In engineering, structure refers to different parts of a building and thus in financial terms, financial structure refers to all the components of finance in an organization. In simple terms, financial structure consists of all assets, all liabilities and the capital. The manner in which an organization’s assets are financed is referred to as its financial structure. There is another term called capital structure that confuses many. There are some similarities between capital structure and financial structure. However, there are many differences also that will be highlighted in this article.
If you take a look at the balance sheet of a company, the entire left hand side which includes liabilities plus equity is called the financial structure of the company. It contains all the long term and short term sources of capital. On the other hand, capital structure is the sum total of all long term sources of capital and thus is a part of the financial structure. It includes debentures, long term debt, preference share capital, equity share capital and retained earnings. In the simplest of terms, capital structure of a company is that part of financial structure that reflects long term sources of capital.
However, capital structure needs to be distinguished from asset structure that is the sum total of assets represented by fixed assets and current assets. This is the total capital of the business that is contained in the right hand side of the balance sheet. The composition of a firm’s liabilities is therefore referred to as its capital structure. If a firm has a capital that is 30% equity financed and 70% debt financed, , the leverage of the firm is only 70%.
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Capital Structure vs Financial Structure • Capital structure of a company is long term financing which includes long term debt, common stock and preferred stock and retained earnings. • Financial structure on the other hands also includes short term debt and accounts payable. • Capital structure is thus a subset of financial structure of a company.
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