When it comes to accounting there is at least one aspect that draws interest from the masses -- the difference between debt and equity to fund a business.
What You Owe Whenever you borrow money you are creating debt for your company.
Even companies that are set against adding debt to their capital structure may find it necessary from time to time.
There are times when it is a good idea to do so as long as you are wise about its use you can use debt for short term assignments such as credit card purchases and buying things on account.
The goal is to keep debt within safe limits and to not rely upon it to fund every aspect of your business.
A good rule of thumb is to determine what is an acceptable balance for your company and stick with it.
You can do that by keeping an eye on debt ratio for your industry and compare your ratio to it.
Have a plan to pay debt off as early as possible to avoid interest expense which can eat away at net profits.
Debt is often seen as a negative in business because it allows others to have a claim to a company's profits.
If you decide to use a credit card, business line of credit, or any other form of credit to fund your business pay careful attention to monitoring and minimizing the interest expense.
Including debt in your capital structure can benefit your company.
As long as you manage it well and pay it off as early as possible it improves cash flow and creates an opportunity to build up your cash reserves.
Your Ownership Interest Equity is another alternative to funding and is not the same as debt in a company.
This term is commonly used to describe the difference between the purchase price of a home and its market value.
However, when used in the context of business, equity takes on a different meaning.
Instead, equity in business is the value of a company after subtracting liabilities from its assets.
Equity is also seen as the investments made into a company by its owners.
For instance, when an owner invests personal funds into the business it increases their ownership interest.
An example is when a company issues sales of stock to shareholders.
The stockholders become part owners and their investment increases the equity value.
Debt and equity are just two ways that you can get money for your business.
Make sure that you have a plan for how to use debt and equity in your company.
Before adding either as a funding source, determine what you will it use it for, how much it will cost, and how your company plans to pay it back so that you can weigh the opportunity costs beforehand.