Successful development of the enterprise, stable positive financial and economic indicators of its activities largely depend on what the capital structure of the enterprise is.
In the economic literature, the term capital structure is usually understood as the ratio between the borrowed (attracted) and own capital of the organization, which are necessary for its sustainable development. The overall implementation of a long-term development strategy of an organization depends on how optimal this ratio of capital is.
The structure of the concept of capital structure of the organization include borrowed and equity.
Equity capital includes the assets of the organization that are used by it to create some of the organization’s property and which belong to it on the basis of ownership. The structure of equity capital includes the following components:
- additional capital (represented by the value of the property that the founders contributed in addition to the funds forming the authorized capital; these are the values that are formed when the property is revalued as a result of changes in its value, as well as other income);
- reserve capital (this is the part of the
enterprise ’s
own capital that is allocated from the profit received in order to repay potential losses or losses);
- retained earnings (is the main means of accumulating the organization’s assets; it is formed from gross profit after payment of the established profit tax, as well as after deductions for other needs from this profit);
- funds for special purposes (part of the net profit that the organization directs to industrial or social development);
- other reserves (such reserves are necessary in case of future large expenses, which are included in the cost of production or services).
The borrowed capital of the organization is represented by borrowed funds or other property values on the basis of their return, which are necessary to finance the development of the organization. As a rule, these include long-term bank loans, as well as bonds on bonds.
It should be noted that the optimal capital structure of the organization is a ratio of equity to debt, which is able to maximize the total value of the organization.
In economic practice, there is no clear recommendation on how to form the best capital structure. On the one hand, it is generally accepted that, on average, the price of borrowed capital is lower than equity. Consequently, an increase in the share of cheaper borrowed capital will entail a decrease in the weighted average cost of capital. However, in practice, in this case, you can come to a decrease in the value of the company, which depends on the market value of the equity of the organization.
Attraction of borrowed capital also has a number of limitations, and the growth of debt obligations directly affects the ability to go bankrupt. In addition, existing debt obligations significantly limit freedom of action when dealing with finances.
Therefore, the capital structure of the organization is a rather complex and unpredictable element of the financial component of the enterprise, requiring a competent and scrupulous approach to it.