Question & Answer: What are the reasons for and methods which companies enter into debt obligations and the importance of managing that deb…..

Securing debt and managing debt is one of the important role of managers in a company. When company has exhausted its subscription by alloting shares to the public and if it is need of financing to operate its business, then companies turn to financial institutions for debt by putting their assets as securities. They come at a charge(interest) to be paid to the financial institutions and the company needs to pay the interest as and when due on the debt borrowed.
When more debt is taken, the cashflows of the company increases not necessarily through sales but mainly due to extra funds being pumped into by the financial institutions. The managers must make sure that debt doesnt exceed the optimal debt/equity ratio i.e 1:2 which when exceeded results in companies cashflows mainly going towards clearing off debt rather than investing in its own business