Self-financing capacity (SFC) is a valuable metric for French companies. They can use it to determine how internal resources can be used to ensure financing. As a metric of financial health, SFC is able to show if a company is profitable and financially independent. It also shows if the company can support future spending (e.g., operations, growth, debts) without using external financing.

This article explains SFC, why it’s important to companies, how to calculate it, and how to increase it to better finance your business.

What’s in this article?

• What is self-financing capacity (SFC)?
  
• What is the purpose of SFC?
  
• Calculating SFC
  
• Interpreting the SFC calculation
  
• Why is a business’s SFC important?
  
• Using SFC with other financial ratios
  
• The pros and cons of self-financing
  
• Increasing SFC
  
• How Stripe Capital can help
  

What is self-financing capacity (SFC)?

SFC is an accounting metric that evaluates a company’s profitability by determining its capacity to finance its business activity without using external financing. It represents the financial resources the company generates and if these internal resources are sufficient to cover all funding needs.

In accounting, SFC corresponds to the company’s net income for an accounting period. This includes surplus cash that results from the difference between collections (i.e., incoming funds) and payments (i.e., outgoing funds).

What is the difference between SFC and cash holdings?

SFC and cash holdings are two of the company’s cash flow streams. However, SFC is a potential and theoretical flow that represents potential resources, and it does not take time lags for payments into account. On the other hand, cash holdings represent actual cash flow streams, which include how money moves within the company (e.g., customer and supplier payments).

What is the difference between SFC and gross operating surplus (GOS)?

SFC and GOS are two financial metrics related to profitability. GOS evaluates a company’s operational profitability, which are resources generated during an accounting period. SFC provides insight that is more comprehensive than profitability, including financial and nonrecurring items, such as noncash expenses and income.

What is the difference between SFC and self-financing?

SFC is a calculation method for determining self-financing, which is a company’s capacity to finance its own business. SFC is a financial ratio, and self-financing is the strategy that the company implements to finance its operations and develop its business without external assistance.

“Self-financing” also refers to the remaining part of SFC after dividends have been paid to shareholders or partners. Part of the SFC is often reserved for payment of dividends after an accounting period. Self-financing represents the part of the SFC that remains after dividends are paid.

What is the purpose of SFC?

Companies in France can use SFC to determine their financial health. SFC makes it possible to evaluate whether a company can cover its various financing needs on its own and within its operations without taking out external loans.

SFC can determine if the company has generated enough cash flow during its accounting period to do the following:

• Pay its suppliers
  
• Pay expenses
  
• Repay existing loans
  
• Increase working capital
  
• Finance new investments (e.g., acquisitions, diversification, fixed assets, infrastructure)
  
• Recruit new employees
  
• Distribute dividends to shareholders
  
• Save money
  

Here’s an example: A company generated SFC of €50,000 during its last accounting period. These resources can be used to repay an existing loan of €15,000, pay €10,000 of dividends to shareholders, and save €25,000.

Calculating SFC

The SFC amount can be determined by simply calculating the net income. This is the difference between cashable products (i.e., receivables that generate incoming funds) and disbursable expenses (i.e., expenses that generate outgoing funds).

There are two methods for accurately calculating SFC:

• Addition method: Using net income for the accounting period
  
• Subtraction method: Using GOS
  

Important calculations

Calculating SFC using net income

This is the most common calculation method. Use the following formula to calculate SFC with net income:

SFC = Reported Net Income – Noncash Income + Noncash Expenses – Proceeds from the Sale of Assets + Net Reported Value of Assets Sold

“Noncash income” refers to reported items that do not correspond to actual incoming funds. These can include reversals of operating expenses or financial and nonrecurring reversals. “Noncash expenses” are reported expenses that do not generate actual outgoing funds. Examples include operating provisions or financial and nonrecurring provisions. These two expenses do not generate cash flow but impact the company’s income.

“Proceeds from the sale of assets” (Account 775) are incoming funds generated following the sale of a company asset, such as a vehicle or property. The “net reported value of assets sold” (Account 675) corresponds to the residual value of assets at their sale, accounting for the cost of the original purchase, amortizations, and accumulated depreciations.

Calculating SFC using GOS

This method is often considered to be more intuitive. Use the following formula to calculate SFC using GOS:

SFC = GOS + Cash Income – Cash Expenses

“Cash income” refers to financial income, nonrecurring income, and other income that is not included in the calculation of GOS. “Cash expenses” are actual expenses (e.g., bank interest, nonrecurring expenses) that are not included in GOS.

GOS can be calculated with the following formula:

GOS = Revenue – Consumed Purchases – Consumption from Third Parties + Operational Subsidies – Employee Compensation – Taxes and Fees

Interpreting the SFC calculation

The SFC calculation determines if SFC is positive or negative:

• Negative SFC
  The company is not generating enough resources to cover its financial needs. In this case, the company must turn to external resources to meet its needs, such as a lease-rent arrangement or a bank loan. The company should also revisit its business model to avoid a negative SFC during its next accounting period.
  
• Positive SFC
  The company’s business model is working, and it is generating sufficient resources to cover its financial obligations on its own. It can also use the surplus to repay loans, pay dividends, finance growth, or convert it to cash.
  

What is a good SFC?

In general, a good SFC is 5% of revenue for a company subject to corporation tax and 15% of revenue for a company subject to income tax.

Why is a business’s SFC important?

Companies in France can benefit from knowing their SFC because it makes it possible for them to evaluate their company’s financial health. SFC helps determine if the company is generating more resources than it spends. This data also makes it possible to determine the best financing strategy for the business while anticipating future needs.

SFC is also important for creditors and investors because it helps them evaluate a company’s creditworthiness, ability to carry out long-term projects, and the amount of distributable dividends. For example, a company with a low-risk profile and a high SFC can benefit from a higher loan.

It is important for companies to accurately calculate their SFC to avoid taking out a loan that they are unable to repay and avoid missing out on investment opportunities.

Using SFC with other financial ratios

Calculating SFC makes it possible to calculate additional ratios. Once calculated, this information allows company executives, banks, and investors to accurately analyze the company’s financial health. For example, these ratios include the following:

• Repayment capacity
  This makes it possible for banks or credit institutions to evaluate a company’s solvency and loan repayment period. It is calculated by subtracting available cash from financial debt and dividing by SFC. The result—ideally less than three or four—indicates the number of accounting periods required to repay the loan.
  
• Business profitability
  This ratio determines the percentage of revenue that corresponds to the creation of resources generated to finance the company. It is calculated by dividing SFC by revenue before tax. For example, a ratio of 60% indicates that, for each €100 of revenue, €60 of internal resources are generated.
  

The pros and cons of self-financing

Self-financing is a strategy that offers French companies a number of advantages. With a positive SFC, companies can do the following:

• Guarantee financial independence
  
• Immediately access available funds
  
• Independently choose which investments to finance
  
• Avoid taking out loans and repaying interest
  
• Assure shareholders and partners about the health of the company by paying dividends
  

However, self-financing also has some disadvantages:

• SFC can be limited and reduce what investments are possible.
  
• Self-financing offers less predictability than external financing.
  

Increasing SFC

There are two main strategies for increasing SFC: increase revenue or reduce expenses. Companies can increase their revenue by raising the price of their products or services and rewarding customer loyalty. They can reduce expenses by renegotiating various contracts (e.g., leases, insurance, suppliers).

For example, companies can increase their revenue by doing the following:

• Increase product or service prices without impacting sales volumes
  
• Offer new, more profitable products
  
• Simplify payment terms and implement efficient payment collection policies
  
• Improve the customer experience by offering new payment methods
  
• Acquire new clients and reward customer loyalty
  

To reduce fixed and variable expenses, companies can do the following:

• Refine contracts, subscriptions, insurance, and supplier costs
  
• Purchase less expensive raw materials
  
• Digitize and automate time-consuming tasks, such as invoicing
  
• Acquire more efficient equipment and hardware
  

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow.

Capital can help you:

• Access growth capital faster: Get approved for a loan or merchant cash advance in minutes—without the lengthy application process and collateral requirements of traditional bank loans.
  
• Align financing with your revenue: Capital’s revenue-based structure means you pay a fixed percentage of your daily sales, so payments scale with your business performance. If the amount that you pay through sales doesn’t meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  
• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion, and more—without diluting your equity or personal assets.
  
• Use Stripe’s expertise: Capital provides custom financing solutions informed by Stripe’s deep expertise and payments data.
  

Learn more about how Stripe Capital can fuel your business growth, or get started today.