The use of borrowed capital to finance the activities of the enterprise, as a rule, is economically beneficial, since the payment for this source is on average lower than for equity capital. The main types of borrowed capital are bonds and long-term loans.
Currently, many enterprises finance their activities with both their own and borrowed funds.
First of all, borrowed funds are needed to finance growing enterprises, when the rate of formation of own sources lags behind the rate of increase in output, for the modernization of production, the development of new types of products, etc. inflation and lack of own working capital force the majority of Russian enterprises to attract borrowed funds to finance working capital. The argument in favor of financing from debt sources is the reluctance of owners to increase the number of shareholders, shareholders, as well as the relatively lower cost of a loan compared to the cost of equity capital, which is expressed in the effect financial leverage (13)
Borrowed capital- this is a set of borrowed funds that bring profit to the enterprise and are issued in the form of loans, loans, loans.
A loan (debt obligation) is an agreement under which one of the parties (lender) transfers to the other party (borrower) for use money or things defined by generic characteristics (number, weight, measure), and the borrower undertakes to return to the lender the same amount of money or an equal number of things of the same kind and quality.
The loan can be both paid and free. In the case of paid borrowing, the amount of the fee is determined either by agreement of the parties in compliance with the requirements for interest rates on loans established by law, or in the amount of the average bank interest rate adopted at the location of the creditor.
Bond loan. Bonds are debt securities. This security gives its holder the right to receive a fixed percentage of the nominal value of the bond or other property rights. Bonds may be issued:
(a) the state and its entities (state or municipal) and
(b) corporations (debt private securities).
Bonds are classified "according to a number of criteria, in particular, by validity (short-term - up to 3 years, medium-term - up to 3 years, perpetual), according to
methods of payment of coupon income, by method of securing a loan, by the nature of circulation (ordinary and convertible). The coupon rate on bonds most often depends on the average interest rate on the capital market.
The bond must necessarily have a nominal value, and the total nominal value of all bonds issued by the company must not exceed the amount of its authorized capital or the amount of security provided to the company by third parties for the purpose of issuing bonds.
The issue of bonds by a company is allowed only after full payment of its authorized capital. A joint-stock company is entitled to issue bonds: (a) secured by a pledge of its certain property, (b) secured, specially provided by third parties, (c) unsecured.
From the point of view of issuers and investors, a bond loan has its pluses and minuses. The issuer benefits from a justified issue of bonds, because:
the amount of money that the enterprise will manage will increase dramatically, there will be opportunities for the introduction of new investment projects;
payments to bondholders are most often made at stable rates that are not subject to sharp fluctuations, which leads to the predictability of the costs of servicing this source;
the cost of the source is less;
the source is cheaper in terms of fundraising;
the procedure for raising funds is less laborious.
The main disadvantage is that the issuance of a loan leads to an increase in the financial dependence of companies, i.e. to an increase in the financial risk of its activities, if the payment of dividends is not mandatory for the company, then the settlement of obligations to bondholders must be carried out in without fail, despite the financial results of current operations.(20)
Credit is the lending of goods or money.
Lending to enterprises is carried out in accordance with the procedure established by the legislation of the Russian Federation. Another enterprise, a bank, an individual can act as a creditor providing a loan to an enterprise in kind or in cash. A feature of a bank loan is that it is issued against liquid collateral for specific purposes. Depending on the repayment period, there are short, medium and long-term loans. Over 90% of banking operations in the Russian Federation are currently accounted for by short-term loans, mainly with a maturity of up to six months.
Long-term bank loan. A bank loan is provided by commercial banks and other credit organizations that have received a banking license from the Central Bank of the Russian Federation.
Most banks issue short-term loans; these loans are used to finance current operations and maintain the liquidity and solvency of the enterprise. Long-term loans are mainly used to finance the costs of capital construction, reconstruction and other capital investments, and therefore they must be recouped from future profits.
Regardless of the amount of the loan, the loan agreement must be concluded in writing, otherwise it is considered void; this is one of its differences from the loan agreement, which is concluded in writing only if its amount is at least ten times the minimum wage established by law. A loan agreement for the gratuitous use of property or money of another person. (27)
A person who has received property under a loan agreement is obliged to return it in the same condition, taking into account wear and tear, or in the condition stipulated by the concluded agreement. Loans are formalized by a loan agreement (for citizens) or a bank loan agreement (for enterprises, institutions, organizations)
From the state budget, short-term financial support can be provided to enterprises of all forms of ownership in the form of a loan for a period not exceeding the current financial year, on terms of repayment and payment in an amount that ensures the payment of interest on the state debt. Such loans are allocated by the enterprise for the following purposes:
restructuring of production;
settlements on targeted loans aimed at the purchase of equipment and materials;
development and acquisition the latest technologies, equipment and materials, including foreign ones.
Borrowed capital can be different in size, share in total capital, source and methods of repayment. Therefore, determining the amount of borrowed capital and its structure is an integral step in solving a number of problems of financial management.
The most common and relevant at the moment are the following tasks:
assessment of financial stability based on the calculation of the coefficients of financial independence and solvency of the enterprise;
forecasting probable bankruptcy and capital structure;
calculation of the price of borrowed capital and the weighted average cost of capital of the enterprise;
determination of the level of financial risk and optimization of the financial structure of the company's capital.
In the group of articles "Loans and credits" of the section "Long-term liabilities" they show outstanding borrowings that are subject to repayment in accordance with agreements more than 12 months after the reporting date.
According to the items "Accounts payable" reflect:
debts to suppliers and contractors for received material values, performed works and rendered services;
indebtedness to suppliers and contractors to whom the organization has issued promissory notes to secure their supplies, works, services;
wage arrears, deductions for state social insurance, pension and medical support, to the employment fund, as well as other taxes and payments to the budget;
arrears in payments of compulsory and voluntary insurance of property and employees;
debt on bank loans obtained for issuing loans to employees.
An important aspect of assessing the financial stability and predicting the bankruptcy of an enterprise is its dependence on the amount of borrowing in the financial and credit sector. This approach stipulates that only funds received from credit institutions in the form of long-term and short-term credits, loans, and loans are included in debt capital.
Efficient management of borrowed capital increases the return on equity. An incorrect approach to the formation of borrowed sources can adversely affect the financial condition of the enterprise, since the requirements of creditors must be satisfied regardless of the results of the financial and economic activities of the enterprise. At the same time, the use of borrowed capital is often extremely beneficial for the owners of the enterprise, since it allows to achieve an increase in production volumes, profits and profitability growth without additional investments of an extremely scarce financial resource - equity. Therefore, the financial manager faces a controversial task - to attract borrowed capital, avoiding a critical loss of financial independence and at the same time increase the return on equity.
To assess the impact of the use of borrowed funds on the return on equity allows taking into account the action financial leverage, reflecting the growth of owners' income due to the attraction of borrowed funds.
The strength of financial leverage depends on the conditions of lending, the availability of tax incentives for loans, loans, loans and the procedure for paying interest on loans and borrowings.
The effect of financial leverage in the European model is measured by the additional return on equity obtained through the use of loans, compared with the return on equity financed only by own funds. Here the ratio of debt to equity is lever arm, and the difference between the level of profitability of all capital and the after-tax price of borrowed capital-differential leverage.
Thus, with an increase in the share of borrowed sources of financing, the return on equity of the enterprise grows until the interest on the loan exceeds the profit. (14)
Conclusion
After conducting research, we can draw the following conclusions: there are the following ways of financing:
Self-financed- the most obvious way to mobilize additional sources of funds, but it is difficult to predict in the long term and is limited in volume. Therefore, any strategic direction of business development inevitably involves the involvement of additional sources of formation.
Funding through capital market mechanisms. There are two main options for mobilizing resources in the capital market: equity and debt financing.
Bank lending. Bank lending looks very attractive. Obtaining a bank loan is not related to the size of the borrower's production, the sustainability of generating profits, the loan can be processed in the shortest possible time. Budget financing. The attractiveness of this form lies in the fact that business leaders are accustomed to the fact that the source of funds is practically free, often the funds received are not returned, and their spending is poorly controlled.
Mutual financing of business entities. In conditions
in a centrally planned economy, there is an absolute dominance of two elements - budget financing and mutual financing of enterprises; in a market economy, profit and capital markets are seen as the main ways to increase the economic potential of economic entities. In capital, three main approaches to formulating an interpretation can be distinguished: economic, accounting and accounting and analytical.
Within the framework of the economic approach, it is subdivided into: a) personal, b) private and c) public unions, including the state. Within the framework of the accounting approach, capital is interpreted as the interest of the owners of this subject in its assets, and the value is calculated as the difference between the sum of the subject's assets and the value of its liabilities.
In the accounting - analytical approach, capital appears as a set of resources characterizing simultaneously from two sides: (a) the directions of its investment and (b) the sources of origin. accordingly, two interrelated varieties of capital are distinguished - active and passive capital.
The ownership structure of the organization's capital includes: authorized (share), additional and reserve capital, retained earnings and other reserves.
Authorized capital - represents a set of fixed assets, other property, intangible assets, as well as property rights having a monetary value.
Extra capital reflects the increase in the value of property during the revaluation of share premium, gratuitously received values, and more.
Reserve capital. The creation of certain reserves is provided for by the charter or legislative acts in order to give the company or its creditors additional guarantees of protection against the consequences of losses. Undestributed profits. Retained earnings reflects information about the presence and movement of amounts of retained earnings, including special purpose funds, or uncovered loss of the enterprise.
Methods of financing the enterprise at its own expense. The source of financing investment activities, as well as ensuring and expanding current activities, of course, is the profit of the enterprise.
Special funds. Due net profit remaining at the disposal of the enterprise after payment of all taxes and settlements with shareholders and founders.
In the fund of the social sphere take into account retained earnings, In consumption funds take into account the means of direct
profits allocated for the implementation of measures to develop the social sphere and material incentives for employees of enterprises and other similar activities that do not lead to the formation of new property of the enterprise.
Borrowed capital- this is a set of borrowed funds that bring profit to the enterprise and are issued in the form of loans, loans, loans. Borrowed capital includes:
Loan (debt)
Bond loan, (debt security).
Credit is the lending of goods or money. - Long-term bank loan.
Loan agreement for the gratuitous use of property or money of another person
List of used literature:
Regulations
1. Decree of the Federal Office for Insolvency (Bankruptcy) “On approval of methodological provisions for assessing the financial condition of enterprises and establishing an unsatisfactory balance sheet structure” No. 31-r dated 12.08.94. Scientific and educational:
Bakanov M.I., Sheremet A.D. Theory of economic analysis. M.: Finance and statistics, 1993
Barnoglets SB. Economic analysis economic activity of enterprises and associations. M.: Finance and statistics, 1998
3. Bendikov M.A., Jamai E.V. improving the diagnostics of the financial condition industrial enterprise//Financial management.2001. No. 5.С.8О)
Glazunov V.N. Analysis of the financial condition of the enterprise // Finance 1999. No. 2.
Novodvorsky V.D. financial statements: compilation and analysis. M.: Finance and statistics, 1994,
Dronov R.I., Reznik A.I., Bunina E.M. assessment of the financial condition of the enterprise // Financial management 2003. №4. S. 15.
Drury K. introduction to management and production accounting. M. 1994.
8. Efimova O.V. Analysis of the turnover of funds of a commercial enterprise // Accounting. 1994. No. 10.
9. Efimova O.V. How to analyze the financial position of the company. M.: 1993
10. Efimova O.V. The financial analysis. M.: Accounting, 1996.
11. Kovalev V.V. Financial analysis: Money management. Choice of investments. Reporting analysis. M. 1995.
13. Kovalev V.V. The financial analysis; capital Management. Moscow: Finance and
statistics, 1996
14. Kolchina n. B. Enterprise Finance. M, 2003
Kreinina M.N. Analysis of the financial condition and investment attractiveness joint-stock companies in industry, construction and trade. ML 994.
Kreinina M.N. " Financial condition enterprises. Evaluation methods "- M .: ICC" Dis ", 1997.
Kreinina M.N. Financial stability of the enterprise: assessment and decision making // Financial management. 2001. No. 2 p.20.
Mishin Yu. A., Dolgov V.P., Dolgov A.P. Accounting and analysis: problems of qualitative processing of accounting information. Krasnodar, 1995.
Pavlova L.p. M; 2003
20. Romanovsky T.V. Enterprise finance. S-P. "Business - press", 2003.
21. Paly V.F. New financial statements. Content. Method of analysis. M. library of the journal "Controlling", 1991.
Rodionova V.M., Fedotova M.A. Financial stability of the enterprise in the conditions of inflation. M. 1995.
Savitskaya G.V. "Analysis economic activity enterprises”, M.: Infra-M, 2002.
Hongren T., Foster J. Accounting: management aspect. M. 1995.
Chetyrkin E.M. Methods of financial and commercial calculations. M. 1992.
Sheremet A.D., Buzhinsky A.I., Methods of economic analysis of the activity of an industrial enterprise. M.: Finance and statistics, 1998.
Sheremet A.D., Suits V.P. Audit. M. 1995.
General Director of the outsourcing center "Osnova Capital" :
In the previous column on DK.RU, we figured out that the main indicator efficient business is not so much the amount of capital and the amount of profit, but the return (percentage) from the funds invested in the business - what financiers call the return on equity. And now I would like to show what factors influence it. The easiest way to do this is with the famous formula of the American corporation DuPont (“DuPont”), formulated back in the last century.
Recall that the formula for return on capital looks like this:
ROE \u003d Pr / SK, where
ROE - return on equity,
Pr - profit, and
SK - equity
Step 1. Increase the return on assets
Mathematically, the ROE formula can be represented as follows:
ROE \u003d Pr / SK \u003d Pr / A · A / SK, where A - assets (all property of the enterprise).
Note that Pr/A = ROA is the return on assets, which characterizes the intensity of their use in business, or, more simply, how much profit one ruble of assets brings.
It is clear that the higher the ROA, the higher the return on capital. There are two ways to increase the return on assets: either by increasing profits (increasing the numerator in the formula), or by reducing assets (decreasing the denominator in the formula). To increase the size of profit, it is necessary to work on revenue growth and cost reduction, in this case the income and expenses report of the enterprise will be an invaluable assistant.
To reduce assets, you need systems approach: it is necessary to regularly monitor all components of the assets - the balances in the warehouses of materials and finished products, to prevent overstocking of warehouses, it is important to build a clear work with receivables, preventing the growth of debts of buyers and suppliers.
Step 2. Controlling financial leverage
Consider the second part of the DuPont A/CK formula.
Knowing that assets are always equal to liabilities, we represent this fraction in the following form:
A / SK \u003d P / SK, where P - liabilities.
In liabilities, each company has its own capital (UK) and borrowed capital(ZK). Therefore, after simple mathematical manipulations, the part of the formula we are considering will look like this:
(SC + SC) / SC = 1 + SC/SC
The ratio of ZK / SK is financial leverage, or financial leverage, characterizing the degree of use of borrowed funds in business.
Step 3. Increase the share of borrowed capital
Now let's put all the parts of the DuPont formula together:
ROE = Pr/SK = ROA (1 + GK/SK)
Looking at this formula, it becomes obvious that there are at least two possible ways to increase the return on capital invested in the enterprise: increasing the return on assets and increasing the share of borrowed capital in the business (without increasing the value of assets).
Efficient capital management naturally includes the replacement of part of equity capital with borrowed funds. However, when attracting borrowed funds into your business, you need to know two financial axioms:
Axiom 1. The cost of borrowed funds should be lower than the return on assets
"The effect of financial leverage" (Efr) - complex mathematical formula, which calculates by what percentage the return on equity will increase in the course of raising borrowed funds, and looks like this:
Efr (%) \u003d (1 - Cnp) · (ROA - Rzk) · ZK / SK, where Snp is the income tax rate, Rzk is the rate of borrowed capital.
It can be seen from the formula that if the return on assets is less than the cost of borrowed money, then as a result the value of the effect of financial leverage will be with a minus sign. This means that the proposed loan will be unprofitable for the enterprise and will nullify the results of your activities.
Axiom 2. The ratio of own and borrowed funds is a matter of financial stability of a business
When there is too much borrowed money, the business becomes dependent on the lender, and any emergency situation can threaten the viability of the company. Thus, European banks recommend the ratio of SC/SC = 1:2. Sufficiently stable is the ratio of borrowed and own funds, equal to 1:1, but subject to the fulfillment of the necessary indicators of profitability.
The maximum possible ratio of borrowed and own funds that can be allowed in business is considered to be 4:1. If the share of borrowed capital is even greater, the situation can very quickly turn into bankruptcy of the organization.
While increasing the return on capital invested in a business using borrowed funds, make sure that your business remains sustainable!
The concept of "credit" is known to all. There is hardly a person in your circle of acquaintances who has never used borrowed money in his life (whether it is a simple loan from a friend, a consumer loan, credit card bank or mortgage). Attracting a bank loan for business is used less often, and many entrepreneurs have a blurry idea about the features of such lending.
Count seven times, take a loan once
If you are looking to raise a business loan, there are a number of things you need to consider before making a decision.
First of all, honestly answer two questions: what exactly will external borrowing give me and can this benefit be measured in absolute monetary terms?
Secondly, you need to know the market and be sure that in order to scale the supply there is a demand and the cost of attracting it is known. Even better, before investing in infrastructure, conduct testing, collect applications, etc. Experienced companies never strive to meet the demand for 100% if the competition in the market allows it. Their offer is always a bit scarce. They take this into account when expanding capacity.
Thirdly, you need to know the return on assets of your business. Some hope that by increasing the business, including through borrowed money, they will achieve increased profitability due to economies of scale. It must be remembered that the scale effect does not work in 100% of cases.
It is also necessary to focus on the duration of production cycles (rate of income generation). The term of the loan must significantly exceed the term of the production cycle, so that the resulting profit allows you to repay the debt.
Fourth, you need to clearly understand all the conditions that are offered financial institution. Not all entrepreneurs can determine the real cost of a loan and calculate the effective rate. Just like in the consumer market, banks include various commissions in the loan agreement, which increase the real cost of the loan. If you are faced with a complex, intricate scheme, it is better to invite a consultant or refuse the proposed deal.
Fifth Always have a "Plan B" in case things don't go the way you planned. For example, a new player suddenly appears on the market, the appearance of which will be an unpleasant surprise for you - especially if he starts a price war.
Only on the basis of all the data collected - independently or with the help of a professional - carry out a calculation of the effectiveness of the use of borrowed funds. Do not forget that getting a loan is not enough, you also need to properly manage the money received, direct it to something that will ensure profit growth. After signing the loan agreement, you can be absolutely sure of only one thing: the money will have to be returned in any case, and the profit must still be received, and no one is immune from force majeure.
How much to take?
Financial leverage allows you to increase the return on equity, however, as the share of borrowed capital increases, the risk of losing financial stability increases. In addition, banks raise interest rates on loans for companies that have a high debt-to-earnings ratio. Therefore, when planning a loan, focus only on the amount that you calculated when compiling the financial model.
Many have probably heard that large companies, especially those that are actively developed through lending (for example, retail chains) the share of borrowed funds in the total capital structure can be up to 70%, and the debt can exceed the annual profit by 3-4 times. Small and medium businesses should not be guided by these indicators. A corporation always has more opportunities for financial maneuvering: issuing bonds, selling shares, etc. In addition, debt obligations may be concentrated on one company within the group. Small and medium-sized businesses do not have such opportunities.
In the article, we touched upon the issues of business lending related to investments in development, but did not consider situations when a loan is required to cover a cash gap: when a company runs out of money in its accounts and cannot pay off its obligations.
Such situations can be associated both with a delay in payment from customers, and with errors in financial management. Of course, in this case, attracting a loan is rather a necessary evil, and you should try to avoid a cash gap. You can timely see the upcoming cash gap by setting up a cash flow forecast in Excel or using financial management services.
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Introduction.
It is known that each enterprise has its own financial resources - these are the funds at the disposal of the enterprise and intended to ensure its efficient operation, for execution financial obligations and economic incentives for employees. Financial resources are formed at the expense of own and borrowed funds.
To own sources financial resources operating enterprises include income (profit) from the main and other activities, non-operating transactions, depreciation, proceeds from the sale of retired property. Along with them, the sources of financial resources are stable liabilities, which are equated to their own sources, since they are constantly in the turnover of the enterprise, are used to finance its economic activities, but do not belong to it. Sustainable liabilities include: arrears in wages and social security contributions, a reserve for future payments wages for the period of regular vacations and a one-time remuneration for the length of service, debts to suppliers for non-fractionated deliveries, depreciation fund funds allocated for the formation of production reserves for overhaul, debt to the budget for certain types of taxes, etc. The need for cash increases with the operation of the enterprise. It has to do with growth production program, wear core production assets etc. Therefore, appropriate capital gain financing is required.
Therefore, when an enterprise does not have enough own funds to finance the activities of the enterprise, it can attract funds from other organizations, which are called borrowed capital.
1. General concept capital.
Capital - From lat. Capitalis - chief
Capital - in a broad sense - the accumulated (cumulative) amount of goods, property, assets used for profit, wealth.
Capital (in the economic sense) is a part of the financial resources of an enterprise intended to finance the current and core activities of the organization, to ensure sustainable and effective development organizations.
By subjects of ownership By object of investment
Own Borrowed Principal Negotiable
Capital Capital Capital Capital
Equity capital is a set of financial resources of the company, formed at the expense of the founders (participants) and financial results of their own activities. As an indicator of the balance sheet, it is: authorized capital (paid up share capital); retained earnings earned by the enterprise as a result of efficient operation and remaining at its disposal; reserve capital (defined as 5% of authorized capital JSC); as well as additional capital (formed based on the results of revaluation of assets, at the expense of share premium); reserve fund (created from net profit); consumption fund (also from net profit), etc.
Borrowed capital - capital received in the form of a debt obligation. Unlike equity, it has a deadline and is subject to unconditional return. Typically, periodic interest is charged in favor of the lender. Examples: bonds, bank loan, different kinds non-bank loans, accounts payable.
Working capital (English working capital, circulating capital) - elements of capital, characterized by short term services; the cost of which is immediately included in the costs of creating a new product (for example, materials; raw materials; products intended for sale; money). Working capital is the value expression of objects of labor that participate in the production process once, fully transfer their value to the cost of production, change their natural-material form. working capital, also called working capital - those funds that the company uses to carry out its daily activities, entirely consumed during the production cycle. They are usually divided into inventory and cash.
These include:
raw materials, materials, fuel, energy, semi-finished products, spare parts
work in progress costs
finished products and goods
future spending
VAT on purchased assets
Receivables (<12 мес.)
Short-term financial investments
Cash in accounts and on hand
Other current assets (low-value and fast-wearing items)
Fixed capital (fixed assets) - fixed assets of the organization reflected in accounting or tax accounting in monetary terms. Fixed assets are means of labor that repeatedly participate in the production process, while maintaining their natural form. They are intended for the needs of the main activity of the organization and must have a period of use of more than a year. As fixed assets wear out, the value of fixed assets decreases and is transferred to cost using depreciation.
2. Borrowed capital and its classification.
2.1. The concept of borrowed capital
Borrowed capital (debtcapital, long-termdebt) is the funds of third parties (they are called landers) provided to the enterprise on a long-term basis (mainly bank loans and bonded loans). Although this is a long-term, but temporary source of loans. Unlike equity, it has a deadline and is subject to unconditional return.
The need to attract borrowed capital should be justified by a preliminary calculation of the need for working capital. The composition of borrowed funds includes a financial loan received from banking and non-banking financial and credit institutions, a commercial loan from suppliers, accounts payable of an enterprise, debt on the issue of debt securities, etc. In accounting, borrowed funds and accounts payable are reflected separately. Therefore, in a broad sense, it is possible to allocate borrowed funds and, in a narrow sense, the actual financial loan. The difference between borrowed funds in a broad and narrow sense is borrowed funds. On the one hand, raising borrowed funds is a factor in the successful functioning of an enterprise, which helps to quickly overcome the shortage of financial resources, indicates the confidence of creditors and ensures an increase in the profitability of own funds. On the other hand, the enterprise is burdened with financial obligations. One of the main evaluation characteristics of the effectiveness of managerial financial decisions is the amount and efficiency of the use of borrowed funds.
Borrowed capital is characterized by the following positive features:
1. Sufficiently wide opportunities for attracting, especially with a high credit rating of the enterprise, the presence of collateral or guarantee of the guarantor.
2. Ensuring the growth of the financial potential of the enterprise, if necessary, a significant expansion of its assets and an increase in the growth rate of the volume of its economic activity.
3. Lower cost in comparison with own capital due to the effect of the "tax shield" (withdrawal of the cost of its maintenance from the taxable base when paying income tax).
4. The ability to generate an increase in financial profitability (return on equity ratio).
At the same time, the use of borrowed capital has the following disadvantages:
1. The use of this capital generates the most dangerous financial risks in the economic activity of the enterprise - the risk of reducing financial stability and loss of solvency. The level of these risks increases in proportion to the growth in the proportion of the use of borrowed capital.
2. Assets formed at the expense of borrowed capital generate a lower (ceteris paribus) rate of return, which is reduced by the amount of loan interest paid in all its forms (interest on a bank loan; leasing rate; coupon interest on bonds; bill interest on commodity credit, etc.).
3. High dependence of the cost of borrowed capital on fluctuations in the financial market. In some cases, with a decrease in the average loan interest rate in the market, the use of previously received loans (especially on a long-term basis) becomes unprofitable for an enterprise due to the availability of cheaper alternative sources of credit resources.
4. The complexity of the attraction procedure (especially in large amounts), since the provision of credit resources depends on the decision of other business entities (lenders), in some cases it requires appropriate third-party guarantees or collateral (at the same time, guarantees from insurance companies, banks or other business entities are provided, usually for a fee).
Thus, an enterprise using borrowed capital has a higher financial potential for its development (due to the formation of an additional volume of assets) and the possibility of increasing the financial profitability of activities, however, it generates financial risk and the threat of bankruptcy to a greater extent (increasing as the share of borrowed funds increases). in the total amount of capital used).
Financial stability reflects the financial condition of the organization, in which it is able, through the rational management of material, labor and financial resources, to create such an excess of income over expenses, at which a stable cash inflow is achieved, allowing the enterprise to ensure its current and long-term solvency, as well as to meet investment expectations. owners.
The most important issue in the analysis of financial stability is assessment of the rationality of the ratio of equity and debt capital.
Financing a business at the expense of equity capital can be carried out, firstly, by reinvesting profits and, secondly, by increasing the capital of the enterprise (issuing new securities). The conditions limiting the use of these sources to finance the activities of the enterprise are the policy of distributing net profit, which determines the amount of reinvestment, as well as the possibility of additional issue of shares.
Financing from borrowed sources implies compliance with a number of conditions that ensure a certain financial reliability of the enterprise. In particular, when deciding on the advisability of attracting borrowed funds, it is necessary to assess the structure of liabilities that has developed at the enterprise. A high share of debt in it can make it unreasonable (dangerous) to attract new borrowed funds, since the risk of insolvency in such conditions is excessively high.
By attracting borrowed funds, the enterprise receives a number of advantages, which, under certain circumstances, can turn into its reverse side and lead to a deterioration in the financial condition of the enterprise, bring it closer to bankruptcy.
Financing of assets from borrowed sources can be attractive insofar as the lender does not make direct claims regarding the future income of the enterprise. Regardless of the results, the creditor has the right to claim, as a rule, the agreed amount of principal and interest on it. For borrowed funds received in the form of a trade credit of suppliers, the latter component can act both in an explicit and implicit form.
The presence of borrowed funds does not change the structure of equity capital from the point of view that debt obligations do not lead to a “dilution” of the share of owners (unless there is a case of debt refinancing and its redemption by the company's shares).
In most cases, the amount of obligations and their maturity dates are known in advance (exceptions are, in particular, cases of guarantee obligations), which facilitates financial planning of cash flows.
At the same time, the presence of costs associated with the payment for the use of borrowed funds displaces enterprises. In other words, in order to achieve break-even operation, the company has to generate more sales. Thus, an enterprise with a large share of debt capital has little room for maneuver in case of unforeseen circumstances, such as a drop in demand for products, a significant change in interest rates, rising costs, seasonal fluctuations.
In conditions of an unstable financial situation, this can become one of the reasons for the loss of solvency: the company is unable to provide a larger inflow of funds necessary to cover the increased costs.
The presence of specific obligations may be accompanied by certain conditions that limit the freedom of the enterprise in the disposal and management of assets. The most typical example of such limiting conditions is pledge obligations. A high proportion of existing debt may result in the lender's refusal to provide new credit.
All these points must be taken into account in the organization.
The main indicators characterizing the structure of capital include the independence ratio, the financial stability ratio, the coefficient of dependence on long-term borrowed capital, the financing ratio and some others. The main purpose of these ratios is to characterize the level of financial risks of the enterprise.
Here are the formulas for calculating the listed coefficients:
Independence ratio = Equity / Balance sheet * 100%
This coefficient is important for both investors and creditors of the enterprise, since it characterizes the share of funds invested by the owners in the total value of the enterprise's property. It indicates how much an enterprise can reduce the valuation of its assets (reduce the value of assets) without prejudice to the interests of creditors. Theoretically, it is believed that if this ratio is greater than or equal to 50%, then the risk of creditors is minimal: by selling half of the property formed at the expense of its own funds, the enterprise will be able to pay off its debt obligations. It should be emphasized that this provision cannot be used as a general rule. It needs to be clarified taking into account the specifics of the enterprise and, above all, its industry affiliation.
Financial stability ratio = (Equity + Long-term liabilities) / Balance sheet * 100%
The value of the coefficient shows the proportion of those sources of financing that the enterprise can use in its activities for a long time.
Dependence on long-term debt capital = Long-term liabilities / (Equity + Long-term liabilities) * 100%
When analyzing long-term capital, it may be useful to assess the extent to which long-term borrowed capital is used in its composition. For this purpose, the coefficient of dependence on long-term sources of financing is calculated. This ratio excludes current liabilities from consideration and focuses on stable sources of capital and their ratio. The main purpose of the indicator is to characterize the extent to which the company depends on long-term loans and borrowings.
In some cases, this indicator can be calculated as a reciprocal value, i.e. as the ratio of debt and equity capital. The indicator calculated in this form is called the coefficient.
Funding Ratio = Equity / Debt * 100%
The coefficient shows which part of the enterprise's activity is financed by its own funds, and which part is financed by borrowed funds. A situation in which the value of the financing ratio is less than 1 (most of the enterprise's property is formed at the expense of borrowed funds) may indicate the danger of insolvency and often makes it difficult to obtain a loan.
At once it is necessary to warn against literal understanding of recommended values for the considered indicators. In some cases, the share of equity in their total volume may be less than half, and, nevertheless, such enterprises will maintain a fairly high financial stability. This primarily concerns enterprises whose activities are characterized by high asset turnover, stable demand for products sold, well-established supply and marketing channels, and low fixed costs (for example, trading and intermediary organizations).
For capital-intensive enterprises with a long period of turnover of funds, which have a significant share of designated assets (for example, enterprises in the machine-building complex), the share of borrowed funds of 40-50% can be dangerous for financial stability.
The coefficients characterizing the structure of capital are usually considered as characteristics of the enterprise's risk. The larger the share of debt, the higher the need for funds needed to service it. In the event of a possible deterioration in the financial situation, such an enterprise has a higher risk of insolvency.
Based on this, the above coefficients can be considered as tools for searching for "problem points" in the enterprise. The smaller the share of debt, the less the need for an in-depth risk analysis of the capital structure. The high proportion of debt makes it necessary to consider the main issues related to the analysis: the structure of equity capital, the composition and structure of borrowed capital (taking into account the fact that balance sheet data may represent only part of the company's liabilities); the company's ability to generate the cash needed to cover existing liabilities; profitability of activities and other significant factors for the analysis.
Particular attention in assessing the structure of the sources of the enterprise's property should be given to the method of their placement in the asset. This shows the inseparable connection between the analysis of the passive and active parts of the balance.
Example 1. The structure of the balance sheet of enterprise A is characterized by the following data (%):
Enterprise A
The assessment of the structure of sources in our example at first glance indicates a fairly stable position of enterprise A: a larger volume of its activities (55%) is financed by its own capital, a smaller one - by borrowed capital (45%). However, the results of the analysis of the placement of funds in the asset raise serious concerns about its financial stability. More than half (60%) of the property is characterized by a long period of use, and hence a long payback period. The share of current assets accounts for only 40%. As you can see, in such an enterprise, the amount of current liabilities exceeds the amount of current assets. This allows us to conclude that part of the long-term assets was formed at the expense of the organization's short-term liabilities (and, therefore, it can be expected that their maturity will come before these investments pay off). Enterprise A has thus chosen a dangerous, albeit very common, way of allocating funds, which can lead to insolvency problems.
So, the general rule for ensuring financial stability: long-term assets must be formed from long-term sources, own and borrowed. If the enterprise does not have borrowed funds attracted on a long-term basis, fixed assets and other non-current assets must be formed at the expense of equity.
Example 2. Enterprise B has the following structure of economic assets and sources of their formation (%):
Company B
| Assets | share | Passive | share |
| Fixed assets | 30 | Equity | 65 |
| Unfinished production | 30 | Short-term liabilities | 35 |
| Future spending | 5 | ||
| Finished products | 14 | ||
| Debtors | 20 | ||
| Cash | 1 | ||
| BALANCE | 100 | BALANCE | 100 |
As you can see, the share of equity prevails in the liabilities of enterprise B. At the same time, the amount of borrowed funds attracted on a short-term basis is 2 times less than the amount of current assets (35% and 70% (30 + 5 + 14 + 20 + 1) of the balance sheet, respectively). However, like enterprise A, more than 60% of the assets are hard to sell (provided that the finished product in the warehouse can be fully sold if necessary, and all buyers-debtors will pay off their obligations). Therefore, given the current structure of placement of funds in an asset, even such a significant excess of equity capital over borrowed capital can be dangerous. Perhaps, in order to ensure the financial sustainability of such an enterprise, the share of borrowed funds should be reduced.
Thus, enterprises in which the volume of hard-to-sell assets in the composition of working capital is significant should have a large share of equity.
Another factor affecting the ratio of own and borrowed funds is the cost structure of the enterprise. Enterprises with a significant share of fixed costs in the total cost should have a larger amount of equity.
When analyzing financial stability, it is necessary to take into account the rate of turnover of funds. An enterprise with a higher turnover rate of funds can have a large share of borrowed sources in total liabilities without jeopardizing its own solvency and without increasing the risk for creditors (an enterprise with a high capital turnover has an easier time securing cash flow and, therefore, paying off its obligations). Therefore, such enterprises are more attractive to lenders and lenders.
In addition, the rationality of liability management and, consequently, financial stability, is directly affected by the ratio of the cost of raising borrowed funds (Cd) and the profitability of investing funds in the organization's assets (ROI). The relationship of the considered indicators from the standpoint of their influence on the return on equity is expressed in a well-known ratio used to determine the impact:
ROE = ROI + D/E (ROI - Cd)
where ROE - return on equity; E - equity, D - borrowed capital, ROI - return on investment, Сd - cost of borrowing capital.
The meaning of this ratio is, in particular, that while the return on investment in the enterprise is higher than the price of borrowed funds, the return on equity will grow the faster, the higher the ratio of borrowed and own funds. However, as the share of borrowed funds increases, the profit remaining at the disposal of the enterprise begins to decline (an increasing part of the profit is directed to the payment of interest). As a result, the return on investment falls, becoming less than the cost of raising borrowed funds. This, in turn, leads to a fall in the return on equity.
Thus, by managing the ratio of equity and debt capital, the company can have an impact on the most important financial ratio - return on equity.
Variants of methods for the ratio of assets and liabilities
Option number 1
The presented scheme of the ratio of assets and liabilities allows us to talk about a safe ratio of equity and borrowed capital. Two basic conditions are met: equity exceeds non-current assets; current assets are higher than short-term liabilities.
Option 2
The presented scheme of the ratio of assets and liabilities, despite the relatively low share of equity, also does not cause concern, since the share of long-term assets of this organization is not high and equity fully covers their value.
Option number 3
The ratio of assets and liabilities also demonstrates the excess of long-term sources over long-term assets.
Option number 4
This version of the balance sheet structure at first glance indicates the insufficiency of equity capital. At the same time, the presence of long-term liabilities makes it possible to fully form long-term assets at the expense of long-term sources of funds.
Option number 5
This variant of the structure may raise serious concerns about the financial stability of the organization. Indeed, it can be seen that the organization in question does not have enough long-term sources for the formation of non-current assets. As a result, it is forced to use short-term borrowed funds to build long-term assets. Thus, it can be seen that short-term liabilities have become the main source of formation of both current assets and, in part, non-current assets, which is associated with increased financial risks for the activities of such an organization.
At the same time, it should be emphasized that the final conclusions regarding the rationality of the structure of the liabilities of the analyzed organization can be made on the basis of a comprehensive analysis of factors that take into account industry specifics, the rate of turnover of funds, profitability, and a number of others.
