The determination of financial structure represents an important decision within the domain of financial policy of the enterprise aiming to the combination of used resources on a reduction background relating to the fiancing costs. The financing decision shall not entirely depend on the enterprise, its objectives, its anticipated profitability or the risks it consents to bear, but it shall be influenced by shareholders, banks, state, and the way in which the economic mechanisms are functioning at the regional, national and global level. The economic and political situation recorded in Romania in the period following the year 1990 affected the economic and financial relations of Romanian enterprises. Within the essay, there are distinguished issues relating to the importance of the choosing decision for the enterprise financial structure, as well as the need for the strengthening of the financing decision within the train of events displayed by the market it acts on. A series of factors regarding the environment such as the inflation, the monetary policy, the exchange rate, the fiscality degree, and so on, exerted notable influences on the financing decision on the microeconomic level.the financing decision on the microeconomic level; the profitability criterion and the resources designation criterion; influence of the inflation rate, interest rate and the exchange rate

Chirculescu, Felicia

Dobrota, Gabriela

English

Research Papers in Economics

CONSOLIDATION OF THE FINANCING DECISION 
ON THE MICROECONOMIC LEVEL 
 
Professor doctor Gabriela Dobrotă, "Constantin Brâncuşi" University, 0721/344193, 
gabi.dobrota@utgjiu.ro
Junior assistant Felicia Chirculescu, "Constantin Brâncuşi" University, 0724309585, 
chirculescu_felicia@yahoo.com
 
 
  The determination of financial structure represents an important decision within the domain 
of financial policy of the enterprise aiming to  the combination of used resources on a reduction  
background relating to the fiancing costs. The financing decision shall not entirely depend on the 
enterprise, its objectives, its anticipated profitability  or the risks it consents to bear, but it shall be 
influenced by  shareholders, banks, state, and  the way in which the economic mechanisms are 
functioning at the regional, national and global level.   
  The economic and political situation recorded in Romania in the period following the year 
1990 affected the economic and financial relations of Romanian enterprises.                     
  Within the essay, there are distinguished issues relating to the importance of the choosing 
decision for the enterprise financial structure, as well as the need for the strengthening of the 
financing decision within the train of events displayed by the market it acts on. A series of factors 
regarding the environment such as the inflation, the monetary policy, the exchange rate, the fiscality 
degree, and so on, exerted notable influences on the financing decision on the microeconomic level.     
 
  Key words: 
the financing decision on the microeconomic level; 
the profitability criterion and the resources designation criterion; 
influence of the inflation rate, interest rate and the exchange rate.  
 
The progress of every activity implies the existence of a capital. As a rule, the 
companies could embrace different financing modalities depending on the organization 
pattern, the capability to obtain overflows from the service operations involved, on the 
influence exhibited by the shareholders, the policy exercised by the debtees, the economic 
environment where it acts but also on the financing cost related to every source.   
An important issue that rises before the company while adopting the financial decision is 
consequently represented by the optimum combination of the financial means, that is the 
preferance for a financial structure which allows the financing of all necessities within the 
reduction background of the financing costs.  
  The determination of financial structure represents an important decision which 
penetrates into the financial policy domain of the company. It has to establish the modality 
for achieving the financing aspects by employing the short-term debts or permanent capitals 
and, moreover, through the determination of the balance between own capitals and those 
lent on a medium-term and long-term. The usage of  own capitals for activity financing has 
been, for a long time, considered as the most profitable modality for ensuring the 
corresponding financial resources. But, taking into account the permanent increase of 
financing needs that could not be covered by repeted issuances and the requirements 
enunciated by the shareholders, in the sense of the enlargement of remuneration level for the invested capitals, the tendency to appeal to short-term lent capitals has been widely noticed 
at the level of Romanian companies. Within short-term debts one distinguishes operating 
debts, the credit line appreciated by the providers managers as an important financing 
source, because of its non-onerous title (although its widely spread usage could lead to 
financial blocking), as well as financial debts. 
          But appealing to indebtment generates compulsoriness for the reimbursement of the 
lent amounts of money and its related interests, which could engender the insolvency risk.  
The choice for financing by indebtment or by own capitals influences the balance 
risk/profitability. Thus, the indebtment financing could determine the increase of 
profitability but also the augmentation of the risk. Certain criteria could be used while 
embracing the financial structure, among which the most important are the profitability and 
resources designation criterion. 
  The profitability criterion is based on the reasoning according to which a profitable 
company (its profitability rate exceeds its interest rate) should not expect until the 
accumulation of its own funds in order to finance a project but the company could very well 
resort to credits. Although both own capital and lent capital imply the existence of costs, 
there is an essential difference between the cost of own capital and the cost of the lent one. 
It consists in the fact that own funds are not remunerated unless the company obtains some 
profit, while the lent capital should be remunerated no matter the company's profitability. A 
company engendering large debts shall register on a monthly or systematic basis, higher 
financial expenditures decreasing the possibility for ownfinancing.  
  Under such conditions, the profitability criterion is decisive, consequently, if the 
company is profitable, that is the rate of economic profitability  (re) is predominant over the 
interest rate (rd) then it could resort to credits. The decider has to follow the indebtment 
effect which is established by comparing the economic profitability and the cost of lent 
capital (reflected within the interest rate):  
 r e>rd ⇒positive or favourable indebtment effect 
 r e<rd ⇒ negative or unfavourable indebtment effect  
  The importance of the financial structure of an enterprise results from the influence 
of lending on the own funds profitablity also known as the levier effect, from the acquiring 
of enterprise autonomy and the risk determined by the contraction. The levier effect could 
be define as the mechanism by which the indebtment influences the financial profitability, 
the profitability expressed by relating profits, as results of the operation and own funds.  
  The financial profitability is directly proportional with the financial structure 
represented by the relation debts/own funds and the difference between the economic 
profitability and the interest rate: 
  
) ( d e
pr
e f r r
K
D
r r − + =      (1) 
  
Taking into account the proceeding for the calculation of financial profitability, one 
could estimate that it equals the economic profitability ( ) e f r r =  when debts are null. If the 
economic profitability is higher than the interest rate ( ) it results that the indebtment  d e r r >effect is positive and, in consequence, the financing through credits is advisable. If the 
economic profitability is lower than the interest rate  ( d e r r < ) one could estimate that the 
indebtment effect is negative and implicitly the financing through credits is not advisable.  
  In compliance with the second criterion used for the assessment of the financial 
structure, namely the resources designation criterion, the fixed assets (Ai), which includes 
the needs bearing a permanent character, should be financed out of invested or long-term 
capitals, as it might be riskful to finance the purchase of fixed assets from financial 
resources with on-coming maturity. The current assets (Ac) could be covered by the 
working capital but also by short-term debts due to the settled feature of a part of the current 
assets, as well as the high fluctuations recorded subsequent to a change within the provision, 
production and commercialization conditions. Consequently, between resources and usages 
the following relations could be established:   
 
Dts FR Ac + =           (2) 
 
where:  Ac represents the current assets (expenditure consumed during the operating cycle); 
FR – the working capital; Dts – short-term debts. 
 
   Ai Cp FR − =          (3) 
or:                                      Ai Cp FR − =                        (4) 
 
where: Cp represents the long-term capital which integrates all long-term financing sources, 
which means the equity ownership and financial debts (credits) on medium and long-term, 
as follows: 
 
Dtml Kpr Cp + =        (5) 
where: Dtml represents the medium and long-term debts.  
Importance is displayed for the company by adopting the financing decisions in 
compliance with the permanent or temporary character of financing necessities. These 
decisions involving financial policy are supported by the financial structure embraced by the 
company depending on certain criteria. Consequently, one could state that the main 
responsabilities of financial policy consist in the selection of the right balance for increasing 
the economic capital, as well as of the modalities for financial covering.  
The financial structure is not only influenced by the capital cost, the relation 
profitabilty-risk, the manager's choice or the old shareholders' adopted position. A series of 
economic and financial factors affects it, such as the sales dynamics, the economic and 
financial profitability, the internal conditions and the profit level.    
  Also, the financing acitivity is influenced by the functioning of macroeconomic 
mechanisms and implicitly, of their corresponding factors (inflation rate, interest rate and 
the exchange rate).  
  One could state that in Romania, with reference to the period  2000-2006, the 
inflation impact on the economic activity developed at the microeconomic level has been 
reduced, compared to the situation recorded soon after the 90's when inflation constituted a permanent reality which oppressed the Romanian economy (especially during the period 
1991-1994 and the year 1997 when hyperinflation has been recorded, and this extremely 
high monetary phenomenon had not been encountered during 2000-2006, acording to 
official data): 
                                               Table no. 1 
Inflation rate in Romania 
Year  Annual inflation rate  
-%- 
2000 45,7 
2001 34,5 
2002 22,5 
2003 15,3 
2004 11,9 
2005 9,0 
2006 6,56 
  
Graphically, the evolution of the inflation rate is represented as follows: 
 
1999 2000 2001 2002 2003 2004 2005 2006 2007
Years
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
I
n
f
l
a
t
i
o
n
 
r
a
t
e
 
          
  One could notice that the inflation decreased from 45,7% in 2000 to 6,56% in 2006, 
and 2005 has been the first year following the period after 1990, when the inflation was 
represented by one digit, confirming the disinflationary trend during the recent years.  
We have to specify that, for every business enterprise that operates within an 
inflationary environment, it is difficult to maintain its position but particularly to develop 
due to the fact that determined policies could not be achieved in time and thus, the 
accomplishment of a real positive profitability becomes almost impossible to reach.   
  The disturbance of the inflationary phenomenon from a period to the other, as it 
results from table 1, represents, in fact, one of the reasons for which numerous enterprises have not been able to adjust to economic conditions and thus, they registered negative 
values for the real profitability. But, as the creditors bear the capacity to estimate negative 
real financial profitability rates, the companies shall be certainly directed towards other 
investment opportunities, and implicitly towards the indebtment procedures in order to 
finance the investments or even for being able to further proceed their activity under certain 
difficult circumstances from a financial point of view.   
  As it has been stated earlier, alongside with the inflation rate, the interest rate on the 
market represents another useful indicator both for the enterprise and its investors, for at 
least two reasons: 
1.  the shareholders constantly compare the profitability rate displayed by the 
enterprise out of its own activity developed by means of deposit interest rate, and if the 
latter cannot offer a higher profitability than the one obtained by capitalizing under the form 
of bank investment, this could mean the loss of financing out of equity ownership;  
2.  in the case of indebted companies, the interest rate determines the cost of debts 
which directly influences the weighted average capital cost. 
  Between the inflation and interest rate, there is an interconditioning relation, one 
could state, because the inflation rate unfavourably influences the interest rates.  
  As far as the exchange currency is concerned, and its influence on the activity 
developed at the microeconomic level and implicitly, on the financing sources for these 
activities, this is affected by the recorded fluctuations, as follows:  
          Table no. 2 
Currency RON/EUR and RON/USD 
At the end of the period 
Year  Currency EUR  Currency USD 
2000 2,40076  2,588 
2001 2,7727  3,1428 
2002 3,4919  3,35 
2003 4,0994  3,2798 
2004 3,9378  2,8941 
2005 3,6908  3,116 
2006 3,3982  2,5859 
 
  Beginning by the year 2000 RNB has replaced the reference currency (USA dollar) 
by a mixture of currency composed of 60% EURO and 40% USD, these balances being 
justified at the moment by the importance of the two exchange rates within the exterior 
exportation Romanian commerce and financial transactions; subsequently, the year 2004 
brought a change in currencies to  75% EURO and 25% USD, and the reference currency 
for the year 2005 shall become EURO. 
  In compliance with the average-term economic strategy elaborated by the 
Government and RNB, the exchange rate has been used at the beginning of 2000, more as 
an antiinflationary anchor and less as an instrument for adjusting the external imbalances, 
the transmission channel of the monetary policy through the exchange rate towards the 
inflation has proved very efficient.  
  If until the end of 2003, the Romanian Leu has experienced a depreciation as 
compared to the European currency and the American dollar as it results from table 3, the beginning of the 2004 has faced a change within the strategy for the RNB exchange rate. 
The currency has become more flexible.  The National Bank has intercede don the currency 
market less frequently and less predictable, and thus the exchange rate RON/EUR 
appreciated.  The exchange rate appreciation has been largely due to an appreciation trend 
existing on the currency market because of the liberalization of the capital account already 
announced since April 2005 and the expectation for high capital inflows due to increased 
currency differencial between Leu and other currencies.  Also, the flexibility of the 
exchange rate of the national currency has been imperatively necessary for the inflation 
aimed strategy, implemented by RNB since August 2005. This strategy of monetary policy 
implies, as an essential condtion, the existence of an exchange rate with free flotation.     
  The depreciation of Leu during the anterior period (until 2003) has influenced the 
financial structure through the net result between export and import, and further on it had a 
certain impact on the net results within all operational domains, because the prices of raw 
materials and utilities are always adjusted as compared to the exchange rate.   
  For exporters and importer, the net financial result depends on the report between 
the financial revenues and the incurred expenditures, under the influence of a change within 
the exchange rate. The net financial result is determined dependent on the recording 
modality of differences in currency. If, for example, the exchange rate Leu-Euro is higher 
during the collection charge than during the moment of receivable right, a favourable 
exchange rate difference shall be registered, and an unfavourable exchange rate difference 
shall be encountered during a distinct situation.  
  The depreciation of Romanian Leu could also have a neutral influence or favourable 
one on the exporters profit duet o charges to be accomplished, which might lead to an 
increase of ownfinancing and implicitly a decrease of debts balance within total liabilities. 
But this situation is negatively reflected on the importers financial results who have paid in 
currency and who are thus, forced to pay more for the imports achieved in the past, paid 
under a depreciated national currency. Consequently, they are forced to increase the debts 
balance for total resources. 
  As a conclusion, one might notice that the selection of financial structure represents 
an important decision for the financial management, with profound implications within the 
operating domains at the level of business enterprises, being subject to the influence of a 
series of interna land external factors. Generally, we could state that the main financing 
source in Romania is constituted by own funds and then, the short-term debts in the 
detriment of long-term debts.  This situation could be considered as a consequence of a 
defective management that cannot contract long-term credits, but also of the microeconomic 
circumstances and a crediting policy which encouraged the companies to resort to short-
term credits (for example, resorting to long-term loans under the form of issuance of bonds 
is not a very common method used by Romanian enterprises). Under such context, the 
selection of financial structure should be made by taking into consideration of all micro but 
also macroeconomic variables. 
 
Bibliography: 
1. Dobrotă, G., Enterprise financial administration, Spirit Publishing House, Craiova, 
Romanian, 2003; 
2.  www.bnr.ro, statistical section. 

Consolidation of the Financing Decision on the Microeconomic Level

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