The financial independence ratio shows the ratio of the enterprise's own resources and borrowed funds. It can be calculated both as a whole for the organization's balance sheet and separately for current assets. The analysis of the financial independence ratio is needed to control the company's liabilities and provide it with resources for expansion and development with the lowest possible risks.
What conclusions can be drawn from the FSC?
An assessment of the enterprise's financial independence coefficient allows us to conclude that the higher the value of this indicator, the more interesting the company will be for potential investors.
At the same time, bringing the FNC closer to one is undesirable, since this may indicate that there are factors that hinder business development.
How does the KFN change over time?
The autonomy coefficient should be calculated on a regular basis so that its dynamics can be monitored. At the same time, it is recommended to compare the obtained results with the average indicators in the industry.
Let's say that in the region the financial british student data package independence ratio is considered normal if it is equal to 0.6. For organization "A" it was in the range from 0.5 to 0.75 in the last 12 months, and for company "B" - from 0.6 to 0.65. It is clear that the condition of the first company is worse, since the ratio changed within a wider range. Sharp fluctuations over a short period indicate illiterate actions of the management in business management, the absence of a consistent and clear financial policy. Probably, the director actively takes loans, then completely refuses them.
How the KFN changes over time
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What to do if the ratio is too low?
If the financial independence ratio of an organization is very small, then independence can be increased in two ways: attract investors or ask for funds from founders or owners. But before taking such steps, you need to calculate liquidity. If the enterprise has enough assets that can be quickly converted into finance, then measures to increase the FCI are not urgent. The management has several months or even years in reserve to do so:
Develop and implement a financial planning system. Within its framework, material reserves can be increased by profits from product sales.
Change the dividend policy, invest the profits received into production in order to develop and expand it, sell more goods and have more income in the future.
Invest money in securities.
Why is too high a ratio also bad?
Standards for the financial independence ratio are not applied to capital-intensive organizations, i.e. those that must have a large amount of personal funds. Their FCI must be overstated. In all other cases, too high a figure (as well as too low) may cause caution among investors and credit organizations.
Deviations from the norm are interpreted as follows: KFN greater than 0.8 - 0.9 is considered good by many businessmen. But it does not indicate a stable position of the enterprise in the market, but rather illiterate management financial decisions.
Too high an indicator is evidence that the management does not use credit. But it is precisely through borrowed funds that it would be possible to expand the business and increase profits. Loans are especially important for organizations that have many assets with average liquidity (these are finished goods supplied to the market for buyers). Loans would allow increasing the volume of these assets and having a greater profit from the sale of goods. But it is necessary to remember that in this case it is necessary to calculate the coefficient of financial independence of capitalized sources.
How to turn the financial independence ratio into a useful tool?
Even with competent calculations and averaging of indicators, we have only a description of the resulting structure of assets and sources of funds. In order for the FSC to be useful, it is necessary to regularly calculate it for different periods of time, monitor the dynamics and assess how the balance sheet structure is affected by the facts of financial and economic activity. That is, the system of coefficients should represent a certain living structure, similar to that of a successfully operating business. This approach allows you to notice possible risks in time, detect weak points in