The financial safety margin is calculated as. Margin of financial strength

Both starting a business and its continuous development require a systematic economic analysis. The analysis of the economic activity of an 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 output (sold) products and the volume of output, which 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;

- leverage of financial leverage;

— coefficient of financial stability, 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);

FFP (in relative terms) = (Sales revenue - Sales volume at 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, litres, 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 advise you to download a ready-made business plan for an enterprise similar to yours in terms of activity and sales 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, the most obvious way to improve the company's financial results is to simply 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. For these purposes, 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 a 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 integration of any coefficient into the overall structure of the business plan.

We also note that margin of financial strength can be called a more objective parameter than the breakeven point. For example, the break-even points of a small store and a large supermarket can 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 stability. 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 develop a business plan for a future project on your own, then we recommend that you download a ready-made sample business plan on the Internet to facilitate this process, which will help you to correctly embed the 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.

Determination of the margin of financial strength.

Decision.

The break-even point in kind and value terms.

Example. The value of fixed costs for the production and sale of products is 1.2 million rubles, the price of a unit of production is 135 rubles. The planned amount of variable costs per unit of output is 50 rubles.

Define:

Substitute the data in the formula above:

OPmin \u003d 1,200,000 / (135 - 50) \u003d 14,118 units.

Revenue min \u003d OP min × Price \u003d 14,118 × 135 \u003d 1,905,930 rubles.

2) the minimum volume of sales of products in physical terms to make a profit of 100,000 rubles.

OP \u003d (PtZ + Planned Profit) / (Price - PrZ per unit)

OP \u003d (1,200,000 + 100,000) / (135 - 50) \u003d 15,294 units.

3) the minimum volume of sales of products in physical terms to obtain a profitability of sales of 20%.

In this case, the basic formula used to calculate the break-even point is somewhat transformed:

OP \u003d PtZ / (Price - Return on sales × Price - PrZ per unit)

OP \u003d 1200,000 / (135 - 20% × 135 - 50) \u003d 1200,000 / 58 \u003d 20690 units.

For trading enterprises, the calculation of the break-even point is carried out according to the following formula:

OP min \u003d PtZ / Margin (in% of the selling price),

where OPmin - break-even point in value terms;

PtZ - fixed costs necessary for the activities of the enterprise.

A margin of safety is a measure of how much a company can afford to reduce its sales volume without incurring losses.

Margin of financial strength = (OPplan - OPmin) / OPplan,

where OPmin - breakeven point;

OPplan - the planned sales volume.

The greater the margin of financial strength, the stronger the financial position of the organization and the lower the risk of losses for it.

Example. Determine the margin of financial strength, if the planned sales volume was 1200 thousand rubles, fixed costs are 100 thousand rubles, the average margin (in% of selling prices) is 10%. The selling price of a unit of production is 1100 rubles.

Let's calculate the breakeven point:

OP min = 100 thousand rubles. / 0.1 \u003d 1,000 thousand rubles.

Margin of financial strength \u003d (1200 thousand rubles - 1000 thousand rubles) / 1200 thousand rubles. = 0.167 or 16.7%

Thus, the company will not incur losses if revenue falls by a maximum of 16.7%.

Assessment of the financial condition of the enterprise

An analysis of the financial condition of an enterprise according to financial statements can be carried out with varying degrees of detail. Two types of analysis can be distinguished: express analysis and in-depth analysis.

1. In express analysis, the analyst expects to get only the most general idea of the enterprise. The purpose of such an analysis is to obtain a simple assessment of the financial well-being and dynamics of the enterprise. , includes viewing reports on formal grounds - the correctness of filling in the reporting forms, the compliance of the results, checking the control ratios between reporting items, familiarization with the audit report. Identification of "sick" items - the presence of losses, overdue loans and borrowings, overdue accounts payable and receivables.

2. An in-depth analysis allows you to get an idea of the following aspects of the enterprise:

· Property status;

· Liquidity and solvency;

· Financial stability;

· Business activity;

· Profit and profitability;

Liquidity of the company's assets- the ability of assets to be transformed into cash, and the degree of liquidity is determined by the length of the time period during which the transformation can be carried out.

The less time it takes for this type of asset to acquire a monetary form, the higher its liquidity.

Enterprise liquidity is the ability to pay off your obligations on time and in full.

The concept of solvency is close to liquidity, but it is not always correct to talk about the identity of these definitions.

Solvency of the enterprise- the ability to make timely payments on its urgent obligations.

Calculation of relative indicators for assessing the liquidity and solvency of the enterprise

Instruction

The margin of financial strength shows the expression that denotes how much you can reduce production without incurring losses. Absolute represents the difference between the planned volume of sales and the break-even point. This expression means that the enterprise should not reduce production volumes more than there are financial safety margins.

At the same time, the indicator of the planned sales volume is used to assess the production risk or those losses that are associated with the system of production costs.

The margin of financial strength in value terms is calculated as follows:
Stock \u003d Planned sales volume x P - Break-even point value x P,
where P is the price of one item.

There is another method for determining the margin of financial safety, which determines the excess between real production and the threshold of profitability.
Thus, the financial safety margin is equal to the difference between the company's revenue and the profitability threshold.

The stock of financial strength of the company is the most important indicator in the structure of financial stability. The calculation of this indicator makes it possible to evaluate certain opportunities for additional reduction in revenue from sales of products only within the boundaries of the break-even point.

In turn, the profitability threshold can be defined as the proceeds from the sale, at which the company no longer has losses, but also does not make a profit, that is, all financial resources from the sale are only enough to cover fixed costs, and the profit is zero.

So, to determine the full margin of financial strength of the enterprise, it is necessary to analyze the effect of the difference between sales and production volume through the subsequent correction of the value of the financial strength margin, taking into account the increase in the inventory of the enterprise.

note

The margin of financial strength is an indicator of the financial stability of the enterprise, which determines to what level the enterprise can reduce its production without incurring losses. The margin of financial strength of an enterprise is the ratio of the difference between the current sales volume of a product and its sales volume at the break-even point in percentage terms.

Helpful advice

Financial safety margin is an indicator of the financial stability of an enterprise, that is, how much an enterprise can reduce production without incurring losses. The formula for calculating the margin of financial strength: ZFP = (FOP - OPB) / FOP * 100%, where ZFP is the margin of financial strength; FOP - actual sales volume; OPB - sales volume at the break-even point.

To determine the break-even production of products consider the relationship between revenue, profit, variables and fixed costs.

Total cost of production divided by fixed(VOSTZ) and variable costs (PERZ), can be represented as an equation:

Or (3.6.)

where p1 - variable costs per unit of product; K is the volume of production.

Sales revenue is determined by the ratio:

, (3.7.)

where C is the unit price of the product.

Then the relationship between profit, revenue, constant and variable costs is characterized by the ratio:

Or (3.8.)

Let us evaluate the impact of revenue and costs on profit based on the assumption that the profit of the enterprise should be non-negative, i.e. PRP > About

If the profit of the enterprise is equal to zero: PRP \u003d O, then in this case the revenue of the enterprise is equal to the costs, i.e. before acceptance has zero profit: VPP = O, V = ZAT.

The main indicators characterizing this situation are:

1. Specific contribution margin

2 . Critical production volume

3. Production safety margin, production strength range, production strength level

4. Marginal profit

5. Critical revenue

6. Margin of financial strength

7. Range of financial strength

8. Level of financial strength

Specific marginal profit.

Difference between unit price and variables for costs of its production is called marginal profit per unit of output or specific marginal profit

(3.9.)

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Critical production volume.

The volume of production and sales at which the enterprise has zero profit, is called critical - Kkr (break-even point).

The value of the critical production volume (Kcr) is determined is obtained from the ratio:

(3.10.)

With an increase in the critical volume, the profit decreases. acceptance. The main factors affecting the value of criti cal volume of production are:

An increase in fixed costs leading to an increase the critical volume of production, respectively, with a decrease in fixed costs, the critical volume of production decreases;

An increase in variable costs per unit of output when constant price, leading to an increase in the critical volume of production, respectively, with a decrease in variable costs per unit of production, the critical volume of production decreases stva;

increase in selling price with constant variables costs per unit of output, leading to a decrease in critical cal volume of production.

Obviously, the critical volume of production is decreasing if the growth rate of fixed costs is less than the growth rate increase in marginal income per unit of output.

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Production safety margin.

Difference between actual (Kfact) and critical volume production (Kcr) characterizes the margin of safety of production in in kind (ZPR):

(3.11.)

If Kfact > Kkr, then the enterprise makes a profit from the production and sale of products, if the value of the ZPR is negative, then the enterprise from the production and sale of these products has losses.

When Kfact > Kcr, you can set the range of production strength - DPP and the level of industrial safety U (ZPP):

(3.12.)

(3.13.)

The larger the value of Uprb, the more efficient production and sales this product.

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Marginal profit.

The difference between sales revenue and variable costs called marginal profit (MPR). This is the part of the gain ki from the sale of products that remain to cover the permanent fixed costs and profit generation:

(3.14.)

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Critical revenue.

Critical revenue (or profitability threshold) (Vcr),

Let us analyze such an important indicator of the financial condition of an enterprise as a “margin of financial strength”. This indicator is used at various levels of enterprise management: strategic, tactical, operational, as well as in external evaluation by investors and creditors.

Margin of financial strength- the difference between the current volume of production (sales) and the volume of production (sales) at the break-even point. It should be understood that, to a greater extent, the margin of financial safety is affected by the volume of sales, and not by production, because it is sales that form the cash income of the enterprise.

The more the company provides the required sales volume, the more finance it has, and, consequently, the higher the ability to repay debts to creditors. A high margin of financial strength allows the company to maintain its production profitability and long-term sustainable development in the event of a deterioration in the economic situation.

Assumptions in calculating the margin of financial safety

The model for assessing the margin of financial strength is used in the management and financial analysis of the enterprise. It is based on several assumptions:

Fixed costs do not change during the entire period of the financial assessment.
There is a linear relationship between the volume of production (sales) and variable costs.
The product line does not change.
The volume of production is equal to the volume of sales, i.e. inventory is minimal.

Stock of financial strength. Formula

In relative terms	In absolute terms
where: ZFP den - margin of financial strength; TR (Total Revenue) – sales revenue; BEP den (break– even point) - sales volume at the break-even point in monetary terms.
where: FFP in kind - financial safety margin in kind; Q p - planned or current production volume; BEP in kind (breakeven point) – sales volume at the break-even point in real terms.

In addition to the standard calculation formulas, there are varieties of them, presented through other indicators of the financial activity of the enterprise.

Alternative formulas for calculating the margin of financial safety	Explanation of formulas
where: NI (Net Income) - net profit of the enterprise; TFC ( Total Fixed Costs) - total fixed costs.	Shows a direct relationship between the margin of financial strength and the size of the generated net profit. As a result, the financial stability of an enterprise is reflected to a greater extent by the efficiency of its sales, rather than production.
where: ZPF - margin of financial strength; Op. Leverage - operating leverage.	Shows an inverse relationship between operating leverage (operating leverage) and financial safety margin.

Stock of financial strength. Interpretation

The obtained values of the financial safety margin in relative terms can be compared with the corresponding level of financial stability and the risk of bankruptcy, when the company is unable to repay its obligations and debts. The table below discusses the values of the financial safety margin and the level of bankruptcy risk.

The higher the value of the financial safety margin, the lower the risk of bankruptcy of the enterprise and the higher the level of financial stability. High values of the financial safety margin show the profitability and efficiency of the production and sales system of the enterprise. As a result, this increases the investment attractiveness and value of the enterprise for investors and creditors.

How to calculate financial safety margin in Excel. Example

Consider an example of calculating this indicator using an example in Excel. First you need to estimate fixed, variable (per unit of goods) costs, as well as the selling price. These are the basic conditions for evaluation. In our example, fixed costs are $90, variable costs are $60, and the selling price is $70.

The basis for assessing the level of financial strength is the assessment of the break-even point, for this it is necessary to calculate the total variable costs (TVC), total costs, revenue (TR) and net income (IN). The formulas for calculating the main parameters of the break-even point are as follows:

Variable costs (TVC)=С$5$*A10

General costs=C10+B10

Income (TR)=A10*$C$6

Net profit (N.I.)=E10-C10-B10

The figure below shows an example of calculating the break-even point of an enterprise in Excel. It is clearly seen that in the production of the 9th product, the net profit is zero, and the total costs are equal to the income received.

Calculation of the main indicators for the break-even point

The break-even point can be calculated analytically using the formulas discussed above. After assessing the volume of production required to ensure the minimum acceptable level of profitability, we calculate the margin of safety for the current (actual) production volume of 17 units. You can learn more about the break-even point in the article ““. Analytical formulas for estimating the break-even point and financial safety margin will be as follows:

Break-even point in money terms=E27*B27/(E27-C27)

Break-even point in physical terms=B27/(C6-C5)

Margin of financial strength in den. expression=E27-C29

Stock of financial strength in kind. expression=A27-C30

Margin of financial strength (%)=F27/(F27+B27)

Calculation of the financial safety margin through formulas in Excel

Graphically, the margin of financial safety is shown in the figure below. It can be seen that the break-even point is reached when producing 9 pieces. products and the margin of financial strength will be 8 pcs. in kind and 630 rubles. in terms of money.

Graphical view of the FFP and the break-even point

Financial safety margin management methods

To increase the level of financial stability of an enterprise, management needs to monitor the margin of financial strength and develop strategies to increase it. Consider a number of strategies to increase this indicator of financial stability.

Increasing the total income of the enterprise through participation in tenders, allows you to get additional orders and increase sales.
A change in prices for a range of products will lead to an increase in the total income of the enterprise.
Expansion of production capacity to increase sales revenue.
Reducing variable costs: the cost of raw materials, fuel, electricity.
Reducing fixed costs: the wages of low-skilled personnel through the automation of its functions.
The use of new innovative production technologies will lead to cost reduction.

Summary

The margin of financial strength is an important indicator for assessing the financial condition of an enterprise based on its production and economic activities. Sales volume plays a key role in financial stability. Therefore, for the enterprise, the primary task is not the production of goods, but the creation of a network and conditions for their sale and receipt of cash income. The assessment of the financial safety margin is used both at the enterprise itself by management and owners, as well as by external investors and creditors. Diagnostics of financial strength allows you to quickly take measures to reduce the risk of bankruptcy.