Financial Structure - Definition, What is Financial Structure, Advantages of Financial Structure, and Latest News - ClearTax (2024)

FAQs

Financial Structure - Definition, What is Financial Structure, Advantages of Financial Structure, and Latest News - ClearTax? ›

The financial structure is a mix of equity and debt used by a company for operating. It can have a strong influence on the risk and value of the associated business. The financial managers of the company deal with the responsibility of deciding the right mixture of equity and debt to optimise the financial structure.

Key Takeaways. Financial structure refers to the mix of debt and equity that a company uses to finance its operations. It can also be known as capital structure. Private and public companies use the same framework for developing their financial structure but there are several differences between the two.

Let's explore some of these benefits, highlighting the positive impact on financial stability, flexibility, and strategic decision-making. A sound financial structure provides a stable foundation for a company, shielding it from economic uncertainties and market fluctuations.

The financial structure comprises various sources of capital for your business. It includes short-term liabilities, short-term debt, long-term debt, and equity. A company can use any or all of these instruments in unique proportions to fund its long-term and short-term working capital requirements.

An optimal capital structure is the best mix of debt and equity financing that maximizes a company's market value while minimizing its cost of capital. Minimizing the weighted average cost of capital (WACC) is one way to optimize for the lowest cost mix of financing.

Financial structuring is the process of selecting the optimal mix of debt and equity, the two basic types of capital to finance a company's operations. For an optimal capital structure to be achieved, market value maximization and cost of capital minimization must occur.

Ensuring Financial Stability

With growth and profitability, achieving and maintaining financial stability is a core objective. This involves establishing a balance between debt and equity, ensuring a stable capital structure, and avoiding excessive financial leverage.

You can calculate your company's capital structure by examining your debt-to-equity ratio, which you determine by dividing your liabilities (level of debt) by your total equity. The difference between your assets and liabilities determines your working capital or the amount of liquidity (current cash flow) you have.

Capital Structure is a combination of different types of long-term sources of funds. Financial Structure is a combination of different types of long-term as well as short-term sources of funds. The Capital Structure is a part of the Liabilities section of the Balance Sheet.

Analysation Metrics for Financial Structure

Debt-to-total capital is the primary metric to analyse the structure. This throws light on the share of debt and equities in the company's capital. The higher the ratio, the higher is the company's dependence on debt.

How do you structure finances? ›

The term “structured finance” is often used to explain the bundling of receivables, although it is more generally applicable to the offering of a structured system to help borrowers – and lenders – accomplish their end goal.

The two main types of funds raised by a project company, as in any corporate finance structure, are debt and equity.

Others conclude that financial structure per se does not matter: it is the overall provision of financial services (banks and financial markets taken together) that is important for growth (Demirgüç-Kunt and Levine (1996), Levine (2002)).

The company with the strongest financial position is with the highest proportion of equity to total assets. Higher equity compared to its liability means that the company can provide funds for its activity without depending too much on loans. Also, the company might able to pay dividends to stockholders.

Structured finance is a heavily involved financial instrument presented to large financial institutions or companies with complicated financing needs who are unsatisfied with conventional financial products. Since the mid-1980s, structured finance has become popular in the finance industry.

Financial systems act as intermediaries between savers and borrowers, channeling funds from those who have excess funds (savers) to those who need funds (borrowers). This intermediation process facilitates the efficient allocation of capital and promotes economic growth.

The financial structure is a mix of equity and debt used by a company for operating. It can have a strong influence on the risk and value of the associated business. The financial managers of the company deal with the responsibility of deciding the right mixture of equity and debt to optimise the financial structure.