Financial Investment Structure

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Financial Investment Structure

June 2nd, 2010 · Dallas TX, USA -

Financial structure is a framework that describes the different types of financing used to run the business of a firm. Various kinds of financing are required for smooth functioning of a business. The assets of a company, is financed either by debt or equity that is on the left side of the balance sheet. It comprises of stockholder equity, long-term debt and short-term liabilities. These items reflect in the left side of the balance sheet.

Determinants of Financial Structure

Structure of assets
Assets that have a high liquidity can be used as a collateral to raise debt whereas assets with low liquidity cannot be used for borrowing capital.

Internal Condition of the Enterprise
If the company is expecting high returns in the near future. It is advised to issue equities at that period when the profit reflects in the market price of the stock. This shows strong internal condition of the enterprise increases more credit.

Market Conditions
The market condition also determines the financial structure of an enterprise. The best example would be recent slowdown period where the companies were facing problems in raising debt from the financial institutions.

A company will require less funding from the external parties if the company has a strong financial performance. This means companies with strong bottom line growth will fund their requirements from their internal earnings.

Growth rate
The company that has a faster growth tends to borrow more capital than the slow growth rate companies.

Stability of Sales
Sales is also one of the determinant of financial structure of an organization Continuous increase in sales leads to additional expansion projects for which funding is required.

If the industry is a heavy tax burdened industry then the corporate try to evade tax by raising more debt.

Tags: Investment