Financial structure

economic-dictionary

The financial structure of a company is the composition of the sources of financing or liabilities formed by external resources, represented by short and long-term debts, and own resources or also called net worth.

Therefore, we can say that this structure is represented in the liabilities of the balance sheet of a company and would be the one that represents the financing. In return, the asset is related to the investment.

The first is the one that reports on how to finance yourself, therefore, it analyzes the financial aspect. The second, where it is invested, that is, the economic aspect.

Funding source

The financial structure and the financial cost

The analysis of the structure of liabilities is one of the most important in a company. Above all, because it controls aspects such as the possibility of excessive leverage or having idle resources. To do so, it is important to know the composition of our sources of funding, both our own and those of others. But let's see what the cost of each source is:

  • Let's start with self-financing. As it comes from the shareholders themselves, it has an intrinsic financial cost, the dividends paid for the shares. This is related to the capital market in listed companies. In the rest, especially SMEs, a reference interest should be used. For example, of the public debt. If having our money in the company generates less income than investing it, we may not be making an efficient distribution of capital.
  • Third-party financing has an extrinsic cost. In this case, the most common in SMEs are loans, the cost of which is easy to calculate.This is the interest rate and possible commissions, both calculated, for example, through the Annual Equivalent Rate (APR). In the companies that are listed on the stock market, there is also another modality: the issuance of bonds. In this case, the cost is the coupon that is paid to the bondholder.

The CFO must analyze the liability in depth to see if it has been built effectively and efficiently. Financial ratios can help in studying the quality of different types of liabilities. That is why its use is recommended in the financial analysis of the company. These indicators allow comparisons with other companies in the sector.

Internal and external funding sources

As we have seen in the definition, the sources are mainly two and depend on the people or entities from which we obtain the financing:

  • On the one hand, the internal ones or own financing. These are made up, above all, by four major games. The social capital, which are the contributions made by the partners. The reserves, which are parts of the profit that remain in the company and are not distributed as dividends. The results of the exercise, in case of obtaining benefits, that should be decided where to apply. And, last but not least, capital grants or donations. They are called internal sources because they are generated in the company itself.
  • Second, there would be external sources or external financing. Here we can distinguish the long term, with the debts contracted with banks (loans) or the financing that the suppliers of fixed assets make us. On the other hand, in the short term would be the financing of suppliers and the rest of current liability accounts. They are called external because it is not the company but the market that offers them.

There is another way of classifying liabilities, based on time. Thus we have the net worth (PN) and non-current or fixed liabilities, which are called permanent capitals, since they are in the company for long periods. On the other hand, current or current liabilities, which are short-term (less than a year) and which are mainly made up of short-term debt accounts, suppliers and creditors.

Example of financial structure

Let's imagine a liability like the one seen in the image. In it we have a net worth made up of share capital, reserves, results and subsidies and two long-term liabilities, made up of debts and suppliers of fixed assets and short-term, with suppliers and creditors. The total of the liabilities is the sum of these three concepts or assets.

As we can see, permanent capitals are those that are located in the long term, that is, net worth and non-current or fixed liabilities. The current would be the one that is short-term. Own financing is made up of said equity and that of others is called payable liabilities (non-current and current). As we can see, at least two years are usually included (usually three to five) for comparison purposes.

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