Capital structure of a company, what sources of financing can be used?

Capital structure of a company, what sources of financing can be used?

Own or external resources

Redacción CIM Tax & Legal

To determine the capital structure of a company, various factors such as the cost of capital or the level of risk must be taken into account.

We understand the financial structure of the company as the composition of capital or financial resources that the company has generated or captured throughout its activity. These amounts appear on the balance sheet as the company's liabilities, classified as either equity or debt and as either long-term or short-term.

It is crucial to recognize that the composition of this structure is very important for the proper financing of the company. To achieve the main objective of maximizing its value, it is necessary to have resources that provide the lowest possible cost, with the least possible risk, and, at the same time, allow for the highest possible financial leverage.

As in any balance sheet, the financial structure of a company will depend on:

  1. Sources of Funding:
    • External Sources: It should be noted that, in most cases, this type of financing is accompanied by a direct financial cost, such as interest.
    • Internal Sources: There is no direct financial cost, as in external sources, but there is an opportunity cost.
  2. Time Horizon for Meeting Obligations of Financing Sources:
    • Short-term: For periods less than a year.
    • Long-term: Periods longer than a year.

Once the different financing structures have been analyzed, decisions must be made based on preferences. Each source of financing has an associated cost, so the company must try to finance itself with resources at the lowest possible cost while maintaining a stable balance within the financial structure.

It is necessary to determine the cost of equity and the cost of debt to weigh them and thus obtain the Weighted Average Cost of Capital (WACC). This cost is influenced by the capital structure itself, so the correct management of the financial structure is a crucial element for the economic-financial management.

Additionally, the financial structure must maintain a certain balance with the economic structure in relation to the use of these resources. This balance is calculated with the Working Capital, already analyzed in the Advisory department's article for the month of August. This is an indicator of the company's long-term financial solvency.

The composition of the company's financial structure depends on the cost of financial resources, the risk the company is willing to assume, and the use of these resources. Only in this way will there be correspondence between the nature of financial resources and the nature of the investments they finance.

There are different theories about capital structure, with this being the difference between financial and current liabilities. The goal of managing the capital structure is to find the combination of financial sources that maximizes the value of the company or, alternatively, minimizes the cost of capital.

However, there is no single model to determine the structure, but there are different basic tools for determining the capital structure. The decision on capital structure is part of corporate financing decisions, which, along with investment decisions and dividend policy decisions, form the central axis of the Financial Management of the Company.

(1) In economics, the opportunity cost refers to the cost of investing available resources in one economic opportunity at the expense of alternative available investments, or the value of the best unrealized option.

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