Financial Structure of the Firm

Financial Structure of the Firm

Financial Structure of a Firm

A firm's financial structure is among one of the many keys to its success. Without proper backing, a firm is considered a sham and will be unable to grow, gain investors, or protect itself from liability. These concepts do not disappear once a firm is established either; in fact, many firms go under because they fail to keep their financial structure solid. In firms, finance plays a significant role in decision making with financial structure of the firm in relation to capital structure decisions, cost, real world decision-making practices, and leveraging investments.

Capital structure is at the essence of a business's finances and many company decisions rest of the current capital structure of the organization. When a company's capital structure has a higher amount of assets to debt, then the company is able to expand, whereas when debt is on the rise, the company begins cutting annual spending to lower overall debt ratios (Baker 2002). Additionally, all capital must be reported in the company's annual report so that the stockholders, lenders, and any other interested parties become apprised of the financial situation of the company. Failing to report the current capital structure or manipulating the capital structure can result in serious penalties via the Securities Exchange Commission.

Companies must grow and expand to survive, but every expansion and risk is carefully calculated. This is where cost comes into the picture of how a business is run. In a standard firm, new projects are proposed at the annual business meeting and full cost reports and figures based on those reports including necessary time for returns, overall benefit to the company, and projected long-term investment costs are all brought into the picture (Bent 2002). In many businesses, certain cost thresholds must be met in order for a proposal to even be presentable.

Another factor that plays a key role in the business world is real-world applications of financial decision-making strategies. While completing one's education, academic ideals of financial forecasting and decision making are constantly presented alongside SEC standards and the theories behind what modern investors are observing (Haddad 2005). While all of this is well and good, the reality is that most businesses are not founded by accountants and most find a financial system that is beneficial for them. For instance, it may have been acceptable in school to take large risks on certain costs; however, if a business is struggling and incoming capital is lower, then no risks may be considered acceptable.