Financial Autonomy of the company, what it is and how it is calculated »
Financial Autonomy of the company, what it is and how it is calculated

Financial Autonomy of the company, what it is and how it is calculated

“Financial analysts” have indicators that allow you to understand the financial health of your company. Let's look at one of these indicators, the Financial Autonomy Ratio (AUF), which can be useful in analyzing the viability of an entrepreneurial project or the situation in which the company finds itself, if it is already in operation.

Estimated reading time: 3 minutes

Financial Autonomy (AUF) what is it?

The Financial Autonomy indicator reveals the extent to which the total assets are supported or financed by the company's equity (Cp'), that is, to what percentage the capital finances the asset.

O company equity it is the sum of the share capital and net income, both for the period under analysis and for those previously placed as reserves or retained earnings.

This ratio shows the share of the partners in the amount of investment made in the company.

Table of Origins and Applications of Funds
Table of Origins and Applications of Funds

How is Financial Autonomy Calculated - AUF

Let's exemplify with a case where Equity is €34.000.

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Table with example of simple balance.
CategoriesMarketDestinationBalance
Availabilities 5 000 €ApplicationsActive
Credits With Term 10 000 €ApplicationsActive
Stocks 15 000 €ApplicationsActive
Net Fixed Assets (IL) 40 000 €ApplicationsActive
Debts with Term 11 000 €SourcesPassive
Debits M / L Term 25 000 €SourcesPassive
Equity (Cp´) 34 000 €SourcesEquity

Total Assets or Capital Employed is the sum of all sources of capital, whether the capital itself or that which originates from debts that have yet to be paid. That sum, in this example, is €11.000+€25.000+€34.000=€70.000.

Thus,

AUF = Equity (Cp') / Total Assets (Employed Capital) = 34.000/70.000= 0,56

How Can It Be Interpreted?

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A low value indicates a strong dependence of the company on creditors and makes it difficult to negotiate new financing.

On the contrary, the greater the Financial Autonomy, the greater the solidity and independence of the company from foreign capital or support programs.

Let's assume that the company has to increase its indebtedness, resorting to a bank loan. Financial Autonomy decreases because total assets increase and equity is maintained. It is the liability side and in this case the loan that increases.

However, when the company accumulates positive results, the net situation, that is, equity improves, increasing financial autonomy.

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Some authors refer that this indicator or ratio must be between 0,30 and 0,60, that is, 30% to 60%.

Based on the current situation, we will have to simulate business slowdown scenarios and verify the impact it will have on the various values ​​and indicators mentioned.

To deal with possible treasury needs, you will probably have to ask for a loan or apply for some type of support that may exist.

This indicator is one of those credit institutions value in their analysis.

In fact, the greater the value of Financial Autonomy, the greater the probability that the company will be able to meet its liabilities, particularly in the event of liquidation.

In any case, knowing these values ​​and performance indicators will help in the choices to be made.

It is relevant information that must be included in the business plan.

How We Compare With the Competition

Sometimes it is important to compare our results, whether they are still forecast or real, with those of the competition.

For example, when we are planning an entrepreneurial project, it is important to understand how the competition operates in our market.

To find out the Financial Autonomy Ratio of a competitor or business partner, we can obtain company reports through the Government Portal and, also, there are specialized companies where we can get information from companies so we can compare.

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