along with themselves. This signify as human behavior or corporate behavior based on their decision making on funding and spending either from equity or debt, which is called capital structuring.

The basic assumption of human spending is by using their own money or someone else’s money, the reason of borrowing someone else’s money is because to double their spending and investment to gain more resources to satisfy wants and needs. However, the consequence of borrowing is that it accumulated debt payment and possible debt default. Compare to a company the capital structure is basically based on the pecking order theory, either the company use its own money, borrow money, issuing hybrid stocks or issuing common stocks.

Knowing that, the most use financial tool that drives the world is money, and most companies in all country’s borrows money, a lot of them, and not using their own money. Why? To create creditworthiness and amplify spending. Mostly developed countries are flooded by debt because they are developed, hence trustworthy to issue high credit. Supportive studies that United Kingdom Debt-GDP ratio is 85%, with Brexit and increasing world inflation, I believe the Debt – GDP ratio will go more than that.

I’m an International Student, so should I be worried?

The answer is, YES! This concerns with my opportunity of employment at the future in the banking sector of United Kingdom, because with accumulated high debts and inflation followed pumping interest rates may lead to recession, and banks goes to strains and may cost my job. Furthermore, I am interested in investing and starting a business at the UK, investment include at the stocks and bonds market, and start up business based on expanding my dessert business from Indonesia to the UK with the aim of long-term financial sustainability with future business benchmark and wealth maximization.

However, because of economic crisis at the future may prevent those activities: to think that a person’s decision making can make a domino affect on creating an economic crisis is scary and its true. For example, in 2008 financial crisis the proposition and issuing of subprime mortgages, followed by borrowing so much money by consumers, businesses, governments and banks resulted to the biggest devastating credit crisis bubble in history. As well the current UK economic condition on Brexit situation will resulted to the decrease of UK relationship with the Euro zone on international trade and free trade agreement. In my opinion on Brexit, it will increase unemployment and reduce jobs, many businesses went bankrupt and many employees retired.

This case of economic downturn can be applied to personal learning, whether to use debt or equity in investment and making a business. I learn that if I want to be rich, I must be productive, hence the productivity growth upward sloping in the business cycle, when I’m always be productive it provides competitive advantage, increase skills and knowledge better than others, and that is the secret for productive investment and starting a business: being better than others.

But through my experience in making a business and investment, obviously we need some help from someone based on funding either from debt or equity which is all about decision making. Such as, once in a financial investment, I invited my friends to provide a mutual fund and portfolio investment that resulted to a positive earning of investment and was successful. This signify as a safe, low risk and diversified investment, so instead of going greedy to invest in risky securities it does not resulted to financial sustainability, its just gambling, being SMART is the key to be rich.

As well starting a business the pool of funds from my money and my friends created a dessert theme business and currently generating profits approaching from Under Dog to Question Mark then Rising Star, well that’s our dream. Another case and I have to be honest, in my business there were accumulation of debt because of inflation, which put my business position to be highly undesirable, hence the solution was to sell some assets and pay the debt. However, after that incident, the business was doing well and we reach our target sales and profits for the next month and following month.

From that event, my perspective was that equity is better than debt, because I’m using my own money and someone else’s money (love money mostly) based on ownership in the business (issuing shares), because shareholders/ owners wants the business to have a future bench mark, while lenders or creditors does not care about the business but the money to be paid. Furthermore, as recommendation for you future entrepreneurs, do not borrow so much money because it may result in financial distress and when you require an investor or partner to increase your business fund make sure that the individual is highly productive, knowledgeable and understand the business and the owners, it is recommended to invite friends or family that are knowledgeable, skilled and experienced to assist you in growing your small business and investment opportunities.