The margin of financial strength characterizes. How to calculate the margin of financial safety. Financial safety margin management methods
Both starting a business and its continuous development require a systematic economic analysis. Analysis economic activity enterprise involves accounting and the preparation of various reports based on it, but this is more likely to apply to quantitative methods of analysis. Speaking about qualitative methods for diagnosing the state of an enterprise, first of all, we should mention such a tool as the calculation of various coefficients. Today in the article we will talk about the coefficient margin of financial strength. We will try to explain the essence of this indicator, give a formula for its calculation and determine the role of this coefficient in business planning.
What does the financial strength factor show?
Margin of financial strength- this is a value that demonstrates the difference between the actual volume of manufactured (sold) products and the volume of output that corresponds to the break-even point.
This indicator, in fact, shows the maximum allowable limit by which it is possible to reduce the output of goods and services, which at the same time can lead to the limit of break-even production and, if the reduction continues, to the unprofitability of the enterprise. Thus, margin of financial strength is an indicator of a certain "insurance" of the enterprise - that is, how far the enterprise is from a loss-making level.
Like any other financial ratio, margin of financial strength will be more "demonstrative" and informative if it is calculated in combination with such parameters as:
- breakeven point;
— profitability ratio;
- shoulder financial leverage;
- coefficient financial stability and etc.
Formula for calculating the margin of financial safety
Margin of financial strength can be calculated both in absolute (value) and relative (percentage) terms. But the main thing is that, unlike other indicators, the formula for calculating margin of financial strength is fairly standardized and looks like this:
ZFP (in absolute terms) \u003d (Sales revenue - Sales volume at the break-even point);
ZFP (in relative terms) = (Sales revenue - Sales volume at the break-even point) / Sales revenue.
The presented formulas can be calculated in monetary and in-kind terms. Monetary expression is a calculation in rubles, thousands of rubles, etc., or in another currency. The natural expression involves the calculation in pieces, kilograms, tons, litre, square meters etc., that is, abstracting from the influence of the price factor.
Margin of Financial Safety - Percentage Formula
SFP = ((Sales revenue - Sales volume at the break-even point) / Sales revenue) * 100%.
Relative (percentage) values, unlike absolute ones (in pieces, kilograms, rubles, etc.), are more convenient for analysis, since they allow you to compare various coefficients with each other. But sometimes the calculation of relative values, in particular margin of financial strength may not be appropriate.
In order to correctly determine by which formula and in which expression to calculate the coefficient margin of financial strength, we recommend downloading ready business plan an enterprise similar to yours in terms of activity and market. Focusing on such a template will help you to include all the necessary sections and paragraphs.
An example of calculating the margin of financial safety
The scale of the calculation of the coefficient fin. strength and break-even point will depend on the specifics of each particular enterprise. Next, consider a conditional example of calculating this indicator.
Before carrying out any analysis, it is necessary to determine the value:
- fixed costs per unit of production (FC);
- variable unit costs (VC);
- the price at which the commodity is sold in the market (P).
Suppose, in the example under consideration, the named units will be equal:
Let in our conditional example the named quantities be equal:
TVC = 80 rub.
TC = 140 rub.
TR = 240 rub.
I (TR - TC) = 100 rubles.
Break-even point \u003d FC * TR / (TR - TVC) \u003d 90 * 240 / (240 - 80) \u003d 135 rubles.
Margin of financial strength\u003d TR - Break-even point \u003d 240 - 135 \u003d 105 rubles.
Thus, calculated in monetary terms, the example shows that:
- the break-even point will be reached at a production volume of 135 rubles,
- a margin of financial strength is 105 rubles.
Ways to adjust the margin of financial strength
It is clear that it is not enough just to calculate any indicator. We still need to find or come up with methods to control it. So, if as a result of calculations you get a low value margin of financial strength the next step is to develop measures to improve the situation.
First, an additional source of improvement financial results companies can be called the most obvious way is simply to increase sales. Even with a small margin per unit of production, you can get a good income due to the large turnover (cumulative increase in income) and the appearance of economies of scale.
In general, economies of scale are one of the main indirect sources of increasing the efficiency of an enterprise and increasing its profitability. It is also connected with the break-even point, which determines the margin of financial strength. As you know, with an increase in production, fixed costs in the unit cost of production tend to decrease, so to speak, "stretch". This trend is called economies of scale. At the same time, the break-even point shows what the minimum output should be in order to at least cover all production costs at least minimally. It is this break-even level that becomes, one might say, the starting point for obtaining economies of scale in the future.
An additional source of funding may be participation in auctions for work, public procurement and tenders. The time spent on marketing can be a catalyst for a much larger amount of revenue.
Of course, you can not do without cost management. Their optimization (if it is still possible) will reduce the cost, which will increase the profit of the enterprise. This is especially true for variable costs. But “manipulating” fixed costs is also a good tool to increase margin of financial strength enterprises. To this end, it is possible to optimize wages, as well as revising the production program. Sometimes the acquisition of innovative equipment with high returns can also significantly improve not only production, but also financial performance.
The margin of safety also uses when researching which is very extensive.
In a business plan, the financial safety margin is defined as
Drawing up a business plan involves a large list of activities to analyze the market and the competitiveness of the project / product, develop production program, investment planning, forecasting future financial results. One of the components of such forecasting is the definition margin of financial strength.
The calculation of the financial strength ratio must necessarily be preceded by the calculation of the break-even point. This once again confirms the need for a comprehensive assessment and embedding any coefficient in overall structure business plan.
We also note that margin of financial strength can be called a more objective parameter than the breakeven point. For example, breakeven points small shop and big supermarket may differ thousands of times, and only the margin of financial strength will show which of the enterprises is more stable.
When choosing an option for implementing your business, pay attention to an option such as. This is an interesting business idea that you might like.
Summarizing
Summarizing the above, it is worth noting that both the start of a project and its subsequent development require special attention not only to the direct production processes and marketing strategy, but also to record keeping and analysis of financial and economic indicators. At the same time, such an analysis includes a wide range of areas - this is the determination of the profitability of the enterprise, and the analysis of the liquidity of its assets, and, of course, the diagnosis of its stability and sustainability. To determine the last of the named characteristics of the enterprise's activity, the coefficient is used margin of financial strength.
Moreover, the calculation of all these coefficients and indicators is important even at the planning stage. In this case, we are talking about the potential margin of financial strength, that is, the ability of the enterprise is in a certain degree of “protection” from a loss-making level. If you are determined to independently develop a business plan for a future project, then we recommend downloading to facilitate this process. finished sample business plan on the Internet, which will help to properly embed financial section into the overall structure of the business plan. It is also possible to order the development of such a document by contacting specialists in the field of business planning, who will prescribe all the necessary sections, taking into account the characteristics of your business.
Financial strength is one of the main indicators of a promising and dynamic company. In other words, this is the critical point at which the break-even operation of the enterprise is realized at an extremely low volume of production.
What is a financial safety margin
The stock of FP is a value that determines the amount of possible reduction in production, at which the company will not incur losses. That is, it is the ratio between current sales figures and sales figures at the break-even point. The result is expressed as a percentage.
Main purposes of calculations
The FFP is defined with the following objectives:
- If it plans to reduce sales revenue, the company needs to know how far sales can be reduced. The critical point is the state of the firm in which it does not incur losses, but sells the minimum amount of production. That is, the organization in this case works “to zero”.
- Finding the financial stability of the company.
- Analysis of the risks of losses in the event of a decrease in production.
The calculation of the FZP provides the solution of the following tasks:
- Analysis of the indicator of financial stability.
- Assessment of existing bankruptcy risks.
- Determination of methods for increasing financial strength.
- Establishing a safe scale for reducing sales.
- Comparison of various forms of products sold.
- Ensuring a reasonable pricing policy.
Documents used in determining the financial safety margin
When calculating the stock, information is taken from company documents. The more accurate the initial values are, the more accurate the result will be. Consider the documents on the basis of which the calculations are carried out:
- Balance sheet. It reflects retained earnings, uncovered loss. From the document, you can understand the current state of the organization's property, its capital and liabilities. Based on the balance, a third-party user can analyze the company's creditworthiness and make a decision on cooperation.
- Profits and Losses Report. The standard reporting period is one year. Based on the document, you can analyze the financial results of activities. The balance allows you to analyze the dynamics of profit values, to determine the degree of influence of external factors.
- Appendix to the balance sheet. Includes provisions that disclose asset and liability items.
Other documents may be used as needed.
Formula for calculation
ZPF is determined by this formula:
Total Revenue - Critical Revenue
The FP reserve indicator may change under the influence of the following factors:
- The volume of production and sales figures are similar.
- Production volume values exceed sales volume values.
- Sales figures exceed production figures.
If the company produces too many goods, but it is not possible to sell them, the profit is low, the margin of financial safety decreases. Therefore, in order to maintain the optimal level of the indicator, it is necessary to plan the scale of production well. Another of the unfavorable options is the excess of sales indicators over production indicators. In this case, the organization's dependence on its counterparties increases.
What is the financial strength ratio
The FP ratio is the ratio of the FP stock indicator and total revenue, expressed as a percentage. The scale of revenue reduction at which the company will begin to incur losses is determined. The ratio reflects the part of the assets that are formed from stable sources. That is, the sources of financing are determined, due to which the company can continue its activities for a long time.
CFP is determined by this formula:
Total Revenue - Critical Revenue: Total Revenue *100
According to the obtained indicator, one can judge the financial condition of the company.
Analysis of the obtained coefficient
A coefficient of more than 10% is evidence of the company's high financial strength, as well as increased profitability. The higher this indicator, the greater the financial strength. The closer the value is to the breakeven point, the faster the stock of FP changes. The inverse relationship is also true. A high value of the stock of FP indicates the following processes in the company:
- Small risk of loss.
- financial stability.
- Small revenue, at which the organization does not receive losses.
Let's take a closer look at the values of the coefficient:
- 0.5-0.8 - relative stability of the enterprise.
- 0.2-0.5 - unstable position of the company.
- Less than 0.2 - a crisis situation, proximity to bankruptcy.
The FP margin is an indicator that is constantly changing. It is recommended to regularly monitor it, analyze changes.
The main stages of determining the margin of financial strength
This algorithm is proposed to determine the FFP:
- Calculation of the stock of FP.
- Determination of the influence of the difference between the number of sales and production indicators through the correlation of the FPI indicator, taking into account the growth of inventory.
- Determining the optimal scaling up and limiter of the FFP.
The result obtained is used in predicting the FFP, ensuring a stable indicator.
How to increase the margin of financial strength?
The following actions are taken to change the stock of FP:
- Increase in total revenue from product sales. This is done by increasing sales volume, increasing the cost of products. It is possible to take both of these measures at the same time.
- Increasing the indicator to the break-even point. This is done by increasing the cost of products, investing in the promotion of goods.
- Cost reduction. This can be done by reducing variable and fixed costs.
Another method of increasing the stock of FP is to replace fixed expenses with variables.
The company's goal is to increase the stock of FP. To achieve this, it is necessary to regularly analyze the performance of the FZP, form strategies to increase the stock. To increase the stock, these methods are used:
- Attract new customers and increase sales by participating in tenders.
- Change in the cost of products. It must be justified in order to increase the company's income.
- Increasing production capacity.
- Reducing variable costs, which include the cost of raw materials, fuels and other inputs used in production.
- Reducing fixed costs, which include salaries for low-skilled employees, automation of personnel activities.
- Implementation of innovative technologies in the company's activities to reduce costs.
Which way to choose? It all depends on the specifics of the enterprise. For example, some companies do not want to reduce the cost of products. The price of a product can be as low as possible. It would be wiser to direct funds to the promotion of goods.
NOTE! There are no specific ways to increase the margin of financial stability. You can increase the indicator by improving the quality of the enterprise. The company's goal is to increase sales figures, make products more attractive.
The financial safety margin is economic indicator, demonstrating the stability of the enterprise to reduce production. This value shows how much you can reduce the rate of release of new products without incurring losses.
The indicator is expressed as the ratio of the difference between the sales volume that exists at a certain point in time and the sales volume that the company will have at the break-even point. The final value of these calculations is presented as a percentage. Naturally, the higher the indicator reflecting financial strength, the more stable the position of the enterprise and the lower the risk of economic losses for it.
The greatest influence on this value is exerted by the size of existing costs. The higher they are, the less, at the current moment of time, as well as in the foreseeable future, the margin of financial strength and vice versa. The greatest effect is the reduction of existing fixed costs.
In real economic practice, there are three situations that determine the amount of profit and, accordingly, the margin of financial safety:
- The first situation reflects the moment when the enterprise reaches a state called the break-even point, that is, production completely coincides with sales. In this case, there is no adjustment to the existing margin of financial strength and profit, so that the indicator remains unchanged.
- The second situation is when a company produces more than it sells. This negatively affects the margin of financial strength, since an excess of production leads to the appearance of lost profits. Getting out of this state will require careful and long-term planning of production volumes, combined with demand analysis.
- The third case - the volume of sales of goods is higher than the volume of production. In such a situation, there is an increase in profits and, in connection with this, financial strength. But the other side of the coin is an increase in dependence on existing counterparties, so that the improvement in the situation will be imaginary. It turns out that if the volume of reserves changes sharply, then a special form of financial instability, called latent, will manifest itself.
To make a full assessment of the existing margin of financial strength, it will be necessary not only to calculate according to the above formula, but also to analyze various aspects economic activity. First of all, you should find out what effect the difference between the existing indicators of sales and production has, and also take into account the existing indicator of increase in the number of inventories. Depending on the results obtained, the financial safety margin will be adjusted.
In practice, if this indicator is above 10%, then the company is considered to be very stable. Such a company is able to withstand changes in the volume of sales and production of goods without any economic losses.
Margin of financial strength is the difference between the actual sales volume and the sales volume corresponding to the break-even point.
Determination and analysis of the financial safety margin is carried out in the FinEkAnalysis program in the Cash flow analysis block.
Margin of financial strength formula
The margin of financial strength shows the extent to which a business can reduce sales before incurring a loss.
Was the page helpful?
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- Study of the problems of underinvestment and overinvestment of Russian companies depending on the stage of their life cycle Sectoral differences may also exist for the level of retained earnings in total assets - in some industries, it is beneficial for a company to have a margin of financial strength if their operating indicators are eolatile or highly dependent on market conditions and
- Justification of management decisions based on marginal analysis Exceeding the actual proceeds from the sale over the profitability threshold determines the margin of financial strength of the enterprise
Margin of financial strength is the difference between the actual sales volume and the sales volume corresponding to the break-even point.
Determination and analysis of the financial safety margin is carried out in the FinEkAnalysis program in the Cash flow analysis block.
Margin of financial strength formula
The margin of financial strength shows the extent to which a business can reduce sales before incurring a loss.
Was the page helpful?
More found about the margin of financial strength
- The use of operating leverage to determine financial stability and risk Based on the above indicators, we calculate the profit margin of profitability margin of financial strength and the impact of the operating leverage The lower limit of the profitability of the enterprise is characterized by the breakeven
- Multi-product break-even point Figure 1. Graphical method for determining the multi-product break-even point Financial safety margin 17,400 12,104 5,296 thousand rubles Calculation results are presented in
- Marginal analysis in business planning It is traditionally considered that if the company's financial safety margin is less than 10%, the production risk is high Therefore, operating leverage should
- Assortment and profit management based on marginal analysis Let's compare the break-even sales volume with the actual one and determine the financial strength margin of the enterprise in kg and thousand rubles Table 5. Calculation of the financial strength margin
- Break-even analysis of the production process of the enterprise
- The financial security of the company: an analytical aspect Let's give a rationale for their inclusion
- Marginal analysis of financial results from the sale of products in JSC "Chishminskoye" of the Republic of Bashkortostan 0 3,794,348.0 3,744,393.0
- Formation of the production program of a machine-building enterprise based on operational analysis
- The effect of operating leverage in the system of marginal analysis FFP financial safety margin PR profitability threshold OP operating leverage P operating profit R operating costs
- The financial potential of an enterprise: concept, essence, methods of measurement These flows are subsystems of the financial system of an enterprise, and the goals of each of them usually coincide with the overall goal of the financial system growth of the financial potential development of the enterprise growth of the stability of the financial system, etc. in the process of formation of financial resources at the expense of the income of the enterprise, it can be measured by a well-known indicator - the margin of financial strength, but with some refinement of its economic interpretation. The margin of financial strength can be
- Increasing the efficiency of entrepreneurial activity of machine-building enterprises in the region based on operational analysis of profit The main elements of operational analysis are the threshold values of enterprise performance indicators critical production volume break-even point profitability threshold ratio of fixed costs to the share of marginal income in sales proceeds financial safety margin difference between sales proceeds and the threshold profitability For the company is very important
- Associated effect of operational and financial leverage in managing the financial condition of an organization
- Operating, financial and tax leverage: interpretation and ratio Traditionally, it is believed that the financial safety margin should be more than 10%, therefore, operating leverage should be limited to 10, in
- Calculation of the break-even point using analytical accounting data
- Methodology for analyzing the financial results of a manufacturing enterprise according to financial statements Break-even revenue 1167197 467134 - 700063 10 Financial safety margin Sum of financial safety margin Actual revenue % 28.1 14.8 - 13.3 If
- Analytical substantiations of the mechanism for applying discounts in settlements with debtors Also, one should not forget about the effect of operating leverage: the greater the margin of financial safety, the slower the growth rate of profitability. Thus, the discount is a rather attractive way.
- Features of the analysis of consolidated financial statements (on the example of the analysis of financial leverage indicators) to cover not only fixed operating costs and interest payments on borrowed capital, but also expenses on quasi-equity capital Financial safety margin, which is already quite large, increases due to the increase in corporate profits Financial safety margin for net profit % 92.17 95.37 Financial safety margin strength for the net income of controlling shareholders
- Directions for analyzing the financial condition of an organization in relation to management objectives and user needs Such an analysis allows us to solve the following management tasks determine the minimum allowable sales volume at which all costs associated with the implementation of the company's core activities will be covered establish the financial strength of the company and its attractiveness in the market of goods and services identify factors affecting
- Study of the problems of underinvestment and overinvestment of Russian companies depending on the stage of their life cycle Sectoral differences may also exist for the level of retained earnings in total assets - in some industries, it is beneficial for a company to have a margin of financial strength if their operating indicators are eolatile or highly dependent on market conditions and
- Justification of management decisions based on marginal analysis Exceeding the actual proceeds from the sale over the profitability threshold determines the margin of financial strength of the enterprise