4.3 Financial planning

The management of the company's development must be based on measurable criteria. These include profitability, liquidity, economic efficiency and, for example, productivity in manufacturing companies. The planned key figures are the basis of financial planning.

 

Profitability target

Profitability is defined by the ratio of profit to capital employed.

Most companies are financed through debt and equity capital. Interest must be paid to the lender for the debt capital. The invested equity capital must also "yield" interest, in the form of the profit or the annual surplus. If the profit meets expectations, the profitability target is achieved.

Return on equity =	Profit	* 100
	Equity

 

If the equity and debt capital are taken as a basis and the interest expense for the debt capital is added to the profit, the result is the return on total capital or corporate profitability.

 

 

In the case of a partnership, the entrepreneur's salary must first be deducted from the profit.

Return on assets =	Profit + interest expense	* 100
	Total capital

 

Return on sales determines the ratio of profit to sales revenue.

Example:

Total capital

Equity                                     300.000 €             

Debt capital                                           200.000 €             

Profit                                                        40.000 €

Interest                                    10.000 €

• Return on equity:

e.g.: 40.000 € : 300.000€ * 100 = 13,3 %

• Return on total capital:

e.g.: 40.000 € + 10.000 € : 500.000 € * 100 = 10 %

Return on sales =	Profit	* 100
	Sales proceeds

 

Information on profitability comparisons is published, for example, for the retail trade by the "Institute for Trade Research", University of Cologne. Comparative data on sectors is also available from the chambers of commerce. Profit margins for small traders are determined by the regional tax offices with the help of reference rate collections.

Target liquidity

Liquidity means being solvent at all times. This is one of the most essential foundations of any business activity. In other words, insolvency and over-indebtedness threaten the continued existence of the company and usually lead to insolvency. 

Building on short- and medium-term financial planning, the capital structure should be aligned in such a way that financial imbalances are avoided. In this context, finance speaks of the financial equilibrium of the company. The financial equilibrium of a company is established through the careful coordination of four factors:

• Amount of capital required,
• Source of capital raising,
• required capital utilisation period,
• Repayment agreement (capital transfer period).

Long-term capital commitments (fixed assets) should be financed through long-term financing (equity and long-term debt). The so-called floor of current assets (inventories and outstanding receivables) should also be financed on a long-term basis.

As a rule of thumb, at least one, preferably several months' sales should be available as liquidity.

 

Goal Economic efficiency

Profitability is defined as the ratio of income to expenditure.

 

 

Productivity target

Productivity is largely due to technical progress. Productivity determines the productivity of economic activity. It is measured by the quantitative output per day, per hour, per employee, per machine, per unit.

Economic considerations play no role in determining productivity. It says nothing about profitability.