The stock of financial strength is an important indicator of the dynamic and promising activities of the enterprise. In fact, this is a critical point determining the crisis volume of production.
The stock of financial strength of the enterprise is determined by the difference between the volume of output in fact and the volume of output at the break-even point.
Typically, the percentage of safety margin is calculated in relation to the actual volume of output. The result shows how much it is possible to reduce the production and sale of goods.
When researching the financial condition and profitability of an enterprise, it is necessary to know the margin of financial stability (break-even zone). If you determine the threshold of profitability of the company, then the margin of stability is not difficult to calculate.
Brief instructions on determining the stock of financial stability. First way
1. It is important to determine how much it is necessary to reduce output so as not to incur losses. This value is expressed in the difference between the volume of sales according to plan and the break-even point. This indicator shows how much production should not be reduced. According to the indicator of the planned volume of sales, risks or losses are calculated that relate to production costs.
2. Financial strength is calculated in price terms by the formula:
The volume of sales according to the plan * : break-even point in numerical expression - x, - the price of one product.
- The second way. The company's revenue - the threshold of profitability - is another way of calculating the margin of safety.
- The third way. You can set the financial strength by another method. It is determined by the indicator between real production and the threshold of profitability. For this, the value of the difference in the revenue of the enterprise and profitability is calculated.
The value of calculating financial strength:
1. The risk of enterprise losses will be less with a higher rate of financial strength.
2. The stock of financial strength accurately indicates the sustainability of the enterprise or firm. His calculation makes it possible to determine and evaluate the reality of the reduction from the sale of products, given the breakeven point.
3. According to the profitability threshold indicator, one can see the revenue at which the company will not incur losses, but there will be no profit. These indicators determine the financial costs of production excluding profits.
In order to have a complete picture of the margin of safety of an enterprise, it is necessary to analyze the difference between sales and production. Then adjust the stock of financial strength taking into account the inventory of the company. After that, it is advisable to calculate the margin and profit from sales.
Marginal profit is determined by the value of the difference in revenue from sales of products and the sum of variable costs in relation to the total volume produced.
Profit from sales is expressed by the difference in revenue and the sum of fixed costs of the entire production volume.
It must be remembered: one of the signs of financial instability of the enterprise is a sharp reduction in stocks.
Such an indicator as the profitability threshold, accurately indicates in practice the conditions for the termination of production, if the company does not pay back its costs. You can determine how to maximize profits in rational ways with given company indicators, reducing production costs in a particular area.
Entrepreneurs must adhere to the following rule:
Revenue must exceed the profitability threshold, and goods must be produced above their threshold value. In this case, profit growth will be guaranteed to occur.