Difference between the golden accounting rule and the golden financing rule
The golden rule of financing , also known as the golden rule of banking , is based exclusively on the matching of maturities between capital (liabilities) and assets (assets), while the balance sheet rule of the same name, as shown above, also takes into account the origin of the funds.
According to ezhoushan.net, the golden rule of financing can also be broken down into key figures. The calculation formulas are as follows:
long-term assets / long-term capital ≤ 1
Fixed assets are also included in long-term assets. Long-term capital includes equity and debt that the company has available for more than a year.
The corresponding formula for current assets is defined as follows:
short-term assets / short-term capital ≥ 1
The short-term assets are to be equated here with the balance sheet current assets. Short-term capital includes outside capital that is left to the company for a maximum of one year, i.e. in particular trade accounts payable, short-term loans of all kinds and liabilities to the tax office and social security agencies.
Let’s go back to our structural balance sheet:
|Current assets||500||Borrowed capital||1,000|
|Claims from L + L||100||Liabilities (> 1 year)||300|
|Liquid funds (cash register, bank)||50||Liabilities from L + L (≤ 1 year)||450|
|Total assets||1,500||Total assets||1,500|
The first requirement of the golden rule of financing is then as follows:
long-term assets ./. long-term capital ≤ 1
1,000 / (500 + 250 + 300) = 0.95 ≤ 1
The golden formula for financing is thus fulfilled. The second requirement does not have to be checked separately, as the two formulas are mutually dependent. This applies at least to companies that are subject to accounting obligations and use commercial accounting.
Criticism of the golden rule of balances
In Germany, unlike in the USA, the IPO for small and medium-sized companies is the absolute exception. Most businesses finance themselves through a mix of retained earnings and bank loans . For German companies, an equity ratio of 20 percent is considered sufficient, and 30 percent is sufficient for public-sector companies (R 33 KStR 2004). At least manufacturing companies seldom cover their fixed assets with equity alone and therefore regularly fail at least the golden balance sheet rule in the narrower sense . The latter can also serve as a guide and is only really meaningful in connection with other key figures.
Although the company in our example fulfills the silver balance sheet rule and the gold financing rule, it could still be threatened with bankruptcy . After all, the trade payables of 450 monetary units (MU) are offset by only 50 MU of liquid funds. If the incoming invoices are due earlier than the outgoing invoices, it will be financially tight for our sample GmbH. At least for day-to-day business, controlling the cash flow plays a far greater role than the balance sheet structure. However, the latter can also have a short-term effect on the profit via the financing conditions.
Debt has its good side too
In terms of profit, however, opposing effects must be taken into account. Interest on borrowed capital reduces the tax base , but dividends do not. It can therefore make sense, especially for sole proprietorships and family businesses, not to carry out a capital increase in the event of a bottleneck, but to grant the company a shareholder loan. The loan interest, provided they are customary in the market, reduce the company’s taxable profit and flow directly to the entrepreneur. He has to pay taxes on it, but he can pay the related operating expenses or business expenses, which are often only of an imputed nature, are tax deductible. In any case, he avoids the double taxation to which distributed profits are subject. Because profit is first charged with corporation tax and trade tax at company level and is subject to capital gains tax as a distributed dividend . So it is worthwhile to do the math to see what is actually more economical in the end.
Debt capital does not only have a positive effect on the entrepreneur’s income through tax advantages. The so-called leverage effect can also take effect . This is understood to mean the leverage effect of debt capital on the profitability of equity . The only requirement is that the company’s total return on capital is higher than the interest rate on borrowed capital. If a company earns fifteen cents for every euro invested and has to pay eight cents in interest in the case of external financing, it still has a return of seven cents. Under this condition, the profit per euro of equity also increases if investments are exclusively debt-financed. The golden rule of balances completely ignores this fact.
The two financing rules presented do not always lead to golden annual results, at least if they are followed uncritically. They only serve as a rule of thumb and orientation aid, but not as a strictly applicable control instrument.