Financial structure

Financial structure is the mix of short-term liabilities, short-term debt, long-term debt, and equity that a business uses to finance its assets. A significant reliance on debt funding allows shareholders to achieve a higher return on investment, since there is less equity in the business. However, this financial structure can be risky, since the firm has a large debt obligation that must be paid. A firm positioned as an oligopoly or monopoly is best able to support such a leveraged financial structure, since its sales, profits and cash flows can be reliably predicted. Conversely, a business positioned in a highly competitive market cannot support a high degree of leverage, since it experiences volatile earnings and cash flows that could cause it to miss debt payments and trigger a bankruptcy filing. A business in this latter position needs to skew its financial structure in the direction of more equity, for which there is no payback requirement.

Related Courses

CFO Guidebook 
Corporate Finance 
Treasurer's Guidebook