The present work was developed in the Industrial Equipment Company «Marcel Bravo Sánchez», belonging to the Ministry of Industry Sidero Mechanics.
The fundamental objective of the research refers to the use of short-term financial management techniques for the analysis and management of working capital, so that existing difficulties can be diagnosed and measures taken by the corresponding managers.
The work was structured in two parts: the first one theoretically addresses the investigated theme detailing the techniques that will be applied. The second contains a detailed characterization of the company from the point of view of the activity it carries out, and its main financial results, as well as the calculation of the cash conversion cycle and its needs to operate continuously, assessing alternatives to follow. In addition, an analysis method based on the calculation of three variables is used: necessary working capital, real working capital and operational needs of funds to know if the company has planning and / or operating problems.
INTRODUCTION
The new style of management of the business economy that Business Improvement presupposes has created the basis for Companies to develop in an organized way all the necessary transformations that allow achieving efficient, economic and effective management.
Under the conditions of the collapse of the socialist camp, as well as the intensification of the blockade by the United States, many of our industries were seriously affected, including those belonging to the Ministry of Sidero-Mechanical Industry.
The Marcel Bravo Company has been no stranger to it, it will implement the Improvement from January / 2003, in search of further development, so plans have been devised to bring economic efficiency, cost reduction, increase of production and its quality, and the rational use of human and financial resources.
Research referring to the analysis of Working Capital is of vital importance in this context given the growing process of recovery of the national economy and taking into account
He says that business improvement is based on business self-financing, which requires that companies have to cover their expenses with their income and generate a profit margin so that they are increasingly efficient and competitive, and achieving a rational use of the reserves of the Company for its better operation; It has been considered necessary to carry out this work, outlining as a general objective the analysis and administration of Working Capital, the causes of its variation as a starting point for managerial decision making.
1. Working Capital in the Industrial Equipment Company "Marcel Bravo Sánchez" in Santiago de Cuba.
1.1- Need and importance of Working Capital.
As a starting point for studying the company's working capital, the terminology used should be examined.
According to Fred Weston in "Fundamentals of Financial Administration": The term of Capital originated with the legendary American pacotillero, who used to load his car with numerous goods and travel a route to sell them. Such merchandise received the name of working capital because it was what was actually sold, or what "rotated along the way" to produce profits.
The car and horse, therefore, were financed with “working capital”, but the pacotillero borrowed the necessary funds to buy the merchandise, these loans were known as working capital loans, and had to be repaid after each trip to show the bank that the credit was solid. If the pacotillero was able to repay the loan, then the banks that followed this procedure used banking policies of a solid nature.
It is useful to start with some definitions and concepts of working capital:
- Gross working capital simply refers to current assets. Net working capital is defined as current assets minus current liabilities. Working capital is a company's investment in short-term assets (cash, marketable securities, accounts receivable and inventory).
In this research, the term working capital will be the difference between current assets and current liabilities.
Lawrence Gitman in his book "Fundamentals of Financial Management" states that working capital management refers to the management of the company's current accounts that include current assets and liabilities. If the company cannot keep
and even that she is forced to declare bankruptcy.
The company's current assets must be large enough to cover its current liabilities in order to ensure a reasonable margin of safety.
The objective of working capital management is to manage each of the company's current assets and liabilities in such a way that it remains at an acceptable level. The main current assets are: cash, marketable securities, accounts receivable and inventories. Each of these assets must be managed efficiently to maintain the liquidity of the company without at the same time maintaining too high a level of any of them. The basic current liabilities of interest that must be taken care of are the accounts to pay, documents to pay and other accumulated liabilities.
For his part, Aguirre Sabada, in "Fundamentals of Business Economics and Administration", states that the decisions of administration of working capital and its control is one of the most important functions of financial administration, including:
- Current assets, primarily accounts receivable and inventory represent the highest investment of asset investment within many companies. Current liabilities are often an important source of financing, as it is often impossible to get loans. Working capital represents the first line of defense for a business against declining sales. In the face of a decline in sales, there is little to be done by the financier regarding commitments to fixed assets or long-term debts; However, it can do a lot regarding credit policies, inventory control, accounts receivable, renew inventories more quickly, adopt a more aggressive collection policy in order to have greater liquidity,and payments can also be postponed to have an additional source of financing.
The theoretical basis that supports the use of working capital to measure liquidity is the conviction that the wider the margin of current assets over current liabilities, the better conditions will be to pay the bills as they become due.
Gitman in "Fundamentals of Financial Administration" states:….. the larger the amount of existing assets, the greater the probability that some of them can be converted into cash to pay an overdue debt… "(4)
4 Gitman. Lawrence: Fundamentals of Financial Management. Volume I Editorial MES Page 167.
However, each company will adopt a certain policy regarding its short-term finances which is made up of two elements:
- The magnitude of investment in current assets that is usually a relative measure of the level of total operating income. Financing of current assets that is a measure of the ratio of short-term debt to long-term debt.
In the correct administration of working capital, aspects that make it especially important for the financial health of the company must be considered:
- Statistics indicate that the main portion of time most financial managers are dedicated to the daily internal operations of the company, which fall under the purview of working capital management. Current assets represent approximately 60% of assets Company Totals. Working capital management is particularly important for small businesses. Although these companies can minimize their investment in fixed assets by leasing plants and equipment, they cannot avoid investing in cash, accounts receivable and inventory. Also, because a small business has limited access to long-term capital markets, commercial credit and short-term bank loans must be used solidly,which affect working capital by increasing current liabilities.
According to James Van Horne in "Fundamentals of Financial Administration": "… the determination of the appropriate levels of current assets and liabilities serves in setting the level of working capital, and includes fundamental decisions on the liquidity of the company and the composition of the maturities of your debt. In turn, these decisions are influenced by a compromise between profitability and risk… "(6)
------------------------------------
6 Van Horne, James: Fundamentals of Financial Management; Editorial Prentice Holl Hispanoamérica SA: Page 205
1.2- Methods of Administration of Working Capital.
The cash conversion cycle, which was mentioned above, focuses on the time frame from when the company makes payments until it receives the cash inflows.
The following terms are used in the model:
- The inventory conversion period: consists of the average period of time that is required to convert materials into finished products and subsequently to sell these goods.
Merchandise Cost Rotation Sold
Inventory = -----------–
Inv. Initial + Inv. Final
----------
two
Note that the inventory conversion period is calculated by dividing the Cost of merchandise sold by the average inventory, if we want to convert it to days we divide the days of the period by the times the inventory has been rotated.
- The collection period of accounts receivable consists of the average period of time required to convert the company's accounts receivable into cash, that is, to collect the cash resulting from a sale. The collection period of accounts receivable is also known as days of sale pending collection and is calculated by dividing the accounts receivable by the average credit sales per day.
Accounts receivable collection period
Accounts receivable = ______________________
Credit sales / 360 days
- Deferral period of accounts payable, consists of the average period of time that elapses from the purchase of materials and labor, and the payment of cash for them.
Accounts Payable Deferral Period
Accounts payable = ------------
Credit purchases / 360 days
Cycle of conversion into cash, this procedure allows obtaining a target figure of the three periods that have just been defined, therefore, it is equal to the period of time that elapses between the actual cash expenses of the company spent to pay the productive resources (materials and labor) and cash inflows from product sales (that is, the time period between the payment of labor and materials and the collection of accounts receivable). Therefore, the cash conversion cycle is equal to the average period of time during which a peso is invested in current assets.
Cycle Period Period Period
Conversion + collection of - deferral of = conversion
Inventory accounts receivable accounts payable in cash
The cash conversion cycle can be shortened:
- By reducing the inventory conversion period through faster and more efficient product sales and processing. Reducing accounts receivable through faster collections. By extending the period of deferral of accounts by pay through the delay of your own payments.
In this way, the determination of each one of these cycles and their final conjugation in the cash cycle of the company allows us to know the impact of financial decisions related to current assets and liabilities on cash requirements and thus can be adjusting the working capital policies followed by the entity on the basis of risk-return intercompensation.
The impact of operational decisions is manifested in the balance sheet and it is the imbalance between the balance sheet variables that causes the payments to be exceeded; Following another short-term analysis methodology, the following should be distinguished:
- Operational Problems (operational finance) Approach Problems (structural finance)
This procedure for analyzing the short-term financial situation was presented by Dr. Mariluz Gómez Rodríguez from the University of Coruña (Galicia Spain) at the Conference given to professors from the Faculty of Economic and Business Sciences of the University of Oriente.
To analyze if the company is poorly planned or malfunctions, 3 variables must be defined:
- Minimum circulating capital (CCM) Real circulating capital (CCR) Operating needs of Funds (NOF)
To know if the company is well established: the minimum circulating capital is compared with the real circulating capital.
To find out if the company works well: we compare minimum working capital (CC) with the operating needs of funds (NOF).
Minimum or necessary working capital is calculated as:
Investment required Duration of
Of each subperiod x subperiod
For an industrial company
- Minimum investment in stocks in raw materials.
It will be necessary to calculate the necessary stocks so that the factory does not suffer disturbances as a consequence of delays or delays of the suppliers.
Where: M: Minimum investment in materials
Ca: Consumption of raw materials in the year (one year)
Ta: Time it takes to supply orders (in days)
AC
M = ----- x Ta
360
- Minimum investment of production in process (manufacturing in progress)
Funds immobilized due to the production process
Fc: Minimum investment of the current manufacturing period
Cpa: Cost of production in cash
Tf: Duration of the production cycle (annual)
Cpa
Fc = ---– x Tf
360
- Minimum investment in finished products
Pt: Period investment in finished products
Cv: Annual cost of sales
Tv: Payment period granted to the client
CV
Pt = ---- x Tv
360
- Minimum investment in customer credit.
Funds frozen by customer credit
Cl: Investment of the period for customer financing
V: annual sales
Tc: collection period granted to customers
V
Cl = --- x Tc
360
- Minimum investment in treasury:
It is determined on the basis of the treasury budget or past treasury statements or based on the payments expected in the period.
- Financing granted by suppliers.
Pr: credit granted to the company by suppliers
C: purchases of the year
Tp: payment term granted by suppliers
C
Pr = ---- x Tp
360
With all this, the necessary working capital (CNN) will be given by:
CCN = M + FC + PT + CL + ET - PR
Basic financing ratio
The following relationships are used to analyze the financial balance of a company: It is compared if the CCN is duly financed with permanent resources.
Where: CBF: Basic financing ratio
CCN: Working capital required
Permanent resources
CBF = ----------
Fixed Assets + CCN
If CBF> 1 the actual CCN is higher than necessary, the company is overfunded; This from a solvency point of view is positive but may be affecting profitability (CCR> CCN).
If CBF <1 the real CC is less than necessary, and the company is being financed by default (CCR <CCN).
If this situation has been foreseen, the company may have solvency problems since it will not have generated liquid resources to face the maturity of the debts, and it will probably be forced to seek external resources in a forced way.
If CBF = 1 (CCN = CCR) it can be said that the company is well established, which does not mean that it cannot have liquidity problems.
As it has already been stated, investments in working capital should be financed the same as investments in fixed assets since, although the currencies rotate faster and become liquid in a short period of time, when these disappear, others will arise in such a way that they will always There will be a working capital that must be financed permanently, this feature gives rise to what we call working capital.
Working capital is a concept of liabilities related to basic financing, rather than an concept of assets. For example, in a company the working capital may not fluctuate while the composition of its assets and liabilities differs.
Fund Operating Needs (NOF)
NOF = ACO - PCO ACO = Operating Current Assets
PCO = Operating Current Liabilities
Operating currency is the sum of accounts receivable, plus inventories, plus the desired treasury.
Operating current is different from current accounting assets and its difference is precisely in the real and desired treasury. To meet the operational needs of the company, however, excess debtors derived from poor collection management and excess inventory are included.
Short-term operating resources are those obtained more or less automatically, such as:
Credit to suppliers and accrued liabilities, credits negotiated with banks or deferrals in payments from suppliers for non-compliance with them will not be considered as operational. Therefore, NOFs do not go out of a balance because the balance informs about what exists and not what is needed. In this way, the NOF concept represents the net investment volume generated by the operations, not linked to structural considerations.
Let's see the relationship between required NOF and real FM (Real Maneuver Fund).
If FM> NOF then FM - NOF = ET (cash surplus)
If FM <NOF then NOF - FM = NGR (need for negotiated resources)
If the company has financial problems because its FM is too low, the company is poorly planned.
If the financial problems come from the company having an excess of NOF, the company malfunctions; It is the anticipated forecast of negotiated resource needs in order to be able to negotiate these resources in time and in the best conditions for the company.
- Diagnosis of the short-term financial position of the Industrial Equipment Company "Marcel Bravo Sánchez" in Santiago de Cuba.
2.1 Main Characteristics of the Company.
The Industrial Equipment Company "Marcel Bravo" was created by Resolution 234 of 1983 as a small workshop located on Carretera Central S / n next to the terminal on Calle 4, dedicating itself to the casting of small parts for the aqueduct and sewerage service.; in 1984 by the results obtained decided to expand the capabilities and investment runs on the site now occupied in Road Refinery Km. 6 1 / 2 Santiago de Cuba, joining a workshop on Pailer for the production of metal structures and tanks industrial.
In 1987, the Metal Packaging Workshop was incorporated, beginning the productive takeoff that was consolidated with the incorporation of new lines, such as light modular constructions, gas cylinder repair, and the technological and engineering services offered, currently associated with East Cycle integrated into the CICLEX Industrial Group, subordinated to the Ministry of the Sidero-Mechanical Industry.
- Business Object of the Company.
On October 1, 2000, through Resolution 282/2000 of the Ministry of Economy and Planning, the precision of the corporate purpose is authorized, being ratified by Resolution 4 of 2001 of the Minister of the Sidero-Mechanical Industry, authorizing the modification of the Business Objective that listed below:
Produce and commercialize cast iron and aluminum parts, basin, metal structures, modular constructions, packaging, repair and manufacture of cylinders, plastic hoses, as well as the technical assistance and post-sale services associated with them.
2.1.1 Current Company Structure:
- STRATEGIC BUSINESS DIVISIONS:
FOUNDRY: With 68 years of experience in the market, it serves as a Strategic Business Unit, with production lines in gray iron, aluminum and bronze. Due to the quality, an indispensable requirement of its products, it has managed to enter not only the National Market but the International Market, exporting part of its productions, which have been certified.
Its main productions are:
- Round and rectangular manholes. Hydrants or fire hydrants. Brake pads (cane car and locomotive). Efficient kitchen elements. Ornamental legs for benches.
UEN PAILERIA: Founded in 1984 for the manufacture of light rail elements, today it has an infrastructure that guarantees a high quality and safety in the production of complex structural elements present in the Multipurpose Hall, Amusement Park, Cubana de Aviación offices, tramoya for the Cabaret Tropicana and others.
Its main productions are:
- Metal load structures used in assemblies, civil constructions and high-tech buildings. These are mainly made of hot-rolled and cold-rolled steel of different profiles.Industrial tanks of different capacities, mainly made of carbon steel sheets of different thicknesses and with a given finish with a layer of anticorrosive paint to reduce the effect to the Corrosion and increase its durability. Perimeter fences. Access door with gear motor. Towers for lighting. Ducts for communication of liquids, gases or steam. Specialized assembly at the request of the client. Modules for warehouses and packaging.
This UEN started the production of modular buildings in 1999, only as producers. In the year 2000, marketing began as a “Marcel Bravo” Company, using from this moment on a new technology contributed by the Spanish firm GTT MELCA, achieving that year the Quality Award at the Expocaribe Fair, thus beginning the productive takeoff and business of this line that is characterized by giving fast, efficient and safe solutions to fixed and temporary construction needs, which have led it to achieve significant achievements in the economic field, an insertion in the market and the respect of its customers.
This construction system allows buildings of different dimensions and floors to be built, such as the one already built in Pesquero 3, Holguín with 1,380 m 2 and another one in the construction phase, the Cubalse Chain store with 1,200 m 2 in Guanabacoa, Havana.
UEN PACKAGING: Since its inception in 1987, it manufactures containers of different capacities that meet the needs of customers who, with an elaborate quality and finish, have managed to position themselves on the national market in a safe and privileged position.
It has a technology that allows it to diversify the types of packaging:
- Open Closed with or without internal lacquer Painted Painted on request
In cooperation with REBICE, SA, a Spanish firm of recognized prestige in the international market, a new production line with state-of-the-art technology is installed, which allows for a substantial improvement in the quality of packaging.
UEN CYLINDERS: A new line launched in 1999 for the repair of cylinders for liquefied gas, which guarantees the needs of clients such as Cupet and Elf gas Cuba. Due to the characteristics of its use, the quality and safety evaluated with sealing tests are prioritized for the production process phases.
It has an installed capacity to repair 1500 cylinders in a work shift, which can be expanded according to customer requests.
2.2 Diagnosis of the company's short-term financial situation
To carry out an exhaustive analysis of working capital, we will not only determine if it increases or decreases with respect to the previous year; rather, we will rely on the analysis of some financial reasons with a view to deepening our work.
Given the characteristics of the company, it is more convenient to show the calculation and interpretation of the financial ratios based on its influence on the results expected by the entity in the analyzed period; without taking into account the priority given in current texts to reasons. On the other hand, comparisons will be made internally and not externally, as this company is atypical in its productive characteristics, which does not allow its comparison with other similar companies in its sector in the national territory.
Knowing that the CT = AC –PC, we can see in Annex 6 that in 2001 an increase in Working Capital is observed, due to a decrease in current liabilities (46.84%) in a lower proportion than current assets (19.81 %) which places the company in an advantageous position from the point of view of the possibility of satisfying its short-term obligations.
LIQUID CAPITAL
Where CL: Liquid Capital
AT: Total Assets
PT: Total Liabilities
CL = AT - PT
CL 2001 = $ 5974385 - $ 1367567 = $ 4606818
CL 2002 = $ 5313907 - $ 745240 = $ 4568667
LIQUID CAPITAL INDEX
CL
IC = -
PT
$ 4606818
IC 2001 = ----- = 3.37 times
$ 1367567
$ 4568667
IC 2002 = ------ = 6.13 times
$ 745240
In 2002 compared to 2001, a significant increase of 2.76 times is observed. Total liabilities decrease by $ 622327 due to:
- Short-term bills payable decreased by $ 127,950.83, as bills of exchange signed with suppliers became effective, representing 89.25% compared to the base year. Accounts payable (USD) decreased by $ 84299.44 for a 15.92% due to payment to suppliers, however, the Short-term Accounts Payable (MN) increased by $ 20,399.89 evidenced by the receipt at the end of the year of purchases of raw materials and materials that were paid at the beginning of 2002., which yielded a value of $ 157500.60 representing 100% evidenced by the invoicing during the course of 2001 to the INVERCO client for the work Guanabacoa Shop carried out in Havana City. The Loans Received decreased by $ 250000.00 which represents 83.33%,This decrease is evidenced by the payment to the financial institutions of the credits granted by them.
SOLVENCY INDEX (IS)
Current Assets
Solvency Index = --------
Current Liabilities
$ 3025511
IS 2001 = ----- = 2.32 times
$ 1303006
$ 2426209
IS 2002 = ------ = 3.50 times
$ 692706
When analyzing solvency, the company at the end of 2001 has $ 2.32 to pay $ 1.00 of debts and in 2002 it has $ 3.50 to pay one. In 2001 the liquidity in the entity is acceptable and the creditors are guaranteed.
Solvency increases 1.18 times from one year to the next, having the same implications that were seen for the calculation of Working Capital for the company.
Carrying out a structural analysis of Current Assets and Liabilities for both years, it was found that structurally the company presents a better distribution of the components of Current Assets (Annex 6), from the point of view of liquidity in 2001 there is an increase in cash and accounts receivable; as well as the decrease in inventories. As for the Current Liabilities (Exhibit 6) the fundamental increase is observed in the account payable in the short term in national currency.
IMMEDIATE LIQUIDITY OR ACID TEST
Current Assets - Inventory
IL = ------------–
Current Liabilities
$ 3025511- $ 760299
IL 2001 = ---------- = 1.74 times
$ 1303006
$ 2426209 - $ 571987
IL 2002 = ---------– = 2.68 times
$ 692706
When analyzing the immediate liquidity, the company has in 2001 with $ 1.74 of available assets for each peso of short-term obligations, and in the same period of 2002 it increases to $ 2.68; This reflects the adequacy of the company to cover short-term liabilities, that is, the degree to which available resources can meet short-term obligations.
TREASURY REASON
Cash in Cash and Bank
Treasury = ----------–
Current Liabilities
$ 430140
RT 20001 = ------ = 0.33
$ 1303006
$ 182831
RT 2002 = ------ = 0.26
$ 692706
However, the treasury decreases by 0.07 from one year to the next as the cash in the Bank decreases; although the Cash in Cash increases, but not in the same proportion as the Cash in Bank.
COLLECTION CYCLE (Cc)
Accounts and Receivables
Cc = --------------
Credit Sales / 360
$ 1395855 $ 1395855
Cc 2001 = -------- = ------- = 109 days
$ 4596998/360 $ 12769.44
$ 1254305 $ 1254305
CC 2002 = ------- = ------ = 84 days
$ 5349042/360 $ 14858.45
Taking into account that the terms agreed with the clients are mostly up to 30 days, it can be argued that there are difficulties in collection management; therefore and others, the sales manager of our company in these cases signs a new payment commitment with customers through a bill of exchange that, if not met, is sold to the Bank to
proceed to collection. In addition, there is the possibility of taking cases to court and obtaining a ruling in favor of making the cash viable.
AVERAGE PAYMENT PERIOD (Pp)
Accounts Payable and Effects Payable
Pp = ----------------
Credit Shopping / 360
$ 758177 $ 758177
Pp 2001 = -------- = ----- = 144 days
$ 1899576/360 $ 5276.60
$ 566327 $ 566327
Pp 2002 = -------- = ----- = 92 days
$ 2202702/360 $ 6118.62
The payment cycle decreases by 52 days compared to the previous year, although in general the entity enters cash faster than it disburses to its suppliers; This situation, although favorable, the entity must fill in the payment dates with its suppliers, thus guaranteeing a stable supply of the same.
Next we will analyze some reasons that describe the operation of the company in general; which shows how the company has used its resources.
SALES PROFIT MARGIN (MUSV)
Utility Note: Net Sales = Sales - Sales Returns
MUSV = ------
Net sales
$ 357750
MUSV 2001 = ----- = 7.78%
$ 4596998
$ 301030
MUSV 2002 = ----– = 5.63%
$ 5349042
The margin on sales, an influential factor in the economic profitability of the company, has worsened, in 2000 for each weight of sales, we obtain 0.0778 of Profit and in 2001 for each weight of sales we obtain 0.0563 of Profit, decreasing from 7.78% to 5.63%
Influencing in this the decrease of the Utilities in 56.7 MP; Observing as the most significant cause that caused this decrease, the 0.03331 increase in cost by weight of sales.
SOLIDITY INDEX (Is)
Totally passive
Is = -----–
Total active
$ 1367567
Is 2000 = ----- = 23%
$ 5974385
$ 745240
Is 2001 = ----- = 14%
$ 5313907
The solidity index represents 23% of total indebtedness in 2000, decreasing to 14% in 2001, that is, creditors have $ 0.14 at risk. For each peso of total resources invested in the entity, it shows that the entity reduces the use of external resources being relatively low, but despite everything, the company has good solvency and liquidity, which allows it to pay its debts on time.
PROFITABILITY OF EQUITY (Rp)
Utility
Rp = -----
Heritage
$ 357750
Rp 2001 = ----– = 0.08
$ 4606818
$ 301030
Rp 2002 = ----– = 0.07
$ 4568667
The profitability of the Patrimony, in 2000 for each peso invested by the State a Profit of $ 0.08 is obtained and in 2001 it is $ 0.07, decreasing by $ 0.01.
2.3. Application of Techniques for the analysis and administration of Working Capital.
2.3.1- The Cash Conversion Cycle
A widely used method that appears in the majority of the literature for the analysis and administration of Working Capital is the determination of the cash conversion cycle. In this case it is taken from the text: "Fundamentals of Financial Administration" by Fred Weston, which was explicitly explained in Chapter I.
Cash Conversion Cycle. Year 2001
96 days + 109 days - 144 days = 61 days
Cash Conversion Cycle. Year 2002
63 days + 84 days - 92 days = 55 days
From the above calculations, the net delay of the cash inflow can be determined according to the following relationship:
Delay Delay Delay
Cash inflow - on payment = net
Year (2001) = 205 days - 144 days = 61 days
Year (2002) = 147 days - 92 days = 55 days
As can be seen in 2002, cash enters the company more quickly, which is beneficial from the point of view of the amount of cash to maintain and its corresponding maintenance and opportunity cost, expressed in the potential loss of profits.
Calculation of cash requirements for operations. Lawrence Gitman's model taken from the text “Fundamentals of Financial Administration” Volume I.
2001 2002
Cash Cycle 61 days 55 days
Cash rotation 5.9 times 6.5 times
The cash rotation speed in 2002 is 0.6 times higher than in 2001. The calculation of cash needs was made only for this year 2002, taking cash disbursements in national currency and in foreign currency.
Need for Cash Annual cash outlay
For operations = -------------
Cash rotation
Need for Cash $ 4887.5
For operations (2002) = ------ = $ 751923..08
6.5 times
As a result of measures adopted and those that will be gradually adopted by the company for future periods, it is estimated that the cash cycle that said entity could reach is the one shown below. It is necessary to point out that the estimates were made based on the financial statements at the end of the period.
Estimated Cash Cycle:
Inventory Cycle + Collection Cycle - Payment Cycle = Cash Cycle at close / 2002
Estimated Cash Cycle = 77 days + 63 days - 116 days = 24 days
Cash turnover will increase to: 15 times (360/24 days) and cash needs will decrease by:
| Cash needs
Real |
Cash needs
Dear |
Variation |
| $ 751923.08 | $ 325833.33 | $ 426089.75 |
The decrease calculated above represents a saving, which valued at the opportunity cost, will offer an idea of what is left to gain by not investing in this value. In the case of our economy, this represents better possibilities for the payment of short-term commitments and the costs related to keeping cash.
2.3.2. - Calculation of working capital and operating fund needs.
The evolution of some items of the Financial Statement for example: (purchases, sales, inventories, debtors and creditors) arise from the daily development of business activity, which cannot be decided in advance and nevertheless must be financed to the extent that they arise one or the other; Even the same ones, having a circulating character, these needs become fixed because they are always present and require permanent financing. If the company does not take these aspects into account, it may be involved in a financial crisis, which manifests itself in the difficulties in meeting its obligations, obtaining credit from suppliers; which would cause serious problems for the development of the company. But if these financial problems arise, two fundamental questions may be asked.
- Is the company malfunctioning? Is it poorly planned?
Next, the method explained by Dr. Mariluz Gómez Rodríguez described in Chapter I will be applied.
The need for working capital depends on the exploitation time, that is, on the time that elapses since a monetary unit is invested to acquire raw materials, labor, general expenses necessary for the exploitation process until they are recovered by the sale and collection of these. This process is known as the maturation or exploitation period, it is calculated taking into account the phases or sub-periods that compose it according to the following relationship:
PM = Pa + Pf + Pv + Pc - Pp
Average stock of raw material
Pa = ---------------
Annual Consumption / 360
$ 645078 $ 645078
Pa (2001) = ------– = ----- = 112 days
$ 2075423/360 $ 5765.06
$ 466854 $ 466854
Pa (2002) = ------- = ----– = 65 days
$ 2583333/360 $ 7175.93
Average stock of products in process
Mp = -------------------
Annual Production Cost / 360
$ 58738 $ 58738
Pf (2001) = -------- = ---- = 6 days
$ 3286787/360 $ 9129.96
$ 84178 $ 84178
Pf (2002) = ------- = ------ = 8 days
$ 3855136/360 $ 10708.71
Average stock of finished products
Pv = ------------------
Annual Cost of Sales / 360
$ 94064 $ 94064
Pv (2001) = -------- = ----- = 11 days
$ 3125568/360 $ 8682.13
$ 116035 $ 116035
Pv (2002) = ------- = ----- = 11 days
$ 3815079/360 $ 10597.44
Accounts Receivable from Clients
Pc = --------------
Credit Sales / 360
$ 1395855 $ 1395855
Pc (2001) = -------– = ------ = 109 days
$ 4596998/360 $ 12769.44
$ 1254305 $ 1254305
Pc (2002) = -------- = -----– = 84 days
$ 5349042/360 $ 14858.45
Accounts Payable to Suppliers
Pp = --------------
Shopping / 360
$ 758177 $ 758177
Pp (2001) = ------– = ---- = 144 days
$ 1899576/360 $ 5276.60
$ 566327 $ 566327
Pp (2002) = ------– = ----- = 92 days
$ 2202702/360 $ 6118.62
Results obtained:
| UM: DAYS | ||
| Periods | 2001 | 2002 |
| Storage Term Pa | 112 | 65 |
| Pf Manufacturing Term | 6 | 8 |
| Pv Sale Period | eleven | eleven |
| Pc Collection Period | 109 | 84 |
| Pp Payment Period | 144 | 92 |
| Maturation period Pm | 94 | 76 |
As can be seen, the maturity period in 2001 is 94 days and the time it takes for the company to recover each monetary unit invested in the production process in 2002 is 76 days, reducing the cycle by 18 days between one year and other. This reduction evidences an improvement in the management of the company; as previously analyzed in the chapter referring to the financial situation of the company.
2.3.3- Minimum or necessary working capital:
It is calculated as:
Investment required Duration
Of each subperiod x of the subperiod
We will only carry out this calculation for the year 2002.
Minimum investment in stocks in raw materials.
Ca $ 2583333
M = - x Ta = ----– x 24 = $ 172222.20
360 360
Minimum investment of products in process (manufacturing)
Cpa $ 3855136
Fc = - x Tf = ----- x 42 = $ 449765.87
- 360
Minimum investment in finished products.
Cv $ 3815079
Pt = --- x Tv = ----– x 15 = $ 158961.62
- 360
Minimum investment in customer credit.
V $ 5348042
Cl = - x Tc = ----- x 30 = $ 445753.50
- 360
Financing granted by suppliers.
C $ 2202702
Pr = - x Tp = ------ x 30 = $ 183558.50
- 360
Desired Treasury (desired cash)
ET = The desired cash will be taken as the one calculated by the method proposed by Lawrence Gitman in the previous section that amounts to: $ 751923.08.
So:
CCN = M + Fc + Pt + Cl + Et - Pr
CCN = $ 1795067.77
Basic Coefficient of Financing
Permanent Resource $ 4585227 $ 4585227
CBF = ----------– = ----------– = ------ = 1.01
Net Fixed Assets + CCN $ 2752924.16 + $ 1795067.77 $ 4547991.93
The calculated coefficient of 1.01 when taking a value close to unity indicates that the real working capital is approximately equal to that necessary and therefore it can be concluded that the company has no planning problems.
On the other hand, to know if a company works well or not, the operational needs of funds must be determined. They are calculated as: NOF = ACO - PCO.
Operating Current Assets (ACO) includes accounts receivable, inventories, and desired cash. Operating current liabilities (PCO) includes funds obtained spontaneously, as described in point 1.
| Year 2002 | |
| Current operating assets | $ 2578215.49 |
| Current operating liabilities | $ 692706.27 |
| Fund operating needs | $ 1885509.22 |
| Real working capital (Working Capital) |
$ 1733502.74 |
We must remember that the NOF concept is an operational concept, not linked to structural considerations.
In our company it would be as follows:
NOF> Working Capital
NOF in the company = $ 1885509.22> 1733502.74
From the above it can be concluded that the company has operational problems. In this way, to guarantee an efficient administration of working capital, the company should continue working on the factors that affect each of the cycles as stated in section 3.1 and thereby reduce its cash needs.
If so, recalculating the NOF taking into account the desired treasury (variation between real cash needs and estimated effective needs) in the company would obtain:
NOF = $ 2152125.74 - $ 692706.27
NOF = $ 1459419.47
Then: Working Capital> NOF
$ 1733502.74> 1459419.47
Cash surplus = $ 274083.27
The achievement of these objectives will allow the company to carry out its management with better financial conditions without interruptions in its production process due to non-payment to its suppliers or financial damages due to late payments.
CONCLUSIONS
Below are the main conclusions in no order of importance:
- In 2002 the magnitude of the working capital with which the company operates increased in relation to the same period of the previous year by $ 10,996.93 pesos, which represents a favorable indicator for the company. The company presents an increase in liquidity with respect to the year above associated with the increase in its obligations together with a greater increase in its more liquid sources. Collection and payment cycles decrease for the year 2002, the relationship between both cycles being favorable from the point of view of the time it takes for cash to return to the company box. These cycles cannot be considered adequate if the current collection and payment regulations are taken into account.The cycle of conversion into cash in 2002 is reduced by 6 days compared to 2001, which affects the decrease in cash required for operations,however this does not mean that this is entirely due to better short-term management. The maturation period for the company in 2002 was 76 days. The working capital required for the year 2002 was $ 1795067.77 and the basic financing coefficient, being approximately equal to the unit, allows us to conclude that the company is "well planned "The adoption of the measures proposed in the work will allow the company's cash cycle to be reduced by 31 days with a consequent release of resources of $ 426089.75. The operational need for funds (NOF) for the year itself is $ 1885509.22 pesos and when comparing them with the working capital according to the balance it can be affirmed that the company has "operating problems".
BIBLIOGRAPHY:
- Weston and Bregham. Finance in Administration Weston John Freed. Fundamentals of Financial Administration. Part One Arias Madrazo Maricela: Study and Interpretation of Financial Statements Fernández Cepero. Modern Accounting I. Editorial UTEHA. Collective of Authors. Intermediate Accounting 5th and 6th part. Editorial MESMeigs & Meigs. Accounting. The basis for managerial decisions. Eighth edition. Editorial Mac Graw HillKerkach, DI Analysis of the Economic Activity of Industrial CompaniesDiagnosis for Business Improvement. EEI "Marcel Bravo"
