Blog : How Capital Structure Can Keep You Out of Trouble

The capital structure of a business organization is given by the different accounts that have allowed the acquisition of resources necessary for the proper functioning of the business, how the resources that the company has required to carry out its activity are constituted, that is, the suppliers of capital.

The Balance Sheet in an organization allows to observe which have been the different means of leverage that the company has used to execute its activities; In this sense, we can say that the providers of financial resources are located in Liabilities and Equity and that each of them has a cost, a value that must be paid to that person, credit institution, a bank that has provided the financial resource.

One of the primary functions of the Financial Administrator is to identify the best option of the different capital offers that are in the market for the business, analyze the different variables to access money, cost, time, guarantees, and in turn optimize the use of this money in the organization, that is to say, that sufficient resources can be generated from the dynamics of the business to generate the necessary money flows that will allow paying the capital and the cost of the money acquired from the capital providers.

The capital structure resources in the organization are classified in the short and long term, such as Financial Obligations, Mortgage Obligations, Suppliers, Contribution partners, etc.

The Financial Administrator must verify that the business generates profit margins higher than the cost that the company must pay for the use of the capital obtained to work.

We may find companies that present profit margins that are lower than the cost that the company must pay to the different providers of capital. This situation makes it appear at first glance that profits are being generated when they are not sufficient.

A methodology that allows diagnosing how much a company is worth the money it has borrowed is the Cost of Capital, which allows those businesses that have acquired various means of financing, in the short and long term, to know the composition of the liability and the patrimony, the relevance or weight that each one of these financing sources has and the weighted average cost of the capital resources used by the organization.