How to Calculate Capital Structure

Capital structure refers to the sources of your company's financing. Some of the money that keeps your business afloat may have come from loans from the bank, some may have come from equity investors who own a piece of the business and some capital may be retained in the company from prior net profits. Understanding the capital structure of your business is the first step in determining the cost to the company of that capital and being able to minimize that cost.

Things You'll Need

• Your company's most recent financial statements
• Calculator
• Paper

Instructions

Calculating Your Company's Capital Structure

1. Review your company's most recent financial statements to find all of the capital components. Highlight all of the debt of the company and the equity (including common and preferred shares, capital contributions and retained earnings).

2. Add up the total debt and equity It will be equal to your company's assets on the balance sheet because the debt and equity is what paid for those assets.

3. Your capital structure is the percentage that each funding source represents of your company's total funding. Let's look at an example. Let's say you have the following capital components: bank loan $176,500, retained earnings $54,300, common stock $12,500. That makes your total capital $243,300. To calculate your capital structure, take the dollar amount of each capital source and divide it by the total capital. In the above example, the bank loan is 72.5%, retained earnings 22.3%, capital stock 5.2% for a total of 100%.

4. Monitor your company's capital structure over time. Debt tends to be the most expensive source of capital and, over time, you will determine the most effective blend of debt versus equity financing for your particular situation. Calculating your actual capital structure will allow you to track how closely you are following your ideal capital structure.