This work was carried out at the Furniture Company GEDEMAX, the purpose of which is to support the theoretical elements on which the analysis of the Company's economic and financial results should be framed and to issue considerations based on the results obtained. In the development of the investigation and as part of the evaluation of the financial situation of the company, the financial statements of the entity were used, materials related to the topic under study were reviewed, consultations were made with specialists in this matter and applied the different methods and techniques of financial economic analysis. The result of the work reveals the key elements that prevent a better result and in what measures they affect.This allows the Company's management to direct immediate actions in order to reverse the unfavorable situation.
INTRODUCTION
The development of business activity on a global scale, as part of the development of humanity, technology, globalization and other political and economic factors, requires organizations to have the capacity to adapt to changing and not always predictable conditions that guarantee the prosperity in business.
financial-administration-as-a-tool-for-decision-makingThe GEDEMAX Furniture Company needs to place its products in a market where there is competition caused by the importation of furniture with similar quality but at a cost that is often lower than that originated in our industry. Hence the need to demonstrate the importance of using information analysis for decision making.
The work provides information on the financial situation of the company, in order to facilitate decision-making and improve its indicators to increase efficiency.
THEORETICAL FOUNDATIONS
The financial analysis allows the financial facts to be interpreted on the basis of a set of techniques that lead to decision-making, in addition, it studies the financing of the company preferably from the Financial Statements.
Financial reasons.
The analysis through reasons consists in determining the different dependency relationships that exist by geometrically comparing the figures of two or more concepts that make up the content of the financial statements of a company. Taking into account that a single reason generally does not offer the necessary information to know the entity, a group of reasons will be used to know the financial situation of the company.
Liquidity reasons.
A company's liquidity is judged by its ability to pay to meet its short-term obligations. Liquidity refers not only to the company's total finances, but to its ability to convert certain assets into cash. For the analysis of the company's liquidity, three basic indicators are considered:
- General Liquidity: This is the ratio of current assets to current liabilities, allowing the ability to cover short-term obligations to be measured, based on current assets.
It is calculated: Where:
Lg = Ac / Pc Lg = General Liquidity.
Ac = Current assets.
Pc = Current liabilities.
Its reading or interpretation is expressed as follows: for each peso ($ 1.00) of current liabilities, there are x pesos to cover short-term debts. From this it follows that the ratio must be greater than $ 1.00 or ultimately equal to $ 1.00.
- Immediate Liquidity or Acid Reason: Ability to pay the company discounting inventories (as they are the least liquid, that is, those that take the longest to become cash).
It is calculated: Where:
Ra = (Ac - Inv) / Pc Ra = Acid ratio.
Ac = Current assets.
Inv = Inventories.
Pc = Current liabilities.
It is expressed: for each peso ($ 1.00) of current liabilities, there are x pesos to cover the short-term debt, discounting inventories.
- Available liquidity: Known as availability ratio, it measures the ability to face short-term debts from those available to pay.
It is calculated: Where:
Ld = Acd / Pc Ld = Available liquidity
Acd = Available current assets
Pc = Current liabilities.
Solvency: Measures the ability to face all debts, whether short or long term, with your real assets.
Is calculated:
Solvency = real assets / external financing
Working Capital:
Working capital is defined as the funds or resources with which a company operates in the short term, after covering the amount of the debts that are also due in that short term. It is calculated by determining the difference between current assets and current liabilities, therefore the existence of working capital is linked to the general liquidity condition. It is also called working capital, working capital, net working capital, considering for the latter, current assets as gross working capital.
- Net Working Capital: It is the difference between the current assets and liabilities of a company.
It is calculated: Where:
Ct = Ac - Pc Ct = Net Working Capital.
Ac = Current assets.
Pc = Current liabilities.
It allows the company to measure its liquidity, therefore, the mechanism must be positive, ensuring that the asset is greater than the liability, allowing the company to have the financial means to cover its short-term obligations.
Operations Cycle:
The cycle of operations is the time that elapses between the moment a monetary unit is invested for the acquisition of raw material, labor and general expenses to carry out the transformation process and the moment it is recovered through the sale or charge.
Inventory cycle = (Inventory / Cost of sale) * 360
Collection Cycle = (Average Accounts Receivable / Sales) * 360
Express how often the accounts receivable are converted into cash. In our country, collection is legislated within 30 days after the operation is carried out.
Payment Cycle = (Average Accounts Payable / Purchases) * 360
It expresses how often the obligations with suppliers and suppliers are fulfilled.
Operations Cycle = Inventory Cycle + Collection Cycle
Cash cycles = Operations cycle - Payment Cycle
Required Working Capital
Calculation of average daily sales:
Vdp = Sales year / 360 days
Average calculated from the total sales made and the days of the period.
CTn = Average daily sales. * Days of sale to finance
Debt analysis.
The use of foreign capital in the financing of investments is a normal practice, however its excessive use creates a great risk, hence the need to assess whether the debt levels are adequate.
Debt ratio
It allows to measure the proportion of the total assets contributed by the company's creditors.
Re = Third party financing / Own financing
Reason of autonomy or guarantee
This ratio shows how far a company has financial independence before creditors.
Ra = Own financing / Total financing
Debt quality
It is related to the possibility of financing investments from long-term debts and thereby minimizing risk.
Cd = Current liabilities / Total liabilities
Profitability reasons.
It expresses the way in which the company's resources have been used.
Financial profit.
Financial Profitability is a reason that reflects the effect of the behavior of different factors; it shows the return extracted to own capital, that is, the capital contributed by the owners and, unlike the return on assets, uses net profit.
Net profit is impacted not only by the results generated in the business, but also by the interest accrued on medium and long-term debt contracted by the company, as well as taxes on taxable profits.
Financial Return is determined:
Rf = Net Income / Equity
Fundamental equation of Financial Profitability:
Financial Profitability = Profitability of sales x Rotation of Assets x Debt.
When posing the equation with the relationships that make it up, we have:
UN / Capital = (UN / Sales) * (Sales / Assets) * (Assets / Capital.)
Financial profitability expresses the relationship between net profit and equity.
Economic profitability
The Economic Return or Return on Investment is the relationship between profit before interest and taxes and total assets. The profit before interest and taxes (UAII) is taken to evaluate the benefit generated by the asset regardless of how it is financed, and therefore, without taking into account financial expenses.
Is calculated:
Re = UAII / Assets
If we propose the equation from the relationships that make it up, we have:
UAII / Assets = (UAII / Sales) * (Sales / Assets)
Where:
UAII: Income Before Interest and Taxes.
The equation highlights the way in which Economic Profitability largely summarizes the economic performance of the company. To increase the ratio it is necessary to improve the profitability of sales and the rotation of total assets, this is the best variant; It can also happen that the margin increases in a greater proportion than the decrease in the rotation, and vice versa. Therefore, the Economic Return or Return on Investment measures the effect on sales management, on cost management and on asset management.
These are the main financial reasons that are used in the business world as economic thermometers of the entities for the understanding and analysis of the results in a given period, which enables the necessary information for decision-making.
Consecutive substitution analysis
The consecutive substitution analysis allows determining the influence of the margin on sales and the rotation of assets on the variation of economic profitability.
Vertical or Standard Method: it is applied to analyze a financial statement at a fixed date or corresponding to a certain period. Vertical Analysis studies the relationships between a company's financial data for a single set of statements, that is, for those that correspond to a single date or a single accounting period.
MANAGEMENT OF WORKING CAPITAL.
Working Capital is defined as the funds or resources with which a company operates in the short term, after covering short-term debts. It is calculated by determining the difference between current assets and current liabilities, therefore, the existence of working capital is linked to the liquidity condition.
To determine the quality of Working Capital and how much the company needs to operate, the behavior of financial ratios, liquidity ratios and other reasons is analyzed. The values defined as optimal by the highest organism are taken as a basis for comparison.
Determination of Liquidity and Activity
General liquidity: it is the ratio of current assets to current liabilities, allowing the ability to cover short-term obligations to be measured, based on current assets.
General Liquidity = Current Assets / Current Liabilities
= 4 981 625/2 937 476
= 1.7 optimal weights = 1.5
The company presents 1.7 pesos of current assets for each peso of short-term debt, to cover its short-term obligations. It was considered correct.
Immediate liquidity: called acid test, it measures the ability to meet the most demanding obligations, based on current assets without the inclusion of less liquid items (inventories).
Immediate liquidity = (Current assets - Inventories) / Current liabilities
= (4 981 625 - 1 554 816) / 2 937 476)
= 1.17 optimal weights = 1.0
The result of 1.17 pesos available for each pesos of short-term obligation indicates excess cash flow.
Available liquidity: known as availability ratio, it measures the ability to face short-term debts from the cash available to pay.
Available liquidity = Available current assets / Current liabilities
= 538 726/2 937 476
= 0.18 optimal weights = 0.5
It is considered acceptable if its value is approximately 0.5, in this case the resulting 0.18 indicates that the company does not have the cash to respond to short-term payment obligations. It will be necessary to analyze the structure of current assets.
Solvency: Measures the ability to face all debts, whether short or long term, with your real assets.
Solvency = real assets / external financing
= 10 842 070/3 943 337
= 2.75 optimal weights = 2.0
Real assets cover 2.75 times all debts, that is, for each peso of external financing, the company has 2.75 pesos of real assets to pay its obligations. The optimal value is 2.0, it seems that there are fixed assets, it is necessary to deepen the analysis.
Given the result of the reasons calculated above, it is necessary to analyze the structure of the asset:
| Asset Structure | ||
| Total active | 10 842 070 | 100% |
| Current Assets | 5 293 560 | 49% |
| Fixed assets | 5 372 535 | 51% |
| Current Assets Structure | ||
| Current Assets | 5 293 560 | 100% |
| Cash in bank | 509 115 | 10% |
| Accounts receivable | 2 846 096 | 54% |
| Inventories | 1 554 816 | 29% |
| Others | 383 533 | 7% |
When analyzing the indicators of general liquidity, immediate liquidity, solvency and comparing them with the bases established by the higher body, we observed a positive behavior, however, the immediate liquidity calculated from the available cash behaves unfavorably. The company's cash only represents 10% of the current assets and more than 90% of the accounts receivable are out of term. This situation results in the inability of the company to fulfill its short-term obligations.
Quality of Working Capital
The quality of working capital is closely related to its composition and liquidity, an increase in the magnitude of available assets indicates a better quality of working capital, on the other hand if the increase is recorded in inventories or another asset, then the quality decreases.
Assets and liabilities structure, graphic representation.
Ct = Ac - Pc
= 5 293 560 - 2 937 476
= 2 356 084
The company operates with a working capital of 2356084 pesos, as a result of deducting current liabilities from current assets. The analysis of the structure of current assets reveals that 54% of them are concentrated in accounts receivable, the majority of which are out of term, thus, the quality of working capital is impaired.
Cycle of operations
The cycle of operations is the time that elapses between the moment a monetary unit is invested for the acquisition of raw material, labor and general expenses to carry out the transformation process and the moment it is recovered through the sale or charge.
Inventory cycle = (Inventory / Cost of sale) * 360
= (1 554 816/4 886 667) * 360
= 114 days Optimal = 70 days
Collection Cycle = (Average Accounts Receivable / Sales) * 360
= (2 846 096/6 294 912) * 360
= 163 days optimal = 30 days
Payment Cycle = (Average Accounts Payable / Purchases) * 360
= (1,941,209/4,500,000) * 360
= 155 days optimal = 40 days
Operations Cycle = Inventory Cycle + Collection Cycle
= 114 days + 163 days
= Optimal 277 days = 100 days
Cash cycles = Operations cycle - Payment Cycle
= 277 days - 155 days
= Optimal 122 days = 60 days
More than 40 days of excess in the inventory cycle and 133 in the collection cycle reflect serious difficulties in inventory management and accounts receivable, which negatively influences the ability to pay in the short term and in all economic and financial results of the company.
Required Working Capital (From Actual Results)
Calculation of average daily sales:
Vdp = Sales year / 360 days
= 6 294 912/360
= 17 486 pesos
CTn = Average daily sales. * Days of sale to finance
= 17 486 * 122
= 2 133 292 pesos
CT difference = Ctr 2 356 084- Ctn 2 133 292
= 222 791 pesos
Under these conditions, there is an excess of working capital of 222,791 pesos, however, the analysis of the structure of current assets, the amount of accounts receivable and the result of the analysis of the inventory and collection cycle, indicate that the The company has to take urgent measures to make collection management more effective, allowing cash to enter, improving available liquidity and being able to face short-term commitments. Similarly, actions must be taken to improve the inventory rotation cycle..
The foregoing indicates that if the necessary working capital was calculated from the operating cycle and this was determined considering the company's result at the end of 2007, then the necessary working capital is distorted. Considering the obtained result, it is suggested to recalculate the operations cycle based on ideal estimated inventory values and accounts receivable.
Required Working Capital (From estimated cycles).
Recalculated cycle of operations.
Inventory cycle = (Inventory / Cost of sale) * 360
= (954 711/4 886 667) * 360
= 70 days
Collection Cycle = (Average Accounts Receivable / Sales) * 360
= (524 576/6 294 912) * 360
= 30 days
Payment Cycle = (Average Accounts Payable / Purchases) * 360
= (500,000 / 4,500,000) * 360
= 40 days
Operations Cycle = Inventory Cycle + Collection Cycle
= 70 days + 30 days
= 100 days
Cash cycles = Operations cycle - Payment Cycle
= 100 days - 40 days
= 60 days
Inventory Cycle. 70 days Collection Cycle 30 days
Payment cycle 60 days Cash cycle 40 days
Cash Out Cash In
CTn = Average daily sales. * Days of sale to finance
= 17 486 * 40
= 699 440 pesos
Difference CT = Ctr 2 356 084 - Ctn 699 440
= 1 656 644 pesos
Ctn (estimated) = Ac - Pc
= 3 636 916 - 2 937 476
= 699 440
Recalculating the necessary values of working capital from the predetermined optimal cycles for the company allows to establish a difference between the necessary working capital calculated under the current conditions and the optimal working capital. The above analysis confirms that the structure of current assets negatively influences the quality of working capital and the Company's economic and financial results.
Debt analysis.
The use of foreign capital in the financing of investments is a normal practice, however its excessive use creates a great risk, hence the need to assess whether the debt levels are adequate.
Debt ratio
Re = Third party financing / Own financing
= 3 943 337/6 898 733
= 0.57 pesos
The level of indebtedness is 0.57 pesos of foreign capital for each peso of own financing. It must be considered that the own financing constitutes it in its entirety the patrimony and is made up of the state investment and the contingency reserve. The 0.57 is made up of 0.43 of short-term liabilities and 0.14 of long-term liabilities.
Reason of autonomy or guarantee
This ratio shows how far a company has financial independence before creditors.
Ra = Own financing / Total financing
= 6 898 733/10842070
= 0.64 pesos
The result indicates that own financing reaches 0.64 pesos for each peso of total financing, this indicates that there is financial independence, however, the composition of that own financing must be taken into account and whether it can really be used to comply with obligations.
Debt quality
It is related to the possibility of financing investments from long-term debts and thereby minimizing risk.
| Liability and Capital Structure | |||
| Totally passive | 3 943 337 | 100% | 100% |
| Current Liabilities | 2 938 000 | 75% | 27% |
| Long-term liabilities | 1 005 337 | 25% | 10% |
| Capital | 6 898 733 | ////////////// | 63% |
Cd = Current liabilities / Total liabilities
= 2 937 476/3 943 337
= 0.75 pesos
75% of the debt is short term and 25% long term this value responds to an investment credit granted to the Company in the year 2000, the relationship between both accounts is positive if we compare it with most companies of our country, where in general long-term liabilities present an insignificant balance.
Analysis of rentability
Profitability expresses the way in which the company's resources have been used.
Financial profit
Rf = UN / Cap.
= 83 074/6898733
= 0.012 optimal weights = 0.15
UN / Capital = (UN / Sales) * (Sales / Assets) * (Assets / Capital.)
0.012 = 0.013 * 0.58 * 1,571
This indicates that for each weight of equity, the company generates 1.2% of profit.
The profit margin on sales must be increased and can be achieved by maximizing sales and minimizing costs and expenses. The company management must work to increase the use of the installed production capacity, which currently does not exceed 70%. Guarantee contracts that support planned production levels, minimize interruptions and establish all kinds of technical organizational measures that contribute to reducing costs and expenses.
The increase in asset turnover is also achieved if the measures taken to increase sales and decrease costs are effective, on the other hand, production scheduling based on information obtained from load-capacity studies. and a management capable of anticipating and taking timely corrective measures during the production process, will also promote the optimal use of assets.
Based on the leverage analysis on the Basic Accounting Equation: the decrease in capital is recommended, always considering maintaining the optimal structure of liabilities in the short and long term.
Economic profitability
Re = UAII / Assets
UAII / Assets = (UAII / Sales) * (Sales / Assets)
0.150 = 0.026 * 0.58 optimal = 0.20
Consecutive substitution analysis
Year 2007: 0.015 = 0.026 * 0.58
Year 2006: 0.013 = 0.023 * 0.56
- 023 * 0.56 = 0.0130026 * 0.56 = 0.0145
- 026 * 0.58 = 0.0150
Analysis of variations:
II - I) 0.0145 - 0.0130 = 0.0015
III - II) 0.0150 - 0.0145 = 0.0005
III - I) 0.0150 - 0.0130 = 0.0020
The consecutive substitution analysis reveals the increase in profit margin and asset turnover in 2007 compared to 2006, in 0.0015 and 0.0005 respectively. The management of the Company should not be satisfied with the result, it is necessary to work in order to achieve the expected economic profitability.
Analysis results.
As a result of the financial analysis carried out in the company, it can be seen that it does not have the cash to fulfill its short-term debts. Detailed analysis of the asset structure and the quality of working capital reveal that there are sufficient current assets and excess working capital, but accounts receivable represent more than 50% of current assets and more than 90% of them. % are out of term. The aforementioned shows the desynchronization of the cash flow and with it the impossibility of making the payment to the suppliers, this brings with it the increase in the payments by default, difficulties in guaranteeing the necessary supplies for the production process, interruptions, decrease in sales, increased costs, in short,The profitability of the company can be seriously affected if urgent measures are not taken.
In this situation, the management of the company must adopt urgent measures aimed at the collection of accounts receivable after the term, on the effectiveness of the procedures carried out depends on the company obtaining the available liquidity necessary to meet its short-term obligations and guarantee continuity in the process, only this way will avoid the deterioration of its economic results in the coming months.
After carrying out the financial analysis of the GEDEMAX Furniture Company, it is concluded that:
- The company has excess financial capital, motivated by high levels of inventories and accounts receivable. High levels of inventories influence low turnover and immobilization of financial resources. Lack of immediate liquidity causes default of payment to suppliers The quality of working capital is poor as a consequence of the concentration of current assets in inventories and accounts receivable out of term.
REFERENCE BIBLIOGRAPHY.
- Amat Salas, Oriol. Analysis of Financial Statements: fundamentals and applications / Oriol Amat Salas. Barcelona: Ediciones Gestión 2000 SA, April 1998. Collective of Authors. Techniques to Analyze Financial Statements. Madrid, Grupo Editorial Publicentro 2000.Finney, HA Intermediate Accounting Course. Typographical Union. Pueblo and Education Editions, 1986. Fred Weston. Financial Administration Foundation. N, SLGitman Lawrence. Financial Administration Foundation. Parts I and II. SN, SLPerdomo A. Analysis and Interpretation of Financial Statements / A. Perdomo. Mexico: Accounting and Administrative Editions, 1986. Meig & Meig. Accounting the basis of Management decisions.
