2011 International Conference on Economics Business and Marketing Management (EBMM 2011)
Evaluating the Relations between the Financing Policy and a Company’s Cash Flow
Simona Florentina FAURESCU
FACULTY OF ECONOMICS AND BUSINESS
ADMINISTRATION
UNIVERSITY OF CRAIOVA
Romania
simona_constantin2004@yahoo.com
Abstract—The financing policy represents the effect of
management decisions on the evolution of capital structure. A
company’s cash flow must be analyzed, in order to evaluate
management decisions. Our study aims at showing the
influence of the financing policy on cash flow, and also the
influence of the evolution of net cash flow on future financing
policies, identifying the elements able to be used for
establishing the optimal structure of capital.
Keywords-financing policy, capital structure, cash flow,
equity, borrowed capital
I. INTRODUCTION
Financial theory acknowledges various views on
determining an optimal structure of capital. They are based
on different approaches on the evolution of funding costs.
Our study aims at identifying certain cash flow elements
which are influenced by the capital structure and which
determine future funding policies.
II. CONCEPTS AND METHODOLOGY
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Capital structure is the sum of the shares held by funding
sources in setting up the invested capital [3]. The shares held
by elements in capital structure result from the funding
policy adopted at a company’s level. Capitals existing at a
company’s level are made up of equity, attracted capital
(operating and non-operating debt) and capitals obtained
through bank loans (borrowed capital). Attracted and
borrowed capitals represent total debt for the company,
which must be repaid within the deadlines established on a
contract basis, which may be less than a year (short-term
debt) and more than a year (long-term debt). The sum of
equity and total debt represents the total capital available to
the company.
The financing policy may be assessed both by identifying
its influences on the company’s treasury, and by using
financial rates calculated on basis of capital structure. Of
these, rates based on forms of ownership provide the most
978-1-4244-9545-0/11/$26.00 C 2011 IEEE
Oana Adriana DUTA
FACULTY OF ECONOMICS AND BUSINESS
ADMINISTRATION
UNIVERSITY OF CRAIOVA
Romania
oana.duta@yahoo.com
relevant information on financial autonomy and the risks the
company is exposed to [2]. These rates are:
• The rate of financial autonomy, with its two forms:
global, calculated as a ratio between equity and total
capital, with a normal level of 50%, but able to
provide financial balance at 30-40% as well, and
forward, calculated as a ratio between equity and
permanent capital (sum of equity and medium- and
long-term debt), which must be higher than 50%.
• The rate of indebtedness, with its two forms: global,
calculated as a ratio between total debt and total
capital, with a normal level of 50%, but able to reach
values no higher than 66%, and forward, calculated
as a ratio between medium- and long-term debt and
equity, which must be no higher than 100%.
The analysis of these rates allows for the assessment of
financial decisions and provides information on the
company’s capacity to resort to borrowed resources, offering
information on the financial risk the company is exposed to
and the way how such risk influences the financial evolution
thereof.
The financing policy affects the company’s cash flows,
both by attracting cash sources and by repaying debt. The
assessment of the financing policy’s influence on the
company’s cash flows may be made by means of the cash
flow statement. This is regulated according to International
Accounting Standards and represents one of the financial
statements drawn up at the company’s level. The cash flow
statement is a dynamic representation which underlines net
changes in assets, debt and equity along a period [1]. This
statement includes changes in the operational, investment
and financing activities, but also the results of each separate
action. The result of each activity will be named operating
cash flow (OCF), investment cash flow (ICF) and financing
cash flow (FCF). These cash flows result in net cash flow.
The parallel analysis of a company’s financial structure
and changes in cash flow components show the influence of
such structure on cash flow. This information may be used
by the management in the company's future financing
decisions.
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 2011 International Conference on Economics Business and Marketing Management (EBMM 2011)

III. EASE OF USE CASE STUDY: CORRELATIONS BETWEEN nt

capital
THE FINANCING POLICY AND CASH FLOW IN PANASONIC Total
6,936,759 6,885,388 6,535,634 5,435,718 6,637,279
CORPORATION AND SONY CORPORATION capital
Share of the main elements in the capital structure
According to Stancu, a criterion for identifying an 2005 2006 2007 2008 2009
optimal capital structure must be determined on basis of the Share of
equity in
accomplishment of financial goals of return, liquidity and total
54.60 56.88 57.26 51.22 42.07
risk decrease [3]. Most theories regarding the optimal capital
financing structure are based on obtaining a lowest cost of Share of
debt in
capital and risk reduction. They do not insist ensuring total
45.40 43.12 42.74 48.78 57.93
liquidity and, most importantly, on available cash. The cost capital
of equity is higher than the cost of borrowed capital, but Capital structure rates by forms of ownership
Rate of
increasing indebtedness exposes the company to a high risk global
regarding profit variation, and to the risk of incapacity to financial
repay the debt principal [1]. For this reason, the literature in autonom
y 0.55 0.57 0.57 0.51 0.42
the field presents several opinions, more or less approved, on Rate of
the criteria for establishing an optimal financing structure, forward
but no unanimously recognized criterion or procedure has financial
autonom
been established so far, for identifying an optimal structure y 0.93 0.95 0.94 0.81 0.73
of company capitals. Rate of
The study aims at identifying the impact of capital global
indebted
structure on cash flow and the importance of assessing net ness 0.45 0.43 0.43 0.49 0.58
cash flow in establishing the optimal structure of capitals. It Rate of
uses two of the most important manufacturers of household forward
indebted
appliances at world level, i.e. Panasonic Corporation and ness 0.07 0.06 0.06 0.23 0.37
Sony Corporation. Cash flow
Table 1 presents the structure of capital, the shares of OCF 575,418 532,557 372,617 116,647 522,333
ICF 407,091 -567,808 -61,371 -469,477 -323,659
important elements in the capital structure, rates of capital FCF -524,568 -448,838 -533,243 -1,183,280 1,159,566
structure by forms of ownership and cash flow during 2005- Foreign
2009, for Panasonic Corporation. currency
exchang
e rate
TABLE I. (MILLION $) differen
ces -39,699 -32,197 129,521 36,831 5,656
The
analyze Net CF 497,640 -451,892 -351,518 -1,572,941 1,352,584
d 2005 2006 2007 2008 2009
indicato
r Analyzing table 1, we obtain the following information
Capital structure (the influence of capital structure on cash flow started in
Register
ed 258,740 258,740 258,740 258,740 258,740 2006, allowing for the existence of comparisons):
capital • equity holds a major share in the period 2005-2008
Differen
ces from
and total debt holds a major share in 2009;
reevalua
0 0 0 0 0 • the rate of financial autonomy records, for both
tion components, values close to normal ones, which
Other
own 3,528,881 3,658,001 3,483,589 2,525,240 2,533,748
ensure a continual balance and certify the fact that
sources the company may resort to new loans; the rate of
Equity 3,787,621 3,916,741 3,742,329 2,783,980 2,792,488 indebtedness records, for both components, values
Long- 264,070 226,780 232,346 651,310 1,028,928
term
under the maximum admitted upper limit, which
debt means that the company resorted to many loans in
Operatin the analyzed period and provides a guarantee for the
g and
non- 2,478,907 2,467,075 2,367,524 1,867,871 2,457,191
repayment of such loans;
operatin • OCF is influenced upon by the variation of
g debt operating and non-operating debt, as an increase in
Current 406,161 274,792 193,435 132,557 358,672
financial such debt implies a positive effect of the negotiation
debt of more advantageous deadlines with the providers,
Short- 2,885,068 2,741,867 2,560,959 2,000,428 2,815,863 which results in an increase in the excess recorded in
term
debt the operating activity (2009), whereas a decrease
Borrowe
670,231 501,572 425,781 783,867 1,387,600
implies a negative effect on the excess recorded in
d capital the operating activity (2005-2008);
Total
debt
3,149,138 2,968,647 2,793,305 2,651,738 3,844,791 ICF is directly influenced by capital structure, meaning
Permane 4,051,691 4,143,521 3,974,675 3,435,290 3,821,416 that investments are subordinated to the financing policy,

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 2011 International Conference on Economics Business and Marketing Management (EBMM 2011)

with a high degree of indebtedness limiting investments to global

financial
the company’s level; autonomy
• FCF is influenced both by the variation of equity, Rate of
and by the variation of total debt. An evolution of forward
financial
these elements in the same direction, i.e. an increase autonomy 0.81 0.77 0.83 0.82 0.76
in both elements influences FCF in a positive way, Rate of
either by reducing the deficit, or by increasing the global
indebtednes
excess (2009), whereas a decrease in both elements s 0.55 0.57 0.58 0.60 0.63
influences FCF in a negative way, either by Rate of
increasing the deficit (2007, 2008), or by reducing forward
indebtednes
the excess. When elements vary in different s 0.24 0.30 0.21 0.22 0.31
directions, the element with the highest value Cash flow
manifests its influence on FCF. This occurs in 2006, OCF 399,858 561,028 757,684 407,153 912,907
ICF -871,264 -715,430 -910,442 -1,081,342 -746,004
with the negative variation of total debt exceeding FCF 359,864 469,105 505,518 267,458 365,014
the positive variation of equity, so that FCF is Foreign
influenced in a negative way and the deficit currency
exchange
increases. In this case, the deficit did not increase, rate
because payments related to financial lease also differences -35,537 -3,300 66,228 18,911 1,098
decreased (resulting in a reduction in total debt). Net CF -76,005 318,003 286,532 -425,642 530,819
• net cash flow was influenced by FCF to a large
extent, and by its other elements, OCF and ICF, to a Analyzing table 2, we obtain the following information:
lower extent. • total debt holds a majority share in the period 2005-
Table 2 presents the structure of capital, the shares of 2009;
important elements in the capital structure, rates of capital
• the rate of financial autonomy records, for both
structure by forms of ownership and cash flow during 2005- components, values close to normal ones, which
2009, for Sony Corporation. ensure a continual balance; the rate of indebtedness
TABLE II.
records, for both components, values under the
maximum admitted upper limit, which means that
The the company resorted to many loans in the analyzed
analysed 2005 2006 2007 2008 2009 period and provides a guarantee for the repayment of
indicator
Capital structure
such loans;
Registered
624,124 626,907 630,576 630,765 630,822
• OCF is influenced upon by the variation of
capital operating and non-operating debt, as an increase in
Differences
from 0 0 0 0 0 such debt implies a positive effect of the negotiation
reevaluation of more advantageous deadlines with the providers,
Other own
2,579,728 2,743,797 2,834,513 2,333,888 2,335,083 which results in an increase in the excess recorded in
sources
Equity 3,203,852 3,370,704 3,465,089 2,964,653 2,965,905
the operating activity (2006, 2007, 2009), whereas a
Long-term 764,898 1,001,005 729,059 660,147 924,207 decrease in such debt implies a reduction of the OCF
debt excess (2008);
Operating
and non-
• ICF is directly influenced by capital structure,
3,057,462 3,499,561 3,960,143 3,507,285 4,011,140 meaning that investments are subordinated to the
operating
debt financing policy, with a high degree of indebtedness
Current 142,766 52,291 63,224 303,615 48,785
financial limiting investments to the company’s level;
debt • FCF is influenced both by the variation of equity,
Short-term 3,200,228 3,551,852 4,023,367 3,810,900 4,059,925 and by the variation of total debt. An evolution of
debt
Borrowed these elements in the same direction, i.e. an increase
907,664 1,053,296 792,283 963,762 972,992
capital in both elements influences FCF in a positive way,
Total debt 3,965,126 4,552,857 4,752,426 4,471,047 4,984,132 either by reducing the deficit, or by increasing the
Permanent
capital
3,968,750 4,371,709 4,194,148 3,624,800 3,890,112 excess (2006, 2007, 2009), whereas a decrease in
Total both elements influences FCF in a negative way,
7,168,978 7,923,561 8,217,515 7,435,700 7,950,037
capital either by increasing the deficit, or by reducing the
Share of the main elements in the capital structure
2005 2006 2007 2008 2009
excess (2008);
Share of • net cash flow was influenced by FCF to a large
equity in 44.69 42.54 42.17 39.87 37.31 extent, and by its other elements, OCF and ICF, as
total capital
Share of
well.
debt in total 55.31 57.46 57.83 60.13 62.69
capital REFERENCES
Capital structure rates by forms of ownership
Rate of 0.45 0.43 0.42 0.40 0.37

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 2011 International Conference on Economics Business and Marketing Management (EBMM 2011)
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[1] E. Helfert, Financial Analysis Tools and Techniques, A Guide for
Managers, New York: Mc Graw Hill Publishing, 2001
[2] M. Siminica, Diagnosticul financiar al firmei, Craiova: Universitaria,
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