Financial structure: what is it and how is it classified?

Financial Structure: What is it?

We can define the financial structure of a company as the one that pooling of financial resources that the partners or shareholders of that organisation have managed to gather in order to create the economic structure to enable them to start up the business.

We can see this better with an everyday example: if we think of a company as a large building, its financial structure would be made up of the pillars on which the building stands. If those pillars are solid, stable, and built with good quality materials, the building will rise without cracks or damage, and furthermore, the architects will be able to continue building new floors or improve those already built. The analogy is simple to understand: a company with a solid financial structure, with solid pillars, will have a better chance of avoiding financial cracks or bankruptcies. It will also be able to continue growing and expanding or, if its administrators decide so, improve its infrastructure to offer more and better services to its local community, find new clients, strengthen its captive clients, improve its employees' salary conditions with new formulas for Flexible remuneration, etc.

Financial structure and economic structure

Some new entrepreneurs They confuse financial structure with economic structure and they are different concepts. Let us try to clarify this:

• The financial structure of a company is The set of resources derived from funding sources that enable a company to invest in assets.
• The economic structure of a company is the set of assets, those goods that the company has managed to acquire precisely thanks to the sources of funding.

Financial structure: classification by sources

A classic way economists classify a company's financial structure is by looking at different sources of funding which businesses turn to in order to create the future economic structure that supports their business activity. These sources of finance can be very varied, but the most common would be the following:

Internal sources

recursos propios self-financing. In this case the financial resources with which the assets are acquired belong to the partner(s) setting up the company.

External sources

External funding sources can be internal or external. Internal sources would be, for example, personal loans taken out by partners to set up the company. External sources would be, for example, Credit and loans requested by the company itself (not by individuals), on leasing, the factoring, etc.

In other words, a company can creating its financial structure in two ways which, moreover, tend to be complementary:

• With own funds (equity capital and reserves)
• With borrowed or lent funds (conventionally referred to as Liabilities)

What does it depend on Whether a company decides to set up its financial structure with its own funds or with borrowed funds? It depends on many variables, such as, for example:

• The risk that the company's partners wish to assume.
• The economic market situation.
• The taxation to which the company will be subject.
• The financial conditions offered by banks or credit institutions at that time.
• Etc.

Another theoretical way to classify financial structure From a company's perspective, this is done by looking at the type of accounts that make it up. In this regard, the financial structure would be formed by two large groups of resources: Permanent and Current Liabilities.

• The so-called permanent resources are those made up of the company's fixed or non-current liabilities and equity.
• Current Liabilities are current liabilities.