INTRODUCTION
The new style of management of the institutional economy that Business Improvement presupposes has created the basis for Companies to develop in an organized way all the necessary transformations that allow achieving economic, efficient and effective management.
management-and-business-economic-administrationUnder 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 severely affected.
Many companies live experiencing in recent years a continued expansion of their activities and a growth in turnover.
Globalization increasingly affects the activities of companies and introduces new variables in business management. Competition becomes general as a consequence of removing internal and external barriers.
The environment in which entities operate today is characterized by a greater need for continuous improvement and the flexibility necessary to adapt to changes, requiring an effort of creativity and innovation.
That is why the traditional approach to the financial function does not offer solutions to the need for continuous improvement. Adaptation of economic-financial management systems and the role of the financial function is required. A cultural change is needed, an evolution that affects the institution as a whole.
Research related to the analysis and interpretation of financial statements is of vital importance in this context given the growing process of recovery of the national economy and taking into account that business improvement is based on self-financing by the entity, 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 achieve the rational use of the Company's reserves for its better operation.
This work is carried out at the Moncar Company, which has not been oblivious to the incidences of the economy, and together with many entities in the country, joins the search for greater development, economic efficiency, cost reduction, and increased services. and its quality, and the rational use of financial and human resources
Main Features of the Company.
Business Objective of the Company
The Moncar Company (Reconditioning and Commercialization Center of Second-hand equipment) was created by resolution No. 8 of February 7, 1995 issued by the Ministry of Economy and Planning with the following corporate purpose:
Acquisition, reconditioning and repair of second-hand equipment and machinery, as well as their commercialization.
For this, it has the following commercial operation licenses:
- Reconditioning and marketing of forklifts.
- Leasing of forklifts.
- Technical repair and maintenance services thereof.
The Company has a reason and a strategy; fully dominate the national market for cargo handling equipment (forklifts) in its different brands, models and versions, both Diesel and Electric, offering and supplying customers with internationally recognized optimum quality equipment, at very favorable prices and with efficient and effective assurance in warranty and post-sale services. The main supply will be covered with second-hand equipment fully repaired and restored to their original manufacturing parameters.
Current Company Structure.
Taking into account the experience accumulated with the operation of the structure and the level of specialization and development of the Company throughout these years and with the purpose of satisfactorily fulfilling the social mandate contained in the Company's strategy, evaluated the need to ratify and officially approve a structural organization that responds to the assigned objectives and tasks.
Company structure
Each UEB Principal Specialist or Director, in addition to his or her own management functions, performs multiple specific functions and tasks within the activity that he or she directs.
With the exception of production activity, the remaining six structural subdivisions are made up of only a small number of workers (between 3 and 6 people).
Theoretical considerations
Economic-financial analysis techniques.
Comparative or horizontal analysis
It is the analysis, as its name implies, of the same data or reports in two or more periods so that the differences between the two can be determined. This is done horizontally because it goes from left to right, and is comparative because of the relationships established with the factors on the left with respect to the right for subsequent decision-making. They are comparable bases: other periods (plan - real), other companies and parameters of the same branch or sector, according to their own characteristics. In the analysis, the analyst can concentrate on a game and determine its trend, that is, if it shows a growth or decrease year by year and in the proportion or measure that it does.
Percent or vertical analysis
It consists of inducing a series of quantities to percentages on a given basis. It is said to be vertical because it goes from top to bottom, inducing one departure from another. Generally, all items in the income statement are presented by calculating what percentage of net sales each represents. This type of analysis facilitates comparisons and is useful for evaluating magnitude and relative change in items. Furthermore, the reduction of monetary values to percentages allows comparison between entities of different sizes. Here the time factor is not substantial and it is convenient to do it year by year, because in this way it is having a history, in relative numbers and absolute numbers, within the same state. This analysis is more significant in the income statement than in the balance sheet.
Analysis of financial ratios
It is one that is executed based on financial ratios, which can be translated in several terms: ratios, indices, indicator or simply, a ratio. The latter is defined as the relationship between two (2) numbers, where each of them can be made up of one or more items in the financial statements of a company. The purpose of using ratios in financial statement analyzes is to reduce the amount of data to a practical form and give the information more meaning.
The Du Pont System for Financial Analysis
The Du Pont System for Financial Analysis is widely recognized in the industry. It combines activity ratios and profit margin on sales in a full study, and shows how these ratios interact to determine the rate of return on assets.. When the Du Pont system is used for divisional control, such a process is often called ROA, where return is measured through operating income or earnings before interest and taxes.
The upper part of the system shows the Profit Margin on Sales; the individual Expense items are totaled and then the Total Costs are subtracted from Sales to determine the balance of Net Income after Tax. By dividing the Net Profit between the Sales, the Profit Margin on the Sales is obtained.
The lower part of the figure shows the Asset Rotation ratio and each of the elements that make it up. By dividing the Total Investment in Assets by Sales, the Rotation of the Investment in Assets is obtained.
Then, when the Asset Rotation ratio is multiplied by the Profit Margin on Sales, the product is the Return on Investment.
Navigation Quadrant
After performing an economic analysis of the Financial Statements, the question of knowing the position of the company arises, which is why the technique of the navigation quadrant is created. This technique takes only two mathematical axes, the (X) axis and the (Y) axis, which are related to the two general positions in decision-making: the economic position and the financial position. The first will take the Y axis in search of rise or fall, and the second the X axis, in search of leveling and stability.
Every company must work to achieve two basic financial goals: profitability and liquidity. The profitability shows the economic position of the entity, that is, the capacity it has to generate and retain profits in a given period. For its part, liquidity indicates the financial position, that is, the payment capacity that it has to adequately face its debts at a given moment, both in the short and long term.
The financial analysis allows to know in which quadrant the entity being evaluated is located and, based on its situation, reach conclusions and propose the pertinent recommendations. Using the graphic representation from the navigation quadrant, different business situations can be found.
I. If the company is profitable (+) and solvent (+), it is Consolidated or in Development, since it makes profits and generates enough cash from operating activities that allow it to fulfill its obligations. You should try to maintain this situation and put excess (idle) cash in fixed-term bank deposits or in short and long-term investments that generate additional interest and speculation gains.
II. If the company is profitable (+) and not solvent (-) it indicates that it is in Growth or Financial Reflection, because although profits are obtained, not enough cash is generated by operating activities to pay the debts, which could cause creditors declare bankruptcy. Debts must be renegotiated trying to extend the period of payments to suppliers and refinancing long-term obligations. Efforts should also be made to decrease the inventory cycle and the collection period.
III. If there is no profitability (-) and no solvency (-), the company is in a situation of Business Death or Failure. There are losses and no cash is generated from operating activities. You should try to merge or reorganize the entity or simply declare it bankrupt and liquidate it.
IV. If there is no profitability (-) and there is solvency (+), the company is undercapitalized or in resizing. There are losses, but the entity covers them by making its non-liquid assets liquid, thus generating the cash that allows it to meet its obligations and stay alive. Although the Company's Equity is declining, it may continue to move forward, but the time will come when you will not be able to pay your debts and fall into Quadrant III. Market and research studies must be carried out to manufacture new or better products, as well as organizational and technological advances to increase sales and reduce costs in order to achieve profit.
Financial balance
Financial balance is another of the analysis techniques. It is controversial and much disputed by many authors from various points of view, and states that a company has Financial Balance when it is able to satisfy its debts on their respective terms and maturities. There are three basic relationships:
1. Liquidity Ratio. Condition where the Current Assets (AC) are greater than the Current Liabilities (PC). AC> PC.
2. Solvency ratio. This condition is met as long as the Real Assets (AR) are greater than the Foreign Resources (RA). AR> RA.
Both Liquidity and Solvency are technical conditions that define whether or not there is a financial balance. This is called Necessary Condition, which is not sufficient given that the quality of the balance must be determined. That is why there is a third condition.
3. Risk or Debt Relationship. The risk in a company is given by the probability of becoming technically insolvent and this relationship is nothing more than a rough comparison of RAs and Own Resources (RP). RP ≥ RA.
The comparison rules according to financing are as follows:
a) Ideal Indebtedness: Their behavior is 50% for both RA and RP.
b) Acceptable or stable indebtedness: Its behavior lies between the parameters of 60% for PR and 40% for RA, regardless of the meaning it may have.
c) Unstable indebtedness: Its normative behavior lies between the parameters of 6.5% for RA and 3% for RP, when one of them predominates over the other above 60%. The increasing financing percentages of RA indicate the more income it means to grant credit to that Entity.
These percentages can be calculated through the formula:
Financial situation according to stability
1. Maximum stability situation
- There are no borrowed resources
- It is generally for companies at their initial moment (when it is created).
2. Normal stability situation
- There is short and long-term credit
- Stability is maintained in the company, facing short-term debts with its short-term resources.
3. Situation of instability or suspension of payments.
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Current liabilities grow and begin to cover part of the fixed assets. - The company cannot meet its short-term debts with short-term resources.
If at this time the suspension of payments is not yet reached, the company must take measures such as:
- Sell part of the fixed assets
- Get new loans
- Increase the capital
4. Bankruptcy
- Debts greater than the real assets
- The fictitious asset is thickened by the successive accumulation of losses.
Financial planning methods.
Another aspect that is equally important to complement the study of the administration of working capital is financial planning. This allows a projection to be made of the desired results to be achieved by the company, as it studies the relationship of projections of sales, income, assets or investments and financing, taking as a basis alternative production and marketing strategies, in order to subsequently decide the way to satisfy financial requirements.
The financial planning of a company is nourished by the economic-financial analysis in which projections of the various investment and financing decisions are made and the effects of the various alternatives are analyzed, where the financial results achieved will be the product of the decisions made. go drink. The idea is to determine where the company has been, where it is now and where it is going; If things turn out to be unfavorable, the company must have a support plan so that it is not unprotected without financial alternatives.
The financial planning process should attempt to identify potential changes in operations that will produce satisfactory results. There are different ways or methods to carry out the process.
Regression method
This method calculates the average ratios over a period of time, therefore it does not depend to a large extent on current data from a particular point in time, and is generally more accurate if a considerable growth rate is projected or if the forecast period spans several years.
Sales percentage method
The use of this method consists of expressing the various items on the balance sheet and the income statement as percentages of the company's annual sales. The core part of any sales budget is obviously their forecast. There are numerous methods to carry out this forecast, some are intuitive, others mechanical and others statistical.
Another method of analysis within financial planning is the preparation of pro-forma statements.
Pro forma financial statements
- Proforma Income Statement: summarizes the projected income and expenses of an entity. It presents the information related to net results (profit or loss), covering an economic period. A very simple way to develop this statement is to forecast sales, that is, the values of cost of sales, operating expenses and interest expenses, which correspond to a certain percentage of projected sales.
- Proforma balance sheet: it is a conjectural balance sheet that is practiced to estimate the situation and the probable results of a company, according to the operations or plans in progress. To calculate the Proforma Balance Sheet, the calculation of certain desired levels of some Balance sheet items and the estimate of others are taken into account, using financing as a compensation figure.
Administration of accounts and documents receivable.
The accounts and documents receivable are part of the current assets and are generated as a result of the credit sales operations carried out by the company and its management consists of five main stages:
1) The conditions of sale must be determined. How long will customers be allowed to pay their bills? Are you willing to offer a prompt payment discount?
2) It will be necessary to decide the proof of debt to be demanded, the form of contract with the client.
3) The probability of payment by customers must be analyzed. Will this be estimated based on previous customer histories or past financial statements? Will bank references be taken as a basis?
4) It will be necessary to decide how much credit each client is willing to grant. Are you playing it safe, denying it to all potential dubious customers? Or is the risk of a few insolvencies accepted as part of the cost of creating a permanent customer base?
5) Finally, once the credit has been granted, there is the problem of collecting the money when it is due. How to follow the progress of payments? What to do with the defaulters?
There are several statistical techniques that help define aspects of the credit policy that must be carried out. Among them are the multiple discriminant analysis (ADM), which is used to calculate the importance that should be given to each variable of the minimum criteria established for the selection of clients and thus predict poor quality commercial risks; There is also the technique of the decision tree to decide which clients should be offered credit once the conditions of sale have been established, and the procedure to estimate the probability of payment of each client has been established.
Accounts receivable.
Accounts receivable are the credit that the company grants to its customers through an account opened in the ordinary course of a business, as a result of the delivery of articles or services. In order to retain current customers and attract new customers, most companies turn to offering credit. Credit terms may vary depending on the type of company and the branch in which it operates, but entities in the same branch generally offer similar credit terms.
Credit sales, which result in accounts receivable, normally include credit terms that stipulate payment within a specified number of days. Although it is known that all accounts receivable are not collected within the credit period, it is true that most of them are converted into cash within a period of much less than one year; consequently, accounts receivable are considered as part of the current assets of the company, so much attention is paid to their efficient administration.
The objective pursued with respect to the administration of accounts receivable should be not only to collect them promptly, but also to pay attention to the cost-benefit alternatives that arise in the different fields of administration of these. These fields include the determination of the aforementioned credit policies, credit analysis, credit conditions and collection policies.
Documents to collect.
Most companies require their clients to sign documents when the payment term of their overdue accounts is extended. In such cases, companies prefer the use of documents receivable instead of an open account, due to the following advantages listed below:
- The document can be converted into cash before maturity if it is discounted in a bank or financial institution.
- In case of non-payment, it allows a legal claim to be made that makes it possible to collect the debt.
- Holding a document allows you to have a written acknowledgment of both the term of the debt and the amount of the debt.
- The documents earn interest that increases income since the latter constitute a charge for the use of money. In business, most document-related transactions fall within a period of less than one year, and this period is generally expressed in days. The term of the document makes it necessary to accurately count the actual number of days that elapse from the day following the issue of the document, until the day it expires.
The promissory note and bill of exchange are the most widely used collection documents today in companies worldwide. The first constitutes an unconditional promise to pay a sum of money on demand, at a fixed date or at a certain future date. It may or may not accrue interest, leaving it expressed in the event that they are charged.
The collection process for documents receivable is very similar to that for accounts receivable. If the holder of a bill of exchange, by the expiration date, cannot collect it, he may protest it through a judicial process. In this way you can reimburse your amount, protest and replacement costs. The amount to be claimed is known as a hangover account and includes the following items: protest expenses, negotiation brokerage, replacement damage and correspondence expenses.
Short-term financing.
Short-term loans are liabilities that are scheduled to be repaid over the course of a year. Short-term financing can be obtained easier and faster than long-term credit, and interest rates are generally much lower; In addition, they do not restrict a company's future actions as much as long-term contracts do.
There are four main sources of short-term financing: commercial credit, accumulated liabilities, commercial paper, and bank loans, with and without collateral.
DEBTS TO PAY
FUNDAMENTAL ASPECTS
Accounts Payable:
Accounts Payable arise from the purchase of material goods (inventories), services received, expenses incurred and the acquisition of fixed assets or the contracting of investments in process.
If they are payable less than twelve months, they are recorded as Short-Term Accounts Payable and if their maturity is more than twelve months, in Long-term Accounts Payable.
These liabilities must be analyzed for each creditor and in each of these for each document of origin (date, document number and amount) and for each payment made. They must also be analyzed by age to avoid the payment of arrears or compensation.
The Accounts Payable Long Term at the end of each economic period, must be reclassified to Short Term, (those due next year).
PRINCIPLES AND PROCEDURES OF INTERNAL CONTROL
• Debts to pay
1- The functions of receiving at the warehouse, authorization of payment and signing the check for settlement must be separated.
2- It is necessary to reconcile periodically the amounts received and pending payment according to accounting controls, with those of the suppliers.
3- Payment Records must be prepared by providers containing each Invoice, its corresponding Receipt Report (when applicable) and the check or payment reference, the Invoices being canceled with the stamp of “Paid”.
4- It is necessary to keep up to date the Submayors of Accounts Payable, the Accounts Payable Various and not present aged balances.
5- Accounts Payable to Suppliers and the Various must be broken down by each Invoice received and each payment made; as well as by ages and analyzed by the Board of Directors.
6- Returns and claims made to suppliers must be controlled to ensure that payments are made for what is actually received.
7- Monthly it must be verified that the sum of the balances of all the Submayors of the Accounts Payable coincide with those of the corresponding control accounts.
INTERNAL VERIFICATION PROCEDURES:
- Short-term Accounts Payable.
• Accounting table of outstanding items in the debtor analytical sub-major.
• Verification of the documents in the payment files by creditors (suppliers).
• Check whether there are debit items or balances (contrary to the nature of these accounts).
• Analysis by age determining past due debts (more than 30 days).
• Verify the subscribed payment agreements.
- Other accounts payable.
• Analyze the items that make up the balance of this account, classify them according to their content, checking their accounting balance as well as analyze by age to determine the aged (more than days).
• Verify the supporting documents of the outstanding obligations, as well as the reconciliations, confirmations and payment agreements.
• Check that this account (Group) does not record the counter value in MN of the operations in MLC that must be posted in the account counter value pending payment in current assets.
- Effects, Accounts and Long-Term Payables.
• Verify the accounting balance of the balances and items that make up this account in each of the subaccounts and sub-major analytical by creditors.
• Analysis by age, verifying that this account includes exclusively those that exceed one year.
• Check the documents in the payment files (contracts, agreements, etc).
• Check reconciliations and confirmations with creditors.
• Analyze overdue and unpaid obligations, as well as debit items (contrary to the nature of this account).
Practical Analysis
Diagnosis of the company's short-term financial situation.
One of the most widely used and spread techniques in the Economic - Financial Analysis of any entity is precisely through the use of Financial Ratios or Ratios. The Ratios are very useful for the Directors of any company, for the Accountant and for all the economic personnel of the same since they allow to relate elements that by themselves are not capable of reflecting the information that can be obtained once they are linked with other elements, either from the accounting statement itself or from other statements, that are directly or indirectly related to each other, thus showing the development of a certain activity.
Ratios, as an essential part of Economic-Financial Analysis, constitute a vital tool for decision-making, facilitate analysis, but will never replace good analytical judgment. They are used to obtain a quick diagnosis of the economic and financial management of a company. When they are compared through a historical series, they allow the evolution of the same to be analyzed over time, allowing trend analysis as one of the necessary tools for the Economic-Financial projection.
There are several ways to classify or group this set of indicators, based on their characteristics or the topics to be analyzed, based on the financial statements they take into consideration for their determination, etc. The most widely used are generally grouped into four groups: liquidity, debt, activity and profitability. Then an analysis of them will be made from the information obtained from it.
Liquidity Ratios Liquidity
is the ability of an entity to meet its debts in the short term, taking into account the liquidity level of the current assets. Various indexes can be obtained depending on the degree of the items taken for their preparation (See Annex 4)
Current Ratio is calculated by dividing current assets by current liabilities. The former typically include cash, marketable securities, accounts and notes receivable, and inventories; while the latter are formed from accounts and documents payable, short-term promissory notes, current maturities of short-term debts, accumulated income taxes and other accumulated expenses. It is the most widely used ratio for measuring short-term solvency, and indicates the degree to which the rights of short-term creditors are covered by assets that are expected to become cash in a period more or less equal to that of the maturity of obligations. (See annex 7)
Table No.1. Behavior of the Circulating Reason.
In general, the result of the circulating ratio must be between the values 1 and 2 to be considered acceptable. A value of this index less than 1 indicates that the company can declare itself in suspension of payments and will have to face its short-term debts having to take part in the Fixed Assets. On the other hand, a very high value of this index supposes, of course, a financial slack solution that can be seen together with an excess of unapplied capital that negatively influences the total profitability of the company. If its value is 1, you can face your debts, but the speed with which you collect from customers and the completion or sale of your inventories depends on it.
In the case analyzed, the solvency values indicate adequate behavior. At the end of 2005, the company had 1.96 available pesos of current assets for each peso of current liabilities, varying to 1.48 in 2006. This indicator does not show very significant variations from one year to the other, thus denoting some stability.
The Quick Ratio or Acid Test is calculated by deducting inventories from current assets and subsequently dividing the rest by current liabilities. Inventories are generally the least liquid of a company's current assets and losses will be more likely to occur in the event of liquidation. Therefore, this is an "acid test" about the ability of the company to settle its obligations in the short term, to face the most demanding obligations.
A result equal to 1 can be considered acceptable for this indicator. If it is less than 1, there may be a danger of falling short of resources to meet the payments. If it is greater than 1, the company may have excess resources and affect its profitability.
Table No.2. Acid Test Behavior.
In the case of analysis, the indicator behaves unfavorably in 2005, when the company had 0.48 cents to cover immediate obligations., which shows that the inventory constituted an element of weight within its current assets. Then, in 2006, it is denoted that it is not the inventory that carries the greatest weight, behaving favorably.
Ratios de Actividad
Estos ratios permiten analizar el ciclo de rotación del elemento económico seleccionado y por lo general son expresados en días. Sus resultados proporcionan elementos que permiten profundizar en el comportamiento de algunos índices. Entre los más utilizados se encuentran los de rotación de cuentas por cobrar, de cuentas por pagar, del activo total, del activo fijo, inventarios, así como el plazo promedio de cobro, de pago y de inventarios.
Las razones de actividad miden la efectividad con que la empresa emplea los recursos de que dispone. (Ver anexo 4)
La Rotación de Cuentas por Cobrar muestra las veces que rotan las cuentas por cobrar en el año. Se calcula dividiendo las Ventas Netas entre el saldo de las Cuentas por Cobrar a corto plazo.
Table No.3. Behavior of Accounts Receivable Rotation.
The Average Collection Period expresses the average number of days it takes for clients to cancel their accounts. Through this index, the company's credit policy and the behavior of its collection management can be evaluated. This ratio is calculated by dividing the number of days in the fiscal year by the number of times the Accounts Receivable rotate, to find the number of days of sales invested in accounts receivable, or what is the same, the average period of time that the business must wait to receive the cash after making a sale.
Table No.4. Behavior of the Average Collection Period.
Both indexes, related to the collection of credit sales, show instability in their behavior during 2005, and therefore, reflects a poor collection policy by the company, improving considerably in the year following the analysis.
On average, accounts receivable rotate slightly more than 5 times a year, which translates to cash inflow every 77 days.
In addition to the instability shown after this analysis in 2005, it is noted that even in 2006, with a more aggressive collection policy application, it is not capable of guaranteeing the collection of short-term loans (30 days).
The Accounts Payable Rotation shows the relationship between credit purchases made during the fiscal year and the final balance of Accounts Payable.
Table No.5. Behavior of Accounts Payable Rotation.
The Average Payment Term shows the days it takes the company to pay its debts.
Table No.6. Behavior of the Average Payment Term.
These indicators show how the company performs its short-term debt settlement by disbursing cash every 114 days, on average, during the 2005-2006 period, that is, 3 times in the year approximately.
These payments are well above 30 days, a favorable situation to a certain extent for the company, since it has the possibility of financing its assets with short-term debts.
The company collects every 77 days, on average, and pays every 114 days, therefore it has a margin of 37 days to use the available cash before making payments to its suppliers. As is evident, the company delays its payments too much, a situation that affects its credibility to receive credit from third parties.
It is interesting that despite having so much time frame for the use of available cash, the solvency indicators are not above two (2), and even the acid test indices denote difficulties for the immediate payment of short-term obligations.
Inventory Rotation refers to the number of times inventory is rotated in the warehouse. It is defined as sales divided by inventory.
Table No.7. Inventory Rotation Behavior.
The Average Inventory Term helps determine the number of days that certain merchandise remains in the warehouse. (See annex 9)
Table No.8. Behavior of the Average Term of Inventories.
The calculation of these two ratios indicates that inventories moved somewhat slower during 2005, when they rotated every 320, which is equivalent to approximately 1 times each year.
These indices improved during the following year: in 2006 inventories rotated every 107 days, that is, 3 times a year.
This improvement is not significant since the company must still improve this index.
Given the importance of inventories for sales, they must occupy approximately 25% of the invested capital, hence the importance of their correct administration.
Inventory levels vary by industry, but inventory-to-sales ratios are generally concentrated in the 12-20% range, and inventory-to-total-asset ratios are generally in the 16-30% range.
Table No.9. Behavior of the ratio of inventories to sales and total assets.
The ratio of inventory to 2006 sales is not adequate. On average, it exceeded the balance sought between the two. However, in the following year of analysis, both reasons are in the permissible ranges.
The Fixed Asset Rotation is based on the comparison of the amount of sales with the total net fixed assets. The objective of this comparison is to try to maximize sales with the minimum amount of assets possible, thus reducing debts and ultimately translating into a more efficient company.
Table No.10. Net Fixed Assets Rotation Behavior.
This indicator shows a gradual growth that denotes the correct administration of fixed assets.
The Rotation of Total Assets measures the degree of efficiency with which the assets are being used to generate sales. It is calculated from the division of sales by total assets. (See annex 6)
Table No.11. Behavior of the Rotation of Total Assets.
The aforementioned relationship conceives the improvement in the efficiency of asset management for sales generation.
Debt Ratios
From knowing to what extent the different sources of financing help finance the different assets, it is also necessary to know how the company's sources of financing are structured. In other words, what relationship do other people's resources, permanent resources and their own resources have to each other. (See annex 4)
The Debt Ratio measures the intensity of all the company's debt in relation to its funds, it measures the percentage of total funds provided by creditors. (See annex 7)
Table No.12. Behavior of the Debt Ratio.
The company is developed mainly with foreign capital, which shows a high degree of financial dependence on external creditors. Its total assets have been externally financed by 76% on average over the period analyzed.
The Reason for Autonomy shows to what extent the company has financial independence from its creditors. It is determined by dividing the value of equity by total assets.
Table No.13. Behavior of the Reason for Autonomy.
The company's possibility of financing with its own capital is reduced to 35% in 2005 and 22% in 2006.
The Quality of Debt allows us to know what part of it corresponds to short-term debts. It is determined by dividing current liabilities by total liabilities.
Table No.14.Debt Quality Behavior.
At the end of 2005, 62% of the debts were short-term, that is, for each peso of debt, 0.62 cents matured within a year. In 2006 there was an increase of 9%, denoting that 71% of the debt was short-term. Proving that the amount represented by short-term financing of total debts is representative.
Profitability Ratios
They cover the set of ratios that compare the earnings of a period with certain items in the Statement of Income and Balance. Their results materialize the efficiency in the management of the company, that is to say, the way in which the managers have used the resources, offer more complete answers about how effectively the company is being managed. For these reasons, management must ensure the performance of these indices, because the greater their results, the greater the prosperity for it. (See annex 4)
The Net Profit Margin or Income Profitability indicates how much profit is obtained for each peso sold, in other words, how much the company earns for each peso it sells. It is calculated by dividing net after-tax income by sales. The value of this index will be in direct relation to the control of expenses, because no matter how much the company sells if expenses increase, the result will be reduced by the negative influence of excess expenses incurred in the period.
Table No.15. Behavior of the Net Profit Margin.
This indicator shows a serious behavior of the cost and price relationship. The company only earns 0.06 cents, on average, for each peso it sells.
The Return on Investment or Economic Return Index shows the entity's basic capacity to generate profits, or what is the same, the profit obtained for each peso of total assets invested. It provides the level of management efficiency, the level of return on investments made. It shows how much the enrichment of the company increased as a product of the profit obtained and is calculated by dividing the Profits before Tax by the total assets.
Table No.16. Return on Investment Behavior.
The entity's basic capacity to generate profits for each weight of Total Assets invested is very low, which denotes a low level of management efficiency. The enrichment of the company, as a product of the profit obtained, hardly increases as a consequence of its low turnover ratios and its low profit margin on sales.
Economic Profitability is a function of the Net Margin obtained from the result of the company's management and the degree of Asset Rotation.
The Financial Profitability Index, also known as the Return on Stockholders' Equity, shows the profit obtained for each peso of own resources invested, that is, how much money the Company's Capital has generated (See Annex 7)
Table No.17. Financial Profitability Behavior.
It represents the opportunity cost of the funds that are kept in the company, and the higher its result, the better it will be for it. But the result of this index in Moncar shows that its assets only generated 0.02 cents for each peso invested in own resources in 2005, improving considerably in the following year 0.57 cents for each peso invested.
In the event that the Capital or Equity has had significant variations, its average value must be taken as the denominator, for which the average of its different values will be calculated in the period that is being analyzed.
Although the analysis of the reasons provides a The panorama is relatively good, it is incomplete in one important respect: it largely ignores the dimension of time. The reasons are photographs of the company's situation at one point in time, but there are developing trends that are in the process of eroding a relatively good current position.
In turn, using the navigation quadrant technique, taking the indicated values, the serious problems of economic profitability presented by Moncar are verified.
The company is located in the first (I) quadrant, with an apparently consolidated or developing situation, capable of obtaining profits and generating enough cash from operating activities that allow it to fulfill its obligations, but has very low levels of profitability. But the reality is that Moncar has a tendency to continue in quadrant (I), having to closely monitor its profitability to prevent it from drifting to another quadrant and decapitalizing.
As a result of the analysis of the situation of the company, the evaluation of the financial balance is necessary. (See annex 8)
Table No.19. Solvency ratio.
At Moncar both necessary conditions are met. But remembering that it is not enough to fulfill this necessary condition of having liquidity and solvency, since the quality of the financial balance must be determined, we proceed to check the third condition.
Table No.20. Risk or Debt Ratio.
Table No.21. Evaluation of the quality of the financial balance.
As the regulatory behavior indicates, Moncar's financial balance is unstable throughout the analysis period, since the external resources are above 60% in the risk ratio, which shows that the company cannot face its short-term debts with short-term resources.
Work done with accounts receivable
From an analysis carried out on accounts receivable for which the evaluation is deficient, the center's management, together with the economic department, is given the task of carrying out a deep work on this topic, fundamentally due to the importance it has in these times and due to the situation that the country presents with the chain of defaults
For all this situation, a brigade was created to update the reconciliation with customers and suppliers as well as complete all the files with all the mandatory data, updating daily in a table all accounts receivable, either its reconciliation or collection (See annex referring to the accounts receivable tables)
Behavior of accounts receivable and payable (2005-2007)
Analysis of some aspects of internal control
There is a separation of functions between the warehouse employee who delivers the products or merchandise, the one who prepares the invoicing and the one who accounts for the operation, as well as the one who collects the payment.
The sub-majors of accounts receivable and payable are in line with the accounting major at the end of April 2007
There is a duly prepared accounts receivable cancellation file, all the sheets are initials, minted, with consecutive, there is a general explanation of the file and reconciliation with each client of non-recognition of the debt. It presents proof of operations of the accounts taken to investigation and proposal of proof to take it to expense in case of approval.
There is a balance contrary to its nature of code 7653 (Ensuma Textil y Calzado), for 0.01 cents which has already been adjusted.
Analysis of the credit element in MONCAR.
It is noted that the credit policy in force in the Company is very flexible. It does not present minimum criteria regarding the selection of its clients or the amount of credits it provides. No information is requested about the economic and financial situation of each of them, nor is any investigation carried out in banking institutions that can attest to the real possibility of fulfilling payment commitments..
The credit conditions specify the terms of payment for each client on credit.
In general, the collection of each debt is required within a term of thirty (30) days at the end of it.
To collect its accounts receivable when due, the Company uses a collection policy very similar to the rest of the country's entities. It is known that as an account ages, collection management becomes more personal and stricter. It almost always begins with a reconciliation of accounts, receivable from the Company, and payable by the client.
The reminder letters of the client's obligation, the telephone calls, the personal visits and the legal procedure, constitute the steps to proceed with the collection of the expired accounts.
It is known that the objective pursued with respect to the administration of accounts receivable should be not only to collect them promptly, but also to pay attention to the cost-benefit alternatives that arise in the different fields of administration of these.. These fields include the determination of credit policies, credit analysis, credit conditions and collection policies, hence the Company is proposed:
1. Establish a more restrictive credit policy.
- Establish credit standards with a minimum criterion that includes terms of references, payment periods, and financial indexes that constitute a quantitative basis for the selection of clients.
- Stipulate the amount of the credit for each client.
- Request each client to supply their financial statements from recent years, and the largest of their accounts payable, in order to analyze their financial stability.
- Channel the obtaining of information about the creditworthiness of the client through the banking institutions.
2. Organize a more aggressive collection policy.
3. Carry out a market study to increase the client portfolio.
4. Apply resolution No. 91 dated October 6, 2005, which implements the mechanism that allows state-owned companies and mercantile companies with 100% Cuban capital authorized to operate in national currency (CUP) or in convertible pesos (CUC), can execute the fulfillment of the agreed obligations with a different currency from the one originally contracted, at an exchange rate agreed by the parties and complying with other requirements.
Once there is a more restrictive credit policy and a more aggressive collection policy, there will be current clients, delinquent in payment, who will stop opting for MONCAR services. Hence, it is suggested that a market study be carried out to search for clients who meet the minimum criteria established.
To analyze the credit policy, it was mentioned that the company can rely on various credit analysis techniques, either through financial ratios, through the credit rating through scores calculating a global risk index for each client; through the elaboration of better risk indexes, such as the credit quality index that is determined through a simple statistical technique to calculate the importance that must be given to each variable of the multiple discriminant analysis (ADM) in order to separate paying customers from non-paying customers.
Having defined the sales conditions and established the procedure to estimate the probability of payment for each client, the next step is to decide which clients should be offered credit.
Using the decision tree technique, the company will be able to determine from which possibility of collection, MONCAR's policy should be to grant credit.
This technique assumes that the probability of the customer paying is "p". If the client pays, additional income (ING) is received and there are additional costs (COS); the net profit would be the current value of ING - COS. There is also the probability (1 - p) that the client does not pay, which would mean not receiving income and having additional expenses. The expected benefit of the two alternatives would be:
Expected benefit of denying credit = 0
Expected benefit of granting the credit = pVA (ING - COS) - (1 - p) VA (COS)
Where VA: Present value
Therefore, the company must grant credit if the expected benefit of doing so exceeds that of denying it.
Considering the projected situation of the company under study, the calculation of the minimum expected profit is:
Cash flow analysis
For the analysis of the cash flow, the calculations of the different variations in the comparative balance, comparative income statement and the costs of sale and operating expenses were performed.
As a result of the flow of operations, the company has excess cash of $ 404 390,17 according to the optimal cash balance. This is mainly due to a significant increase in accounts payable, which had a variation of $ 700 870.2
CONCLUSIONS
- The company has an unfavorable financial position with some positive trend. It has low levels of profitability. It has high external financing. Moncar's financial balance is unstable, which shows that the company cannot face its short-term debts with short-term resources. There is an excess of cash according to the cash flow according to the optimal cash balance for the entity. With the application of a collection and payment policy consistent with the reality that is being pursued, Moncar will be able to solve the existing problems in its administration.
The present situation of collections and payments of the entity is not unfavorable but it presents deficiencies that must be solved immediately.
There are deficiencies in the conception of the entity's credit policy.The entity presents a situation according to the navigation quadrant technique under development, capable of obtaining profits and generating enough cash from operating activities that allow it to fulfill its obligations
RECOMMENDATIONS
- They continue to show problems with their profitability, and as the main responsible for this are the high costs of sale and the amount of accounts receivable; hence an in-depth cost study is proposed as a solution Perform better management of accounts receivable, accounts payable and inventory for better financial planning and better management of working capital (See Annex 1). Work on the basis of reducing external financing.Improve the relationship between external and own resources to achieve a good financial balance.Perform regular analyzes of your cash flow to eliminate possible excesses or deficits of cash in the entity.Undertake a rigorous market study in function of customers and suppliers.
Develop a credit policy consistent with reality. Take as a basis the study carried out in this work and follow up on the financial analysis of the entity to solve current existing problems.
BIBLIOGRAPHY
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