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What Is a Financial Structure?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 September 2016
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    Conjecture Corporation
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A financial structure is simply a means of describing the total scope of assets and types of financing that are employed as part of the overall financial operation of a business or other entity. Within this structure, information regarding the management of short-term borrowings, long-term debt, and any type of owner's equity is included in the overall management strategy. The structure is sometime referred to as the "right side," as the financing tracked as part of the structure is usually recorded on the right side of the balance sheet maintained by the company.

There is sometimes confusion between the financial structure and the capital structure of a business. The key difference is that the financial structure is more inclusive, in that it calls for tracking short-term obligations as well as long-term ones. In contrast, a capital structure is focused on accounting for owner's equity and long-term debt obligations, meaning obligations that will endure for more than one calendar year. Capital structure does not include attention to short-term debt or borrowings, or any obligations that are anticipated to be settled in full within 12 months or less.

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Assessing the financial structure of a business is a key strategy in determining if the company is financially stable. Since this approach encompasses a wider range of financial assets, the task of determining if the company is increasing or decreasing in overall worth is easier to manage. Taking the time to review the structure on a regular basis, such as monthly or quarterly, offers the benefit of identifying emerging trends that could be to the advantage or the detriment of the operation, and adjusting the asset management strategy in order to produce a desirable result.

It is important to note that the financial structure of even a viable and profitable company will shift from time to time. This means that a negative change from one review period to the next does not necessarily mean there is cause for concern. By identifying the reasons behind the change, owners and managers can ascertain if isolated events that are not likely to recur exerted a short-term influence that is now passed, or if there is some issue that should be addressed to prevent any long-term complications for the business operation. In some cases, ongoing review of the financial structure may also inspire creative ideas about how to make improvements that ultimately help to increase the solvency of the company, and increase the chances of the business remaining in operation for many years to come.

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