Payout Policy & Capital Structure

Payout Policy

A company's payout policy discusses the way the business wants to use its excess cash, principally the percentage of revenue to allocate to dividends. For example, if a company reaps a net profit of $1 million at year-end and top leadership consents to pay aggregate dividends of $250,000, the payout is 25 percent, or $250,000 divided by $1 million times 100. Investors may shun an organization's fundraising efforts if the business is awash in cash, but carries a payout rate lower than what operationally similar companies offer. Financiers may leave the company's bandwagon not necessarily from any animus toward top leadership, but to seize other opportunities -- domestically and overseas -- in an economy that becomes more global by the day.

Capital structure refers to the various funding methods a company uses to operate, as well as the respective percentages of financing products. For example, the balance sheet of a publicly traded business shows the following data: short-term debts, $1 million; long-term liabilities, including bonds payable, $500,000; common stock, $1 million; and retained earnings, $2.5 million. Consequently, the company's total capital balance amounts to $5 million, or $1 million plus $500,000 plus $1 million plus $2.5 million. The company's respective capital structure shows: 20 percent ($1 million divided by $5 million times 100), 10 percent, 20 percent and 50 percent. The percentage calculation for other capital components follows the same pattern as the one used for short-term debts.

A company's capital structure interrelates with its payout policy, because both concepts help senior executives run a tight ship, compensate shareholders fairly and insulate the organization from a bad economy -- or, at least, from its pernicious effects, such as a slump in demand, challenging credit conditions and customer exodus. These concepts also share a mathematical proximity, because an increase in dividend payments lowers the retained earnings balance -- which is a capital structure component.

Business fundraising initiatives require the steadfast contribution of various personnel, including corporate treasurers, investment analysts and accountants. Financial managers also work in tandem with investment bankers to help a company raise funds in securities markets, such as the London Stock Exchange, or through private conduits.