What is one key factor in making financing decisions as a financial manager?

In financing decisions, one of the most critical factors is the choice between equity and debt. This decision fundamentally impacts a company's capital structure, which is the mix of debt and equity financing used to fund its operations and growth. Each option has its advantages and disadvantages that financial managers must consider.

Choosing debt often allows a company to leverage financing, potentially increasing returns on equity if the returns from investments exceed the costs of borrowing. However, excessive debt increases financial risk due to fixed interest obligations. On the other hand, financing through equity does not require repayment and can provide greater financial flexibility, but it dilutes ownership and may lead to higher costs of capital over time due to the required returns by equity investors.

Understanding how to balance these financing methods is central to maximizing a firm's value, managing risk, and ensuring sustainable growth. This choice directly influences financial health, investment strategies, and the firm’s overall strategic direction. By carefully evaluating when to use debt versus equity, financial managers can align their financing strategy with the company's broader goals.