Capacité d'Autofinancement (CAF) and Self-Financing Theory and Practice

Conceptual Foundation of the Capacité d'Autofinancement (CAF)

• Definition and Internal Nature: The CAF represents the potential internal resources generated by an enterprise's activities. It is fundamentally distinct from external resources, which are provided by the company's partners (such as shareholders or lenders).
• Potential vs. Effective Resources: The CAF measures potential resources because it is derived from the income statement (Compte de résultat), which records revenues at the moment of invoicing. Due to credit terms granted to customers, a temporal lag often exists between the accounting registration and the actual cash inflow (encaissement).
• Link to Autofinancement (Self-Financing): Potential self-financing is calculated by subtracting dividends paid to shareholders from the CAF. This resource is primarily intended to:     * Ensure the renewal of investments.     * Cover probable risks of loss.     * Finance the expansion and growth of the company.

The PCG Definition and Structural Components

• Official Definition: According to the Plan Comptable Général (PCG), the CAF is defined as the "residual flow of effective or potential cash secreted by the management operations of the enterprise."     * Residual Flow: This identifies the CAF as a balance or difference between specific products (revenues) and charges (expenses).     * Cash (Trésorerie): It specifically concerns items that lead or will lead to a cash movement.     * Effective or Potential: Products and charges paid immediately (au comptant) are considered effective cash; those settled on credit represent potential cash.     * Management Operations: This includes all charges and products except for the proceeds from asset disposals (Compte $775$).

The Split of the Income Statement (Compte de Résultat)

To calculate the CAF, the income statement is divided into two distinct parts:

• Monetary Items (Cash-related):     * Category A (Encaisasble Products): Revenues that generate cash inflows.     * Category B (Décaissable Charges): Expenses that generate cash outflows.

• Non-Monetary Items (Calculated):     * Category C (Calculated Charges): Non-cash expenses such as Depreciation, Amortization, and Provisions (DAP), and the Net Book Value of sold assets (VNCEAC).     * Category D (Calculated Products): Non-cash revenues such as Reversals of Provisions (RAP), Proceeds from Asset Sales (PCEAC), and the portion of investment grants transferred to the result (QPSVR).

• Fundamental Equality: The income statement balances such that Total Charges = Total Products. This can be expressed as:     $(B + C) = (A + D)$     Therefore, the CAF can be derived in two ways:     $CAF = A - B$ (The Substractive Method)     $CAF = C - D$ (The Additive Method - where $C$ includes the Net Profit/Loss ($12$))

Detailed Calculation Methodologies

1. The Additive Method (Indirect Method)

This method is generally considered simpler and faster as it involves fewer accounts. It starts from the Net Result (Résultat net) and adds back non-cash charges while subtracting non-cash products:

• $+ \text{Résultat net de l'exercice}$
• $+ \text{Dotations aux amortissements, dépréciations et provisions (DAP)}$
• $+ \text{Valeur nette comptable des éléments d'actifs cédés (VNCEAC)}$
• $- \text{Reprises sur amortissements, dépréciations et provisions (RAP)}$
• $- \text{Produit de cession d'éléments d'actifs cédés (PCEAC)}$
• $- \text{Quote-part de subvention virée au résultat de l'exercice (QPSVR)}$
• $= \text{Capacité d'Autofinancement}$

2. The Substractive Method (Direct Method)

This method strictly follows the PCG definition by focusing on cash-generating items. If Intermediate Management Totals (SIG) are available, it begins with the Excédent Brut d’Exploitation (EBE):

• $+ \text{Excédent brut d'exploitation (EBE)}$
• $+ \text{Autres produits de gestion courante}$
• $+ \text{Quote-part de résultat sur opérations faites en commun (gains) (1)}$
• $+ \text{Produits financiers}$
• $+ \text{Produits exceptionnels (excluding PCEAC and QPSVR)}$
• $+ \text{Transfert de charges}$
• $- \text{Autres charges de gestion courante}$
• $- \text{Quote-part de résultat sur opérations faites en commun (losses) (1)}$
• $- \text{Charges financières}$
• $- \text{Charges exceptionnelles (excluding VNCEAC)}$
• $- \text{Participation des salariés aux fruits de l'expansion}$
• $- \text{Impôt sur les bénéfices}$
• $= \text{Capacité d'Autofinancement}$

(1) Note on Joint Operations: Results from operations conducted in common often involve Groupements d'Intérêt Économique (GIE); these are recorded in accounts $75$ and $65$ but appear on a separate line in the income statement.

Interpretation and Strategic Ratios

• Financial Autonomy: The CAF measures the degree of financial independence, as it allows the firm to renew investments and repay debt without external reliance.
• Debt Repayment Ratio: The ratio $\\frac{\text{Dettes financières}}{CAF}$ facilitates the assessment of a company's ability to repay structural loans.     * Target: Credit institutions generally set the maximum threshold for this ratio between $3$ and $5$ years.     * Indication: A lower ratio signifies higher solvency and long-term borrowing potential.

Self-Financing Policy (Politique d'Autofinancement)

Self-financing is the portion of the CAF remaining after dividend distribution. It has a triple vocation:

1. Maintenance of Productive Potential: Managed through Amortization (Amortissement) to renew tangible assets after use, involving certain losses (perte certaine).
2. Risk Management: Managed through Provisions and Depreciations (Dépréciations et Provisions) to face probable losses (perte probable).
3. Growth Financing: Financed by non-distributed profits (Reserves) to support the expansion of the business.

Advantages and Disadvantages of Growth Self-Financing

• Advantages:     * Increased financial autonomy through the growth of equity (capitaux propres).     * Regulation of dividends via the variation of reserves.
• Disadvantages:     * Potential for price increases: Companies may raise selling prices to generate more CAF.     * Impact on Share Price: Reducing dividends can lead to a drop in stock market values.     * Strategic Mismatch: Risk of investments being misaligned with the actual needs of the enterprise.

Case Study: Ordino Company

Ordino specializes in hardware sales and IT services. Despite ending the year with a loss of nearly $7$ million euros, the CAF must be verified.

Compte de Résultat Data (Extracts)

• Operating Products (Produits d’exploitation):     * Vente de marchandises: $147,296,026\,€$     * Prod. vendue de biens et services: $17,159,040\,€$     * Subventions d'exploitation: $767,220\,€$     * RAP et transfert de charges: $1,875,826\,€$ (Note: includes $1,500,000\,€$ in charge transfers)     * Autres produits: $4,304\,€$
• Operating Charges (Charges d’exploitation):     * Achats de marchandises: $121,762,740\,€$     * Variation de stocks: $501,592\,€$     * Autres charges externes: $14,193,518\,€$     * Impôts taxes et versements: $800,893\,€$     * Salaires et traitements: $18,096,037\,€$     * Charges sociales: $7,748,754\,€$     * DAP (amortissements): $2,757,037\,€$     * DAP (dépréciations): $2,462,270\,€$     * Autres charges: $324,823\,€$
• Financials:     * Charges financières (Interêts): $6,644,957\,€$     * Produits financiers (Interêts): $964,393\,€$
• Exceptionals:     * Charges exceptionnelles (gestion): $1,889,240\,€$     * VNCEAC (capital *): $723,965\,€$ DAP exceptionnelle: $423,121\,€$     * Produits exceptionnels (gestion): $684,461\,€$     * PCEAC (capital **): $2,454\,€$ RAP exceptionnelle: $291,022\,€$
• Totals:     * Impôts sur les bénéfices: $-2,407,270\,€$ (Tax credit/adjustment)     * Perte de l'exercice: $6,876,931\,€$     * Total Général: $175,921,677\,€$