There are many interpretations of the term "capital". Virtually all of them are reduced to three areas: material, monetary and labor. More details on what constitutes the structure of capital in general and in the enterprise in particular, read on.
At the present stage the term “capital structure” comprises all types of equity and debt. Part of the first category must be present not only the original invested money, but in the future the accumulated reserves trust funds. Debt capital consists of leasing, commercial loan, current liabilities. The sources of funding plays an important role in the formation of enterprise value.
There are four basic concepts of the term "capital":
- indifference of structure;
- contradictions of interests.
They are based on alternative approaches to the possibility of optimization and allocation of factors affecting capital.
It consists in the fact that the structure is created by taking into account the different values of individual elements. On the example of enterprises, this means that the price of attracting own funds is always higher than borrowed funds. This is due to different levels of risk. The yield of borrowed funds is deterministic: the interest rate is determined by the parties in a fixed amount. The profitability of personal funds is formed in market conditions by the results of economic activity.
The structure of the capital of the enterprise, attracted from the side, is secured in the form of guarantees of third parties, pledge or mortgage. In the event of bankruptcy of the organization, the law of the countries provides for the right to satisfy claims of creditors (first of all). That is, the use of borrowed capital leads to a decrease in the average cost of enterprise resources and the growth of the market value of the organization. The application of these principles in practice encourages owners to maximize the volume of loans, reduce financial sustainability.
The concept of indifference
It is built on a number of conflicting conditions that determine the level of profitability and risk, which in the process of optimizing the structure should be accounted for in a certain way. In the framework of this direction, the following provisions have been singled out that were not previously taken into account:
- Debt service costs are deductible from the tax base. Therefore, the cost of borrowed capital is always lower, and the demand for it to certain limits causes a reduction in its price.
- With the increase in the share of borrowed funds has probability of bankruptcy of the organization. Bankers are forced to reduce lending or to require the company to analyze the capital structure with a view to its optimization.
- The cost of certain elements of sources of funding attracted from outside includes not only debt servicing costs, but also initial costs.
From all of the above, we can conclude that the level of profitability and risk owners or managers choose, based on their "preferences."
The concept of the contradiction of interests
Managers receive more complete information about the activities of the organization compared with the owners. If the shareholders owned the same data, they could have managed the funds more correctly. So the optimization of the structure of capital would occur faster.
With favorable growth prospects, managers will try to meet the need for finance by raising borrowed funds. Otherwise, capital will be used from external sources, for example, additional shareholder investments.
Lenders want to exercise control over the use of funds. These costs are transferred to the owners. The higher the share of borrowed capital, the higher the level of costs, the weighted average cost of funds and the market price of the enterprise. This is the definition of the structure of capital.
They are based on the following conditions:
- optimal level of profitability and risk;
- minimization of weighted average cost;
- maximization of the market price of the enterprise.
Priority of specific criteria on which the structure of the company's capital is formed is determined by the management itself. But there is no single approach.
Optimization of the capital structure is to find the ratio of personal and borrowed sources of funds, which will ensure the achievement of a balance between profitability and risk, to minimize the weighted average and market value of the organization. Over time, this ratio varies, so periodic adjustments are required. The dynamics of the indicator depends on the rate of loan interest, the level of taxation, transaction costs and other factors.
Structure of the organization's capital
The main principle of formation of sources of financing, maximize the prices of the organization and finding the optimal level of financial leverage – the ability to affect profits by changing the amount of long-term liabilities. Its dynamics depends on the growth rate of net profit to gross income. The higher it is, the less dependence between the considered concepts. The level of leverage increases with the share of borrowed capital. At the same time increasing the profitability sources of funding and level of risk. It looks like financial capital structure.
Optimal formation of the capital structure is a complex process. It should also take into account the ability of the enterprise to repay debts due to income received, stability of cash flows and other factors. Also, it is necessary to take into account the sectoral, territorial features of the institution, the goals and strategies, the planned rate of growth. The existing structure of working capital is also taken into account. Not always the risks of alternative financing options, the projected interest rates are more affordable than their own funds.
This paradox is also the explanation of the real conditions are far from ideal, which Modigliani and Miller laid in his theory. Absolutely no efficient markets, access to credit from individuals and legal entities are different, but there are transaction costs. Therefore, for the owners at this stage higher priority has an optimal capital structure. Moreover, the interest on loans can be attributed to the cost of production, that is, to exclude them from the taxable base taxes.
The increase in the share of borrowed funds within reasonable limits can reduce the price of the attracted capital. The task of financial management is to find these very limitations. To solve it, it is necessary to develop principles by which the structure of fixed capital will be evaluated. Some rules have already been formed in the Myers sequence theory:
- Preferred is the financing of the company from its own resources.
- Organizations impose the size of dividends.
- If the volume of own sources of financing is insufficient, the company should reduce the portfolio of assets.
- If you can not do without external financing, it is better to start with the issue of the safest securities, and then proceed to the shares.
Indeed, the structure of the enterprise's capital is such that bonds are a more accessible source of financing than stocks. To issue of the enterprise resort with the purpose of expansion of manufacture at low credit risks.
Advantages and disadvantages
The capital structure of large corporations usually has a ratio of 70:30. The more your own funds, the higher financial independence. When increasing the borrowed capital the probability of bankruptcy of the enterprise increases. This forces lenders to raise interest rates, compensating for new risks. At the same time, organizations with a large share of borrowed funds have their advantages. With the same amount of profit, they have a higher profitability.
It is formed at the expense of the value of property invested by the owner. It is calculated as the difference between general assets and liabilities. Own capital has such advantages:
- Simplicity of attraction: the decision is made by owners without the consent of other subjects.
- A higher ability to generate profits, since there is no need to pay interest on loans.
- Ensures the stability of the organization, its solvency and reduces the risk of bankruptcy.
Disadvantages of own capital:
- Limited scope and ability to expand activities.
- High price.
- The possibility of an increase in profitability is not used.
- The most important thing is an enterprise that does not use loans, has financial stability, but is limited in the pace of development.
The structure of own capital consists of the authorized, additional, reserve fund, undistributed profit. Let's consider each of these elements in more detail.
The authorized capital is means (property) invested at the time of foundation of the organization. Depending on the form of ownership, it can be called a warehouse (full partnership), unit (cooperative), fund (municipal enterprise). He determines the relative weight of each participant in the management of the organization and guarantees the interests of creditors. The structure of fixed capital can be adjusted only after the change of constituent documents as a result of:
- attracting participants' funds;
- the direction of profit on the increase of funds;
- receiving subsidies from state bodies;
- exit of participants from the enterprise;
- bringing the amount of capital to the value of net assets;
- withdrawal of part of the fund.
Additional capital is income generated as a result of:
- trades (the excess of the issuing value of shares over the nominal);
- revaluation of non-current assets;
- exchange rate dynamics - the difference in the ruble valuation of the founder's contribution in foreign currency on the date of receipt of the amount and that indicated in the documents;
- the amount of undistributed profit;
- gratuitously received property;
- banknotes from the budget.
In fact, these are the funds formed as a result of changes in the market price of property. They can not be directed at meeting the needs of the organization. The gain is only on paper.
Funds intended to cover losses in the absence of other possibilities of their compensation, dividend payments and income creditors in the event when there is not enough profit. The reserve Fund is to guarantee the smooth operation of the organization. Its value does not exceed the amount established by the owners and recorded in the documents. Even at the legislative level for joint-stock companies and enterprises with foreign investment set the minimum size of the Fund and its annual recharges (5% of net profit). Whether to include the structure of working capital of organizations of other forms of ownership of the reserves, or not, is decided by the founders.
The structure of equity also includes a reserve of doubtful debts. It is created based on the results of an inventory of receivables. The value is determined separately for each shipment, depending on the client's solvency. If before the end of the current year the amounts generated are not used, then they are subject to joining the profit of the year.
In addition, other trust funds can be created:
- for the payment of holidays, bonuses, salaries;
- repair of equipment;
- production costs for seasonal work;
- warranty service;
- cover other costs.
Their size, structure and order of formation are also regulated by statutory and internal documents.
This is the difference between the income received by the organization and the payment of all amounts due, including taxes and other mandatory contributions. This profit is used for capitalization, reinvestment in production. Owners can withdraw assets in the amount of earned funds. But if the owners consider it expedient to abandon the current income in favor of future benefits, they can leave them on the accounts of the organization. This is reinvestment. Property owners only increases as a result of increasing their share in the capital of the organization, and the company has the opportunity to expand the scale of its activities.
The value of equity is the most important indicator of the company's financial stability. Its level determines the investment attractiveness of the organization. Therefore, the problem of correct management of own funds becomes important in the activities of the business entity.
The structure of borrowed capital
In the process of development of the organization there is the need to attract new funds. Loan capital is generated through loans, leases, subsidies, etc. the Sources of funds can be very different. A clear answer to the question about the ratio of debt to equity in the capital structure no. American scientists believe that founders must first Fund the organization, and to the loans to be resorted to only as needed. The opposite opinion exists among Japanese bankers. Companies with a large proportion of borrowed funds are more attractive, accordingly, to him the above trust banks.
As for the Russian enterprises in the structure of borrowed capital is dominated by short - and long-term loans (with maturity more than 1 year). They are a valuable resource that is invested in large-scale projects and pays for itself at the time of repayment. These include the credit debt, issued bonds repayable aid. Such funds are used to Finance non-expendable use. Short-term liabilities are involved to cover the demand in current assets. They are repaid usually within a few months. These include current payables for remuneration of labour, contributions to the budget and funds received advance payments, advance payment orders, payables to suppliers etc. In theory, the company is not prohibited to Finance a long project at the expense of short-term loans. But in practice, this leads to an increase in risk activities.
The borrowed capital can be divided into interest (for example, loans) and interest-free (debts to suppliers, etc.). So this concept is very broad. Loans allow you to quickly cover the shortage of funds, but at the same time indicate that the company is funded by liabilities. A large share of loans in the capital structure is typical for organizations with aggressive financing policies. The effectiveness of their use is the main task of management.
To ensure the activities of the organization you need money. At the first stages of operation, the authorized capital is used. But sooner or later the organization will require funds from external sources. Joint-stock companies can expose their shares for sale and attract new members of the organization. Enterprises of other forms of ownership have to use loans and loans. Such funds are attracted at a certain percentage for a predetermined period. Competent management of the capital structure is to find the optimal balance between own and borrowed funds, in which the increase in profitability will not occur due to a strong increase in risks.