The financial strength of a particular company shows how far this company is from the break-even point. It is the difference between the actual output and the output at the break-even point. Quite often, the percentage of this safety factor to the actual volume is calculated. The resulting value determines by what percentage the sales volume can decrease.
Instructions
Step 1
The margin of financial strength shows the expression that denotes how much you can reduce the production of products without incurring losses. Absolute expression is a calculation of the difference between the planned sales volume and the break-even point. This expression means that the enterprise should not reduce the volume of production more than there are reserves of financial strength.
Step 2
In this case, the indicator of the planned volume of sales is used to assess production risk or those losses that are associated with the system of production costs.
Step 3
The financial strength margin in value terms is calculated using the following formula:
Stock = Planned sales x P - Break-even point x P, where P is the price of one item.
Step 4
At the same time, the higher the financial strength indicator, the lower the risk of losses for the company.
Step 5
There is another method for determining the margin of financial strength of an organization, which determines the excess between actual production and the profitability threshold.
Thus, the margin of financial strength is equal to the difference between the company's revenue and the profitability threshold.
Step 6
The financial strength of a company is the most important indicator in the structure of financial stability. The calculation of this indicator makes it possible to assess certain possibilities for an additional decrease in revenue from product sales only within the boundaries of the break-even point.
Step 7
In turn, the profitability threshold can be defined as revenue from sales, at which the company no longer has losses, but does not receive profit, that is, all financial resources from sales are only enough to cover fixed costs, and the profit is zero.
Step 8
So, to determine the full margin of financial strength of the enterprise, it is necessary to analyze the influence of the difference between the volume of sales and the volume of production through the subsequent correction of the value of the margin of financial strength, taking into account the increase in the inventory of the enterprise.
