What is a 'Financial Structure'

Financial structure refers to the specific mixture of long–term debt and equity that a company uses to finance its operations. The composition directly affects the risk and value of the associated business. The financial manager must decide how much money should be borrowed and the best mixture of debt and equity to obtain, and he must find the least expensive sources of funds for the company.

BREAKING DOWN 'Financial Structure'

Like the capital structure, the financial structure is divided into the amount of the company's cash flow that goes to creditors and the amount that goes to shareholders. Each business has a different mixture depending on its needs and expenses. Therefore, each company has its own particular debt-equity (D/E) ratio. For example, a company could issue bonds and use the proceeds to buy stock, or it could issue stock and use the proceeds to pay its debt.

Financial Structure Versus Capital Structure

While a capital structure and a financial structure both include information regarding long-term financing and common stock, preferred stock and retained earnings, it does not include any information regarding short-term debt obligations. A financial structure does include both long-term and short-term obligations in its calculation. In this regard, the capital structure can be seen as a subset of the financial structure that is more geared toward long-term analysis, while the financial structure provides more reliable information regarding the business's current circumstances.

Differences in Financial Structures

The design of a business's financial structure may vary from country to country and may shift in response to changes within its country’s economy. Often, these differences are attributed to the relevance of the banking system for overall business operations.

Certain production facilities may be more inclined to rely on traditional bank loan offerings, as well as those that have the option to back financing with collateral, such as construction and agriculture. Further, a smaller business may be more likely to consider traditional financing models, as the availability of private investments or the ability to issue securities may not be available.

Businesses in sectors that are more reliant on human capital may be more inclined to finance operations by issuing bonds or other securities. This may allow them to obtain a more favorable rate, since the option to collateralize assets may be highly limited. Larger firms, regardless of their industry, may be more inclined to consider offering bonds or other securities, especially if the businesses already have shares traded on a public exchange.

RELATED TERMS
  1. Capitalization Structure

    Capitalization structure refers to the proportion of debt and ...
  2. Optimal Capital Structure

    The best debt-to-equity ratio for a firm that maximizes its value. ...
  3. Fee Structure

    A fee structure describes how an entity is to be compensated ...
  4. Debt Financing

    Debt financing occurs when a firm raises money for working capital ...
  5. Recapitalization

    Recapitalization is the process of restructuring a company's ...
  6. Long-Term Debt To Capitalization ...

    A ratio showing the financial leverage of a firm, calculated ...
Related Articles
  1. Investing

    Target Corp: WACC Analysis (TGT)

    Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry.
  2. Investing

    Evaluating a Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  3. Investing

    UPS Stock: Capital Structure Analysis

    Analyze UPS' capital structure to determine the relative importance of debt and equity financing. Identify the factors influencing financial leverage trends.
  4. Investing

    Lowe's Stock: Capital Structure Analysis (LOW)

    Examine Lowe's Companies' equity capitalization, debt capitalization and enterprise value to analyze trends in the retailer's capital structure.
  5. Investing

    Structured Notes: Buyer Beware!

    At first glance, structured notes look like the answer to investors' prayers. In reality, it's just too good to be true.
  6. Investing

    Twitter Stock: Capital Structure Analysis (TWTR)

    Analyze Twitter's capital structure to understand the importance of equity and debt financing. Identify trends in financial leverage and enterprise value.
  7. Investing

    Yahoo Stock: Capital Structure Analysis (YHOO)

    Learn about Yahoo's capital structure, including whether or not a decline in year-over-year earnings is leading the company to use more debt.
  8. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  9. Investing

    McDonald's Stock: Capital Structure Analysis (MCD)

    Learn about the importance of capital structure, and what equity and debt capitalization measures can tell us about the performance of McDonald's Corporation.
RELATED FAQS
  1. Which financial ratio best reflects capital structure?

    Learn about the debt-to-equity ratio and why this metric is widely considered the most useful reflection of a company's capital ... Read Answer >>
  2. How do interest rates influence a corporation's capital structure?

    Learn about how changing interest rates can affect a corporation's capital structure because of their impact on the cost ... Read Answer >>
  3. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ... Read Answer >>
  4. What are the benefits for a company using equity financing vs. debt financing?

    Learn what some of the principal advantages are for a company that chooses to utilize equity financing in preference to debt ... Read Answer >>
  5. What are financial risk ratios and how are they used to measure risk?

    Explore some of the primary financial risk ratios that investors and analysts commonly use to evaluate a company's overall ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center