Capital Structure vs. Financial Structure

Difference Between Capital Structure and Financial Structure In engineering, the structure refers to different parts of a building…

Difference Between Capital Structure and Financial Structure

In engineering, the structure refers to different parts of a building and so in financial terms, the financial structure refers to all components of finance in an organization. In simple terms, the financial structure is composed of all assets, all liabilities and capital. The way in which the capital of an organization is funded is considered to be its financial structure. There is another word known as capital structure. Capital structure and financial structure have many things in common. Yet there are also many differences that will be highlighted in this article.

If you take a look at the balance sheet of a company, on the left hand side you would see the liabilities plus equity and this is known as financial structure of a company. It contains all the sources in the long term and short term capital. Capital structure is the total of all long-term sources of capital and is thus part of the financial structure. It includes equity share capital, a long-term debt, debentures, preference share capital and retained profits. In the simplest terms, the capital structure is part of the financial structure that reflects the long-term sources of capital.

However, capital structure must be differentiated from the asset structure which is the total amount of capital represented by fixed assets and capital of the company. It is the entire capital that you see on the right side of the balance sheet. The composition of the liabilities of a company is considered its capital structure. If a company has funds out of which 30% is equity financed and rest 70% is debt financed, then the firm get leverage of only 70%.

 

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