Why calculate the financial independence ratio
Posted: Sat Jan 18, 2025 6:18 am
The definition of this parameter is required first of all by the director of the enterprise. The financial independence (stability) coefficient can be used to objectively assess the state of affairs in the company. If the calculations show that the indicator is too small, the management will be able to take timely measures to correct the situation. Regular calculations are needed to:
Understand whether the company can carry out current work, purchase materials, raw materials, pay wages or sell goods. This is necessary to decide whether to take out a loan. If it is clear that the company cannot cope on its own, then it will be possible to apply to the bank for a loan.
Find ways to sell products or increase british student data package production income. For example, by calculating the long-term financial independence ratio, a manager can understand that there is an opportunity to modernize - purchase new equipment, use higher-quality raw materials and modern technologies. Due to this, the quality of the products will increase, which means they can be sold at a higher price and have more profit in the long term.
Identify risks to the business and take steps to prevent them. For example, demand for a product may decrease significantly or market conditions may change.
Partners and investors also need to calculate the coefficient. They assess how stable the enterprise is in general and decide whether it is worth investing in it. For example, when an organization applies to a bank, the creditor calculates the coefficient of financial independence (autonomy) and gets a low value. In this case, he understands that when issuing a loan to this company, he is taking a risk, since there is a possibility that it will not be able to pay off either the interest on the loan or the amount of the debt itself.
Increase Your Profits by 10X: 5 Key Metrics You Must Track
Alexander Kuleshov
Alexander Kuleshov
General Director of Sales Generator LLC
Read more posts on my personal blog:
After working with over 300 online projects , I can guarantee: monitor these metrics weekly and your company will not only survive, but also increase its profits by 10 times!
In the context of sanctions and crisis, knowing the ROI of your advertising decides whether your business will be successful. Tracking these 5 critical indicators is the key to your prosperity.
What you get for free:
5 Key Metrics to Increase Profits by 220%
The Secret ROI Formula: Instant Advertising Efficiency Calculator
Anti-crisis Solutions Matrix: Find the Perfect Strategy for Your Business in 15 Minutes
We have prepared all the documents and templates with formulas for you. And yes, it is FREE:
Download documents for free
Already downloaded
153318
Formula for calculating the financial independence coefficient
What kind of dependence is the financial independence coefficient that businessmen calculate intended to eliminate?
This is a connection with credit institutions. The financial independence ratio characterizes the ratio of personal and borrowed funds. External resources include not only bank loans or obligations to suppliers of raw materials, but also all accounts payable in general.
Formula for calculating the financial independence coefficient
Source: shutterstock.com
Thus, the composition of borrowed funds includes obligations to pay salaries to employees, tax debt and other urgent payments that the company has on the reporting date.
The FSC, in terms of balance sheet architecture as a whole, tells what share of the company's finances comes from its own funds.
In this case, the financial independence ratio is determined by the ratio of the sum of equity and reserve funds to the balance:
K1 = (SK+RK) / B
This indicator can also be found in a more specific understanding. The coefficient of financial independence in terms of reserves determines which segment the enterprise provides for at the expense of personal finances.
The formula for calculating the coefficient of financial independence in the formation of reserves looks like the ratio of own working capital and the total amount of reserves:
K2 = SOS / Zp
Understand whether the company can carry out current work, purchase materials, raw materials, pay wages or sell goods. This is necessary to decide whether to take out a loan. If it is clear that the company cannot cope on its own, then it will be possible to apply to the bank for a loan.
Find ways to sell products or increase british student data package production income. For example, by calculating the long-term financial independence ratio, a manager can understand that there is an opportunity to modernize - purchase new equipment, use higher-quality raw materials and modern technologies. Due to this, the quality of the products will increase, which means they can be sold at a higher price and have more profit in the long term.
Identify risks to the business and take steps to prevent them. For example, demand for a product may decrease significantly or market conditions may change.
Partners and investors also need to calculate the coefficient. They assess how stable the enterprise is in general and decide whether it is worth investing in it. For example, when an organization applies to a bank, the creditor calculates the coefficient of financial independence (autonomy) and gets a low value. In this case, he understands that when issuing a loan to this company, he is taking a risk, since there is a possibility that it will not be able to pay off either the interest on the loan or the amount of the debt itself.
Increase Your Profits by 10X: 5 Key Metrics You Must Track
Alexander Kuleshov
Alexander Kuleshov
General Director of Sales Generator LLC
Read more posts on my personal blog:
After working with over 300 online projects , I can guarantee: monitor these metrics weekly and your company will not only survive, but also increase its profits by 10 times!
In the context of sanctions and crisis, knowing the ROI of your advertising decides whether your business will be successful. Tracking these 5 critical indicators is the key to your prosperity.
What you get for free:
5 Key Metrics to Increase Profits by 220%
The Secret ROI Formula: Instant Advertising Efficiency Calculator
Anti-crisis Solutions Matrix: Find the Perfect Strategy for Your Business in 15 Minutes
We have prepared all the documents and templates with formulas for you. And yes, it is FREE:
Download documents for free
Already downloaded
153318
Formula for calculating the financial independence coefficient
What kind of dependence is the financial independence coefficient that businessmen calculate intended to eliminate?
This is a connection with credit institutions. The financial independence ratio characterizes the ratio of personal and borrowed funds. External resources include not only bank loans or obligations to suppliers of raw materials, but also all accounts payable in general.
Formula for calculating the financial independence coefficient
Source: shutterstock.com
Thus, the composition of borrowed funds includes obligations to pay salaries to employees, tax debt and other urgent payments that the company has on the reporting date.
The FSC, in terms of balance sheet architecture as a whole, tells what share of the company's finances comes from its own funds.
In this case, the financial independence ratio is determined by the ratio of the sum of equity and reserve funds to the balance:
K1 = (SK+RK) / B
This indicator can also be found in a more specific understanding. The coefficient of financial independence in terms of reserves determines which segment the enterprise provides for at the expense of personal finances.
The formula for calculating the coefficient of financial independence in the formation of reserves looks like the ratio of own working capital and the total amount of reserves:
K2 = SOS / Zp