What Is the Higgins Project?

The Higgins sustainable growth model is an American financial scientist Robert Higgins conducted in-depth research on company growth issues and financial issues, and proposed a sustainable growth model in 1977. The sustainable growth model describes the relationship between the growth rate of a company under certain conditions, which is constrained by operating levels, financial resources, and policies.

Higgins sustainable growth model

Right!

The Higgins sustainable growth model is an American financial scientist Robert Higgins conducted in-depth research on company growth issues and financial issues, and proposed a sustainable growth model in 1977. The sustainable growth model describes the relationship between the growth rate of a company under certain conditions, which is constrained by operating levels, financial resources, and policies.

This model is an effective method for setting sales growth targets and has been widely used by many companies (such as HP, Boston Consulting).

Higgins definition: Sustainable growth rate refers to the maximum rate that a company's sales can grow without exhausting financial resources.

Setting sales targets based on sustainable growth rates allows companies to reasonably weigh the relationship between increasing revenue and controlling debt scale. Sustainable growth rate (SGR) is the condition under which companies do not increase equity financing and maintain current operating efficiency (represented by asset turnover rate and net sales margin) and financial policies (represented by asset-liability ratio and return retention ratio). The biggest growth rate of a company's sales revenue is actually a kind of balanced growth.

The sustainable growth model is based on the following assumptions:

1. The company wants to develop at a rate allowed by the market;

2. It is impossible or unwilling for managers to raise new equity costs, that is, the number of shares issued by the company remains unchanged;

3. The company should continue to maintain a target capital structure and target dividend policy;

4. The company's asset turnover rate remains unchanged.

According to Higgins' method, the company's sales growth rate must be supported by new assets. If the company's opening sales are S, the current year's sales growth rate is g. In order to maintain the opening total assets A and the corresponding sales S, The target ratio A / S is unchanged, and the company's total assets at the end of the period should be expanded by a factor of g. There are two sources of funding to support the company's sales growth. One is the company's retained earnings after net profit minus dividends; the other is to realize the company's capital structure and debts as the company's owner's equity increases. Growth. Get the formula according to the "asset = liability + owner's equity balance" equation:

The company's ending asset growth amount = A × g

The number of owners' equity growth at the end of the period = P × (S + g × S) × (1-d) = P × S × (1 + g) × (1-d)

The corresponding amount of liabilities that the company can grow at the end of the period = P × S × (1 + g) × (1-d) × (D / E)

According to the accounting identity, we get:

A × g = P × S × (1 + g) × (1-d) + P × S × (1 + g) × (1-d) × (D / E)

g / (1 + g) = P × S / A × (1-d) × (1 + D / E)

Let g * = g / (1 + g) = P × S / A × (1-d) × (1 + D / E) = (1-d) × P × S / A × (1 + D / E )

g is the achievable sales growth rate using internal resources and constant corporate capital structure, which is called sustainable growth rate. For discussion purposes, define g * as the company's sustainable growth rate. The company's beginning equity ratio R = 1 + (D / E), the beginning of the period total asset turnover rate Q = S / A, the ending retained earnings rate L = 1-d, and the net sales interest rate for the current period is P.

It can be concluded that: g * = retained return rate (current year) x net sales interest rate (current year) x total asset turnover rate (previous year) x equity multiplier (previous year) = L × P × Q × R = retained return rate × Roe

From the above equation, it can be seen that a company has to rely on itself to achieve sales growth. Its sustainable sales growth rate and the company's retained return rate L, net sales interest rate P, total asset turnover rate Q and equity multiplier R are four ratios. Products are closely related. These four ratios relate to all the main elements of the company's financial management. P and Q in the formula summarize the profitability and asset operation ability of the company, while R and L describe the company's main financial policies (R reflects the company's financial leverage policy , And L reflects management's attitude towards dividend payment).

The main advantage of the Higgins model is that it clarifies the important financial factors that affect and restrict the growth of the company. The model is simple, the idea is clear, and it is easy to operate. However, because its model is built on a series of assumptions and reflects only the sustainable growth rate of enterprises in a static state, the shortcomings of this model are also quite obvious. Because in practice, some assumptions of the Higgins model are difficult to exist, and the growth decision or plan of the enterprise should not be a purely mechanical activity. For example: the assets of an enterprise may not necessarily increase proportionally with sales; the ratio of net profit to sales is also difficult to be constant; the ratio of corporate debt to equity should also be adjusted according to actual conditions; the dividend policy also There are many, and the dividend payment rate of an enterprise is not necessarily fixed: these actual conditions necessarily conflict with model assumptions. Of course, the assumption that it is impossible for an enterprise to issue new shares at any time is more in line with reality, at least for a period of time. According to relevant foreign statistics, listed companies sell new shares once every 20 years on average. China's listed companies also have strict approval procedures for new issuance of new shares, and they must be at least a certain number of years apart. But this does not mean that companies can never issue new shares. All this shows that the assumptions in the Higgins model are not reasonable.

Steady state refers to: assets and liabilities increase with the proportion of sales; net sales margin is constant; capital structure and dividend policy have been determined; external equity funds are not increased; equity funds required for growth are internal; financial ratios remain at current levels.

Under steady conditions, the variables that determine the continuous growth rate (g) are:

Tthe ratio of total assets to sales;

pnet sales margin (net profit / sales after tax);

ddividend payout ratio (1-d = retention ratio);

Lliability-equity ratio;

S0Sales for the current period;

SSales increase in the next period.

Basis: increase in assets = increase in retained earnings + increase in liabilities

T S = [(S0 + S) × p × (1-d)] + [(S0 + S) × p × (1-d)] × L

Let g = S / S0. After finishing the above formula, we get:

Unsteady state refers to the situation where the variables in the model may change. At this point, some variables in the model are expressed in absolute values. Set the shareholder's equity of this period as E0, the amount of new equity financing is E, the amount of dividend payment is D, and the other symbols have the same meaning, then:

There is a close relationship between the sustainable growth model and the DuPont analysis system: g * = retained return rate × return on net assets. However, the content covered by the sustainable growth model and its significance to financial management are much richer than the DuPont analysis system, to a certain extent, it makes up for the shortcomings of the DuPont analysis system in financial management:

1. The introduction of retained earnings ratio fully reflects the manager's attitude towards dividend distribution, clarifies the manager's intention in using the company's internal and external resources, and thus expands the scope of the company's financial policy that can be explained by the DuPont analysis system.

2. The sustainable growth rate provides important reference indicators for the company's development capabilities. When sustainable growth differs significantly from the company's actual growth, it reminds managers to conduct a comprehensive analysis of their differences and find out the financial problems behind high-speed growth or slow growth, so as to timely formulate the correct financial strategy and Strategy.

(1) The sustainable growth rate of an enterprise can be calculated based on the sustainable growth model. In order to achieve its business growth goals, business managers need to formulate relevant budget plans. The sustainable growth rate provides a basis for managers to prepare budget plans in terms of quantity. At the same time, through the use of sustainable growth models, it is also possible to check the consistency of various growth plans. Businesses in general are accustomed to making many attractive plans for expectations, however, these plans may not be consistent with each other. In this way, you can make more informed and informed decisions in marketing, finance, and manufacturing.

(2) Comparing the sustainable growth rate with the actual growth rate can reveal many financial problems and help managers to manage their finances correctly. In general, when the actual growth rate exceeds the sustainable growth rate, the growth of corporate funds often fails to keep up with the actual demand, which will cause difficulties in funding payments. Therefore, managers' attention should be focused on how to obtain cash. Expansion provides the funds needed; when the actual growth rate is less than the sustainable growth rate, the company will have a large cash surplus, which is not good for the value of the company. At this time, managers' attention should be focused on how to effectively control the excess cash flow. These will involve the choices of managers' financing decisions, operating decisions, investment decisions and other decisions.

(3) Select a long time span of data for the sample.

When using the DuPont analysis system for financial planning, managers are constantly improving the company's finances by analyzing the factors that affect the net sales margin, asset turnover rate and equity multiplier on the basis of weighing risks-returns. The ultimate goal of return on assets. In contrast, when using the sustainable growth model for financial analysis and planning, its guiding ideology does not lie in "continuous improvement", but in "equilibrium"-sustainable growth is consistent with actual growth. Based on this guiding ideology, the issues that managers need to consider and analyze are more comprehensive and complex than the DuPont analysis system.

1. Real growth is greater than sustainable growth

The situation where actual growth is greater than sustainable growth usually occurs as the growth phase of the enterprise life cycle. At this stage, the company is growing fast, and some projects invested in the early stage have not produced returns, so sufficient funds are the decisive factor to support the further growth of the company.

If the company has strong financing ability and can easily obtain resources from the capital market, then even if the actual growth is greater than sustainable growth, managers need not be very worried, because although the company is in the stage of rapid growth, it will not fall into the plight of resource shortage. Sustainable growth is essentially based on the assumption of "resource scarcity", and the above situation does not meet this assumption, so the difference between actual growth and sustainable growth can be tolerated. However, according to the life cycle theory, the company cannot always be in a high-speed growth stage, so the actual growth and sustainable growth should be consistent in the long run, which does not violate the principle of "equilibrium". At this stage, the company should focus on improving the return on net assets and rationally arranging the dividend payout ratio:

Raise the net sales margin. On the one hand, strengthen the cost management of the enterprise to increase the marginal gross profit contribution rate of the product, strengthen the cost control of the enterprise, and reduce unnecessary waste; on the other hand, the unit price of the product can be appropriately increased according to the price elasticity of the product to obtain more profits. .

Strengthen asset management and increase asset turnover. Now that the company has sufficient funds, it is necessary to pay more attention to the efficiency of the use of funds. It should accelerate the inventory turnover rate, the receivable turnover rate and the fixed asset turnover rate, and cannot make thick capital a stumbling block to increase the company's asset turnover rate.

Increase equity multiplier. Equity multiplier is an important indicator that affects the return on net assets. Managers should weigh the risks and benefits of equity and bond financing, and increase the proportion of debt financing within the acceptable risk range. Formulate a reasonable dividend payment rate. Companies with strong financing ability can appropriately increase the dividend payment rate to obtain optimistic expectations of the company's prospects from shareholders and potential investors, which will facilitate further financing of the company in the future.

If the company's financing capacity is limited, examine whether its growth capacity has exceeded its own capacity. The corresponding financial strategy should be: increase retention ratio, asset turnover rate and net sales margin. Due to the difficulty in raising funds in the capital market, the company adopted the following strategies:

Reduce working capital requirements. The company may adopt stricter credit policies and credit conditions in the management of accounts receivable to shorten the recovery period of accounts receivable. In terms of the choice of commercial credit including bills payable and accounts payable, the company's payment period should be extended as much as possible to Capital turnover efficiency of enterprises.

Beneficial peeling. Favorable divestitures reduce sustainable growth in two ways: on the one hand, cash is generated directly from production operations that sell for income and only expenses; on the other hand, actual sales growth is reduced by abandoning certain growth resources. If the actual growth rate at this time still far exceeds the sustainable growth rate, then the company can only tolerate it, give up some markets and customers, and artificially reduce the actual growth rate to keep the actual growth consistent with sustainable growth and avoid falling into financial crisis. Dilemma.

2. Real growth is less than sustainable growth

When actual growth is less than sustainable growth, companies need to conduct a careful analysis. If this inadequate growth is temporary, managers simply need to continue to accumulate resources to wait for future growth. If this insufficient growth is long-term, then companies usually face the following problems: excess funds, idle financial resources, and reduced asset turnover; an increase in the proportion of income used to make up for fixed costs; and a constant decline in sales profitability. The measures the company should take at this time:

Actively explore new markets and look for new growth points. Enterprises entering the mature stage often face a situation of insufficient growth momentum. If they cannot find a way to support growth, then the company will definitely enter a period of decline in the life cycle. In addition to finding and eliminating internal factors restricting the company's growth internally, companies can also seek out those companies that have high-speed growth but lack funds to restructure their assets. This approach is called sell-through growth.

Increase the dividend payment rate to reduce the sustainable growth rate. This approach is relatively passive, and it conveys to investors the message that operators are not capable of managing the business. As a result, many managers are reluctant to pay large amounts of dividends.

In the practical application of sustainable growth model in financial management, it should be guided by a balanced mind, analyze the factors that cause the difference between the sustainable growth rate and the actual growth rate, and formulate a financial policy that meets the growth needs of the enterprise. Continued financial goals consistent with real growth.

1 Lin Na. Sustainable growth model and empirical test [D] .2008 ^[1]