The economic meaning of the financial safety margin. Safety margin: calculation formula that shows

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

In this case, the indicator of the planned sales volume is used to assess production risk or those losses that are associated with the production cost system.

The margin of financial strength in value terms is calculated as follows:
Inventory = Planned sales volume x P - Break-even point value x P,
where P represents the price of one product.

There is another method for determining the margin of financial safety, which determines the excess between actual production and the profitability threshold.
Thus, the margin of financial strength is equal to the difference between the enterprise’s revenue and the profitability threshold.

The firm's financial strength margin is the most important indicator in the structure of financial stability. The calculation of this indicator allows us to evaluate certain possibilities for an additional reduction in revenue from product sales only within the break-even point.

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

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

note

The margin of financial strength is an indicator of the financial stability of an 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 volume of sales of a product and the volume of its sales 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. Formula for calculating the margin of financial strength: FOP = (FOP - OPB) / FOP * 100%, where FFP is the margin of financial strength; FOP - actual sales volume; OPB - sales volume at the break-even point.

The margin of financial strength (FSA) indicates about how much the company can withstand a decrease in sales revenue without a serious threat to its financial position, i.e. whether it will maintain its financial stability and solvency at the same level. The recommended value of the final safety margin should be at least 10%. To calculate the FP in absolute terms, use the formula: FP = BP plan - threshold revenue from sales, where BP plan is revenue from sales of products according to the plan.

The margin of financial strength in relative terms is equal to: ZFPotn = ZFP abs/VR plan x100%

If sales revenue falls below the threshold value, then the financial position of the company worsens, i.e. There is a shortage of liquid funds.

A similar method for calculating the margin of financial safety is used in the countries of France, Germany, etc. Economists in the USA, Canada, and Great Britain understand the effect of production leverage (EPR) as the ratio of the percentage change in earnings before interest and taxes (EBIT) to the percentage change in sales volume: EPR = Percentage changes in EBIT / Percentage of changes in sales volume.

For analysts, the indicator of the production leverage ratio (LPR) is also important:

Kpr = fixed costs / total costs.

The higher the value of the production leverage ratio of an enterprise, the more it is capable of accelerating the growth rate of operating profit (EBIT) in relation to the growth rate of sales volume; an enterprise with a higher production leverage ratio (under other equal conditions) is always capable of a higher degree increase the amount of its operating profit compared to a company with a lower value of this ratio (due to the effect of production leverage). This coefficient directly affects the financial strength of the enterprise.

2 Answer option!

The margin of financial strength when assessing the financial stability of a company allows one to assess the level of profitability in case of worsening market conditions.

The margin of financial safety is the difference between the actual volume of output and the volume of output at the break-even point. The higher the margin of financial strength, the greater the opportunity to maintain the designated level of profitability when sales revenue decreases.

The formula for calculating the financial safety margin is:

Zfin = (Qp - Qmin) / Qp * 100%

where Zfin is the margin of financial strength; Qp - actual sales volume; Qmin - sales volume at the break-even point.

As a rule, the indicator is calculated as a percentage of the financial safety margin to the actual volume. This value shows by what percentage sales volume can be reduced in order for the company to avoid losses.

The margin of safety changes rapidly near the break-even point and more slowly as it moves away from it.

A good idea of ​​the nature of this change can be obtained by plotting the dependence of the safety margin on the sales volume in physical terms.

It is possible to monitor the dynamics of the financial safety margin if the enterprise has established a management accounting system that provides for grouping the costs of production and sales of products based on their dependence on sales volume.

The growth of this indicator is facilitated by any reduction in production and sales costs, but a more significant impact is exerted by a reduction in fixed costs. In practice, three situations are possible, which will have different effects on the amount of profit and the margin of financial strength of the enterprise:

sales volume coincides with production volume;

sales volume is less than production volume;

sales volume is greater than production volume.

The margin of financial strength is a more objective characteristic than the break-even point, since the break-even point largely depends on the volume of revenue, i.e. The break-even point of a stall and a store may differ thousands of times, but only the margin of financial strength will show which of the trading enterprises is in a more stable financial position.

The activity must bring positive profits, this is understandable. But there are situations (the reasons may be different) when things start to go badly for a company, and it is necessary to reduce the volume of products produced and sold. The company no longer expects large incomes, but at least zero profits when expenses do not exceed income. But where is this threshold, when crossed, the activity becomes unprofitable? How much can a company cut back on its work? What is the margin of financial stability?

Security zone

There is a “turning point” volume of production or sales, at which the costs of creating and marketing products are equal to the revenue received. This is the break-even point, when crossed, the “everything is bad” stage begins. So, the “distance” from the existing sales volume to a given point is a kind of safety zone, that is, a margin of financial strength of the enterprise.

Required indicators

To determine to what extent a company can afford to reduce revenue without incurring losses, the following data will be required:

Fixed and variable costs

Fixed costs do not depend on either production volumes or selling prices. It doesn’t matter how many products are produced, these costs will be incurred: rent, leasing, credit, utility payments, wages, etc.

Variable costs are directly related to the volume of products produced: costs of materials and raw materials, payment of piecework wages, etc. These costs appear either after income is received (for example, interest is paid to a sales manager after he has sold a product) or product production process. In both cases, expenses are completely controlled, money does not disappear into nowhere. The same investments in spent materials let the unsold products remain with the enterprise in the form of inventory. It is the optimization of these costs that the company primarily engages in when the margin of financial strength runs out or is too small, and it is necessary to lower the break-even point.

Break-even point calculation

• Now that we have decided on the revenue parameters and types of costs, let’s calculate the profitability threshold. This is the ratio of fixed costs for production and sales (Zpost) to the difference between revenue (V) and variable costs (Zper), that is, Tb = Zper/(V - Zper).
• The result will show how many units of production must be produced in order for revenue to cover costs. To obtain the result in monetary terms, the formula will look like this: B*Zpost/(B - Zper).

Calculation of the financial strength coefficient

• Finally, the margin of financial strength (Sfp) is determined using the following formula: Zfp = (B - Wtb)/B * 100%, where B is the current sales volume, and Wtb is the difference between the sales volume in the current period and the estimated sales volume in break-even point.
• If you want to get the result not in monetary terms, but in physical terms, then you should substitute the sales volume in units of production in this formula instead of revenue (B).

Thus, the margin of financial strength is an indicator of the financial stability of the company, which gives an idea of ​​​​the permissible decrease in production and sales volumes within the profitability threshold.

Margin of financial strength as an important indicator characterizing financial stability

The indicator “Margin of Financial Strength” is one of the indicators of the stability of the financial condition of the organization. It helps to determine to what extent, in monetary or physical terms, an enterprise can reduce production without incurring losses.

Definition 1

In fact financial safety margin is the difference between the actual volume of output and the volume of output at the break-even point. That is, this indicator shows how far the company is from the break-even point.

When comparing two companies, only this margin of safety will show which of the companies is in a more stable financial condition. The display of the volume of the financial safety margin on the break-even chart is shown in the figure:

In practice, there are three options for the state of production of products, which, one way or another, affect the considered stock indicator:

• The enterprise reaches the break-even point, and the volume of products produced coincides with the volume sold. In this case, the indicator remains unchanged;
• The company produces more than it sells. Excess production leads to lost profits, and the stock indicator decreases. In this case, only rigorous planning of production volumes and careful analysis of demand will help;
• The enterprise produces less than it sells, profits grow, and the safety margin increases. At the same time, the key indicator in this case is the volume of inventories, which means there is an increase in dependence on counterparties. If there is insufficient inventory, the company will lose financial stability.

Calculation of financial strength indicator

Definition 2

The financial strength ratio shows how much sales can be reduced (in percentage terms) before the company begins to incur losses.

In monetary terms this indicator is calculated as the ratio of the difference between the current volume of product sales and the sales volume at the break-even point to the current volume of product sales, expressed as a percentage.

$ZPd = ((Vr-TBd))/Vr×100%$, where:

• $ZPd$ – margin of financial strength in monetary units,
• $Вр$ – sales revenue,
• $TBd$ – sales volume at the break-even point in monetary units.

Calculation of financial safety margin in kind:

$ZPn = ((Rn-TBn))/Rn ×100%$, where:

• $ZPn$ – margin of financial strength in natural units,
• $Рн$ – sales volume in natural units;,
• $TBn$ – break-even point in natural units, sales volume at the break-even point.

The financial position of an enterprise can be characterized as financially stable if the margin of financial strength (financial strength ratio) is above 10%.

Ways to increase the financial safety margin

To increase the financial safety margin and its ratio, it is necessary:

• Increase sales revenue by increasing its volume, increasing prices, or increasing these two indicators in combination;
• Reduce the amount of costs, in particular fixed ones, or replace fixed costs with variable ones.

Note 1

To adjust the safety margin, it is necessary to conduct a full assessment of it. It is necessary not only to make calculations using the appropriate formulas, but also to analyze various aspects of economic activity. Identify the impact that the difference between existing indicators of product sales and production volumes has on financial stability and the margin of safety in general, while it is necessary to take into account the existing level of inventory and its increase.

Profitability threshold (break-even point, critical point, critical volume of production (sales)) is the volume of sales of a company at which sales revenue fully covers all costs of production and sales of products. To determine this point, regardless of the methodology used, it is necessary first of all to divide the predicted costs into fixed and variable.
The practical benefit of the proposed division of costs into fixed and variable (the value of mixed costs can be neglected or proportionally attributed to fixed and variable costs) is as follows:
First, it is possible to determine exactly the conditions for a firm to stop producing (if the firm does not cover average variable costs, then it must stop producing).

Secondly, it is possible to solve the problem of maximizing profit and rationalizing its dynamics for the given parameters of the company through a relative reduction in certain costs.
Thirdly, this division of costs makes it possible to determine the minimum volume of production and sales of products at which the business breaks even (the profitability threshold) and to show how much the actual production volume exceeds this indicator (the firm’s margin of financial strength).
The profitability threshold is determined as revenue from sales, in which the enterprise no longer has losses, but does not receive profits, that is, financial resources from sales after reimbursement of variable costs are only sufficient to cover fixed costs and profit is zero.
Break-even point in physical terms for the production and sale of a specific product ( TB ) is determined by the ratio of all fixed costs for the production and sale of a specific product ( Zpost ) to the difference between price (revenue) ( C ) and variable costs per unit of product ( Itching. lane ):

Break-even point in value terms is defined as the product of the critical volume of production in physical terms and the price of a unit of production.
Calculation of the profitability threshold is widely used in planning profits and determining the financial condition of an enterprise. Two rules useful for an entrepreneur:
1. It is necessary to strive for a position where revenue exceeds the profitability threshold, and produce goods in kind in excess of their threshold value. At the same time, the company's profits will increase.
2. It should be remembered that the closer production is to the profitability threshold, the greater the influence of the production lever, and vice versa. This means that there is a certain limit of exceeding the profitability threshold, which must inevitably be followed by a jump in fixed costs (new means of labor, new premises, increased costs of enterprise management).
The company must necessarily pass the threshold of profitability and take into account that after the period of increasing the mass of profit, a period will inevitably come when, in order to continue production (increase in output), it will simply be necessary to sharply increase fixed costs, which will inevitably result in a reduction in profits received in the short term.
When making a specific decision on the volume of production, an entrepreneur should take these conclusions into account.
Financial strength margin shows how much sales (production) of products can be reduced without incurring losses. The excess of real production over the profitability threshold is a margin of financial strength of the company:
Margin of financial strength = Revenue – Profitability threshold
The margin of financial strength of an enterprise is the most important indicator of the degree of financial stability. The calculation of this indicator allows us to assess the possibility of an additional reduction in revenue from product sales within the break-even point.
In practice, three situations are possible that will have different effects on the profit margin and the margin of financial strength of the enterprise: 1) the volume of sales coincides with the volume of production; 2) sales volume is less than production volume; 3) sales volume is greater than production volume.
Both the profit and the margin of financial strength obtained with an excess of produced products are less than when sales volumes correspond to production volumes. Therefore, an enterprise interested in increasing both its financial stability and financial results should strengthen control over production volume planning. In most cases, an increase in a company's inventory indicates an excess of production. Its excess is directly evidenced by an increase in inventories in terms of finished products, and indirectly by an increase in inventories of raw materials and starting materials, since the company incurs costs for them already when purchasing them. A sharp increase in inventories may indicate an increase in production in the near future, which must also be subject to rigorous economic justification.
Thus, if an increase in an enterprise’s reserves is detected in the reporting period, one can draw a conclusion about its impact on the value of the financial result and the level of financial stability. Therefore, in order to reliably measure the size of the financial safety margin, it is necessary to adjust the sales revenue indicator by the amount of the increase in the enterprise's inventory for the reporting period.
In the last version of the relationship - with a sales volume greater than the volume of manufactured products - the profit and margin of financial strength are greater than with the standard construction. However, the fact of selling products that have not yet been produced, that is, does not actually exist at the moment (for example, when prepaying a large batch of goods that cannot be produced for the current reporting period), imposes additional obligations on the enterprise that must be fulfilled in future. There is an internal factor that reduces the actual value of the financial safety margin - hidden financial instability. A sign that an enterprise has hidden financial instability is a sharp change in the volume of inventories.
So, to measure the financial strength of an enterprise, the following steps must be completed:
1) calculation of the financial safety margin;
2) analysis of the impact of the difference between sales volume and production volume through correction of the financial safety margin, taking into account the increase in the enterprise’s inventory;
3) calculation of the optimal increase in sales volume and the limiter of the financial safety margin.
The margin of financial strength, calculated and adjusted, is an important comprehensive indicator of the financial stability of the enterprise, which must be used when forecasting and ensuring the comprehensive financial stability of the enterprise.
Operating leverage effect is that any change in sales revenue leads to an even stronger change in profit. This effect is associated with the disproportionate impact of semi-fixed and semi-variable costs on the financial result when the volume of production and sales changes.
The higher the share of semi-fixed costs in the cost of production, the stronger the impact of operating leverage.
The strength of operating leverage is calculated as the ratio of marginal profit to sales profit.
Marginal profit is calculated as the difference between revenue from product sales and the total amount of variable costs for the entire production volume.
Profit from sales is calculated as the difference between revenue from product sales and the total amount of fixed and variable costs for the entire volume of production.
Thus, the size of financial strength shows that the enterprise has a margin of financial stability, and therefore profit. But the lower the difference between revenue and the profitability threshold, the greater the risk of losses. So:

• the strength of the operating leverage depends on the relative value of fixed costs;
• the strength of the operating leverage is directly related to the growth in sales volume;
• the closer the company is to the profitability threshold, the greater the impact of operating leverage;
• the strength of the operating leverage depends on the level of capital intensity;

The lower the profit and the higher the fixed costs, the stronger the impact of operating leverage.