This article is an academic paper on the new approach based on the Theory of Company Growth, for reasons of reinforcement required by this topic, and not detracting from any aspect related to the topic, the article is divided into three parts (market, direction, and finance), providing it with a concrete and complete body, to a certain extent.
The first part, the company, limits and market, covers topics such as: The position that the company has within the economic and business sciences, on what type of nature it has, what role the entrepreneur has, what are the dimensional limitations of growth of any company, starting with the market, the staff, also offering advice on the market, demand, and finally showing some case studies.
The second part is about the limit generated by managers, emphasizing new growth business structures, the profile that a manager must have, and other considerations related to senior management.
The third part deals with aspects such as: the problem of financing in SMEs, what are the alternative investments of this century, on investment funds, risk capital and finally derivatives (futures, options and swaps). Thus offering the reader up-to-date information about everything related to state-of-the-art instruments to solve their possible financing problems.
Keywords: Entrepreneurs - Marketing - Company
The company, limits and market
“… Because if there were no progress, it would lead to stagnation and disintegration. However, progress must be stopped by progress, because many times our traditional tests do not accept touch-ups. A balance, therefore, between the old and the new, between permanence and change, between tradition and innovation ”.
JK Rowling. Harry Potter and the Order of the Phoenix.
The Company Within the Economic and Business Sciences
In the field of economics as a science, the company has always had a privileged position as an object of study. From Adam Smith, David Ricardo and Schumpeter, the company plays a fundamental role in the regional, national and world economy.
Based on the analyzes of the classical school, over time an economic theory was outlined, based on the nature, behavior and growth of the company, as well as the <
Later, economists move from a theoretical approach to an analysis and explanation through the use of mathematical tools and models, thus creating a new branch of economics known as <
At the end of the 80's, universities such as Wharton, Yale and Harvard, promoted the theory of the company in the capitalist world seen from a merely strategic approach (marketing, finance, sales, etc.).
Known as MBA (Master Business Administration) based on the individual strategy of knowing how to do business with a touch of top management.
A master's degree in Europe or a master's degree in business administration in Latin America is not the same as an MBA; An MBA is an entire educational franchise, supported by major business universities in the world.
Given the long historical, theoretical, and fundamental journey in which the theory of the company has been diversified in various branches, in this article I intend to rescue the best of the three approaches (the classical, neoclassical, and the business) and thus be able to offer a practical study on the growth of <
During the following pages I will guide the reader through the applicable ideas and theories that have existed for centuries, to the most modern business and business practices to this day.
Nature in Question
The nature of the company will be from a figurative point of view a <
Therefore, we will understand growth in a company as the "increase in size (physical or territorial of the same) or an improvement in quality as a result of a development process analogous to biological processes, in which the reciprocal action of a series of internal changes, leads to increases in size, accompanied by changes in the characteristics of the growing object ”(Pentrose, 1962) and not only to the growth of production, exports or sales volume.
Businessman
The entrepreneur is not the only person who makes the decisions in the company, there are also partners or other figures that are essential for the birth of a new company.
Despite the aforementioned, not in vain we must recognize that the figure of the entrepreneur is essential in making decisions in the company, as well as the problems that arise during the journey.
Also this character will bring with himself personal and independent motivations that move him to the business world:
The Dimensional Limitations of Growth
An SME may be limited in terms of size for one or more general reasons, which may be: market, management, uncertainty of future expectations (or also known as Risk) and finally, and probably the most common or worrisome of all: the problem of financing.
Limitations that, I will describe one by one, offering their possible cases and alternative solutions.
The Market Limit
The key to the company's success will be in the merchandise, product or service offered to the market.
Therefore, the entrepreneur will want what his company sells or provides to enjoy a long and pleasant life.
Knowing that the product will not be sold forever (probably), the entrepreneur will expect to make a reasonable amount of profits to cover the efforts and risks invested in its launch or startup.
Therefore, it is important to know the characteristics, objectives and strategies of the product life cycle (aspects that are summarized in table number 1).
Table No. 1: Characteristics, objectives and strategies of the product life cycle. (Source: Kotler, 1996)
| INTRODUCTION | INCREASE | MATURITY | DECLINE | |
|---|---|---|---|---|
| Features in Sales | Low sales | Sales increase rapidly | Maximum sales | Decreased sales |
| Features in Costs | High cost for the customer | Average cost per customer | Low cost per customer | Low cost per customer |
| Utilities Features | Negative | Increasing profits | Big profits | Decrease in profits |
| Characteristics of Competitive Clients | Innovative few | First to adopt increasing quantity | Intermediate majority stable quantity | Delayed amount in decline |
| Marketing Objectives | Create product awareness and testing | Maximize market share | Maximize profits while defending market share | Reduce spending and squeeze the brand |
| Product Strategies | Offer a basic product | Offer product extensions, services, guarantees | Diversify the brand and models | Remove the weak items |
| Price Strategies | Extra cost per use | Price to penetrate the market | Price to match or exceed the competition | Reduce the price |
| Distribution Strategies | Create selective distribution | Create intensive distribution | Create a more intensive distribution | Be selective: eliminate unprofitable outlets |
| Advertising Strategies | Create awareness of the product among the first to adopt it and distributors | Create awareness and interest in the mass market | Reinforce brand differences and benefits | Decrease to the level necessary to keep the faithful at heart |
| Sales Promotion Strategies | Use many sales promotions to encourage testing | Reduce to take advantage of high consumer demand | Increase to encourage brand change | Reduce to minimum level |
In table number 1, we can see that there are 4 stages in the product life cycle. But, not all the products or services offered follow this life cycle, some are introduced to the market and die quickly, others remain in the maturity stage and prevail in that stage for a very long time. And there are cases in which some products or services enter the decline stage and are later recycled to the growth stage due to strong promotions and their repositioning.
All of the aforementioned will also be influenced by concepts such as: style, fashion and fashion.
The passing fashions have a limited number of followers, these have a novel or whimsical nature. Passing fashions don't last long because they hardly ever satisfy a strong need and don't satisfy it well.
Other concepts that must also be considered: the class of product (gasoline cars), the shape of the product (truck) or if it is a brand (Honda Civic).
The product classes remain in the maturity stage for a long time, the forms of the products have a more standard behavior, since they usually go through introduction, rapid growth, maturity and decline. And finally, brands are more about behaving extremely, as they are affected by attacks from the competition, but a good brand often has quite long life cycles.
The Personal Limit
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For some people the sky is said to be the limit, but for others it is only the beginning.
At this point the entrepreneur plays a crucial role in the development of his company, from having a clear idea of the mission, vision and objectives of the company. That they forged the values to be followed by their company and the motive for all their actions.
To break through the world of business and emerge victorious, the entrepreneur must know the techniques of the battle that will begin.
Practical and Simple Tips on the Market
This will take us back to ancient and still valid techniques contained in Sun Tzu's work "The Art of War", based on ancient philosophy <
This Chinese philosopher, from more than two thousand years ago. His work was modified and used by Mao Tse Tung, founder of the People's Republic of China in 1949. Among Sun Tzu's postulates, the following stand out:
- When the enemy advances, you have to retreat! When the enemy stops, you have to harass him! When the enemy tries to avoid combat, you have to attack him! When the enemy retreats, you have to chase him!
Although these rules were intended to be a guide to military strategy; They have long been used in planning strategies to confront competing companies.
Another more modern and perhaps simpler technique is the analysis through the SWOT matrix (Strengths, Opportunities, Weaknesses and Threats) where the internal and external, present and future causes of the company are broadly analyzed. (See table number 2).
Table No. 2: Example of a SWOT matrix. Source: Own elaboration based on professional experiences.
| PERSPECTIVE | POSITIVE ASPECTS | NEGATIVE ASPECTS |
|---|---|---|
| INTERIOR ANALYSIS | Forces | Weaknesses |
| EXTERNAL ANALYSIS | Opportunities | Threats |
The Creation of Market Demand
It is said that the size or growth of the company will be limited to market demand:
"A company is linked to given products and that its expansion can only refer to certain markets" Pentrose, 1962.
This is a question with which I totally agree, but remember that just as demand exists, it can also be created.
In this section, three key words enter the business game: change, innovation and diversification. These keys to success will be supported by the levels of information of the company together with the information that said entrepreneur has.
From the internal information (company personnel, financial and work environment, etc.) to the cultural heritage, interest or knowledge of what is in vogue (clothing, music, etc.) since fashions usually influence culture and This in turn modifies tastes and preferences, as well as needs, whether direct or indirect (or even alien to the company itself).
The profile of the successful and informed entrepreneur is always the same, a person who knows or tries to call his employees by their first names, they know economics and financial accounting (the basic or intermediate level).
They usually read the newspaper in the morning (or at least the headlines), they have one or more subscriptions to business magazines, they watch cable television at home, and at night they read some pages of a novel or literary work before about sleeping.
Some will think that this is mere exaggeration, since they surely remember those stories (without denying the veracity) that formerly existed entrepreneurs who never needed to know how to read or write for their businesses or companies to be successful (50 years ago).
But times change, and today things change with such speed, that many times we miss the flight of competitiveness in a second and without realizing it.
Successful businesses of the 80's that were run by businessmen made in the old days, already by the mid 90's, were history of the past. They simply disappeared without a trace of what hit them.
Foolishness and aversion (as well as ignorance at times) evaded necessary change and at the right time, but without realizing it they had already buried their business long ago.
Since the Second World War, technological, social and computer advances have created a more dynamic and globalized world. Simplifying man's life, making it ironically more complicated in terms of the speed with which things change, tastes, preferences, needs, ideology, culture, and a new class vision of modern societies.
The own taste for reading and being informed, as well as being updated in all areas is not a cause for discouragement, much less to discourage, remember that there are always professional partners or collaborators who can always contribute some intellectual capital to the business.
Therefore, we must always keep in mind that what we do not know, or the answer to our problems, we can always consult others.
Donald Trump and Carlos Slim. Two Demand Makers
What better example than to analyze two cases of successful businessmen in the international arena: the American Donald Trump and the Mexican Carlos Slim.
- Characteristics of both: Billionaire entrepreneurs among the main in the list published by Forbes magazine. Their main activities (but not unique) are those of the construction industry. They buy cheap and sell expensive. Fully diversified asset owners (various types of companies). and businesses). Philanthropists. Highly informed people, with a great cultural heritage and always updated on what is in vogue.
Carlos Slim is the largest businessman in all of Latin America. A reserved man who does not like being involved in public life, much less being the center of attention of the media.
Better known as King Midas as it is said in business lingo that every company he touches turns to gold.
In recent years, he has focused primarily on buying bankrupt companies from which he acquires, at exorbitantly low prices at real or market prices.
The methodology: Buy at low prices, invest, improve, sell a percentage of shares (never being greater than yours, which gives you certain levels of power or control over these companies).
The results: He recovers his initial investment, made profits from the sale of a part of the shares, and finally continues to receive benefits for his percentage of participation in the companies, as well as owning a part of the total assets.
Instead D. Trump, is a person who himself calls himself a showman turning his last name into a brand and his figure into a superior business personality, this formula usually works very well until today giving him a surplus value above that of market and therefore also on the real value of its assets and therefore of its companies.
Both characters, being such large, important and millionaire figures, still need financing, but this type of financing is not usually obtained with banks as we traditionally think, but through international financial systems and using cutting-edge financial instruments (such instruments will be seen and explained later).
Another ideological guide for these modern entrepreneurs, which is nothing new, since all leaders and politicians around the world have stuck to these techniques to carry out successful leadership.
It is the leading book of many great historical figures through time: entitled "The Prince" by Nicholas Machiavelli. With deep and famous phrases such as: "the end justifies the means", "it is preferable to be feared than to be loved" just by mentioning some examples (emphasizing the invitation to make a revision of the aforementioned books).
Since the combination of such widely practiced readings in professional life offer a balance between faithful employees and psychological advantage over competitors (for example, "The Prince" teaches us topics such as: resistance to change, favors, obligations, appearances, prudence, generosity, punishments, human nature, fidelity, simulations and dissimulations; delegations of problems, alliances, prestige, etc.).
Trump stated at some point that he learned from the famous and controversial former heavyweight boxing champion Mike Tyson about psychological superiority, from which he observed that said boxer imposed so much supremacy against his opponents, that since entering the fight ring, he had already won the fight. His opponents had already been psychologically defeated.
The German philosopher F. Nietzsche, with his work "Thus Spoke Zarathustra", touches points based on the <
Despite the fact that neither Machiavelli, nor Sun Tzu, let alone Nietzsche tried to elaborate a theory of administration and top management per se, their concepts teach us an important historical lesson. Where the administration, nor the great directors, as well as the best entrepreneurs did not originate in the United States or in this century. When analyzing the administration of organizations from the perspective of our specific time and place, we must be careful not to put on cultural or historical blinders.
Both Slim and Trump are creators of market demands and exemplify the strong balanced relationship between image and information, which in turn teaches and exposes the virtues that top managers, entrepreneurs and their message must have within the company.
The Case of SPV
More than 18 years ago, a young German named Manfred Schüss went to work in a record store, since his passion was music.
On January 1, 1984, with his savings and his experience in administrative and supplier operations, he decided to set up his own music CD sales company in Germany.
Unlike other stores, this one was characterized by specialized sales (imported material, special editions, rarities, etc.) of the metal genre and all its subcategories (Melodic, Black, Death, Doom, Power, Speed, etc.).
The fame of this company (which was initially micro in size) was so great that orders began to arrive from other European countries. Moment that derived in getting a winery to be able to satisfy your orders.
During the early 90's, its prestige as a company specialized in Europe helped it obtain the exclusive distributor license in Europe from the famous Roadrunner Records label.
He is currently the main <bridge> distributor for North American and European labels such as: Sanctuary Records, Century Media, and Metal Blade, among others.
Having in its catalog 6,500 (thousands) products. In 18 years, the once microenterprise has grown into a large international company.
It currently has 100 employees worldwide. And although CDs are not yet manufacturing (which is one of their next goals to become a producer - distributor) they have a legal department, their own promotional division, they own A&R, they have their cover design department for CD´s, warehouses, its sales department (with 20 employees strategically distributed around the world) and finally it has established its headquarters in Hannover, near the most famous European business fair.
What was the success of this microenterprise? And why is it still so successful? Can it grow even more?
The answers are very simple. The demand for metal music has always presented a constant (slow growth) but very stable trend.
An existing demand, but never fully satisfied (until today) is therefore a very fertile market niche.
Large international companies lost interest in metal groups in the early 1990s, as these types of rock bands do not usually sell more than 1 million copies. And these companies are interested in music groups that generate or exceed one million copies sold, without leaving behind all the marketing and sale of tickets for concerts offered, which generate exorbitant profits for record companies.
Therefore, the distribution between continents makes it very difficult to commercially access this type of music, which makes it a relic for its consumers, so its purchases are usually high prices and highly desirable objects if you have a catalog.
Unlike metal, commercial music and music from large companies are temporary fashion groups or artists, who do not get to list their albums in the markets, and are quickly forgotten by their fans, once fame or euphoria has passed. in passing fashion.
To the contrary effect with the metal genre, since its fans are loyal fans, and therefore loyal consumers, who ensure a constant sale of copies throughout the years.
Another advantage of the metal music market is that it is almost unaffected by Internet piracy, given the difficulty in obtaining the material, characteristic of an unsatisfied demand for distribution.
This case shows us that the knowledge of the product and the market, well developed, can turn a micro-company into a great company, and where really, cunningly, not much investment is needed. Given that the market itself was and continues to freely promote said company.
Senior management as limiting growth
Address Limitation
The presence of top management within any company is a very broad limitation depending on the stage that the same need requires.
Firstly, it assumes that it is difficult for every businessman to delegate power in responsibilities and decision-making of great importance for the company. As the company grows, the entrepreneur himself will notice that he can no longer do all the work alone and that he needs help, but at first, adapting to trust new managers or executives will be very difficult, even if he does not value in a I start the salary of a worthwhile manager.
The reality of senior management is that human capital and especially that of senior management is very expensive, a second issue that limits the growth of the company. Since depending on the salary will be the quality of your managers within your company.
And finally the limitation of the functional profile for any company. That is, that the contracted subject is effective and a good acquisition for the company, that its results and what it costs us, translate into real benefits in the medium and long term.
New Structures
When we talk many times about the different sizes that companies have, it is usually based on their number of employees, some consultants or analysts consider it on the basis of financial capital (sales, profits) and others for the amounts of assets over liabilities.
Business consultant Alberto Calva is one of the supporters of a more real way of classifying companies by size:
Although all these points of analysis are valid and effective, something that is never taken into account and is always present, is the entire financial, informational and administrative structure that is behind every company (remember the case of SPV in the first part of the article) and that is fundamental for the growth of companies.
In these new administrative structures, the importance of the role of the managers or executives with whom it is counted will flourish given that “an industrial company is getting bigger and bigger and its operations are progressively decentralized, making lines of authority more tenuous and allowing autonomy growing to the sections that comprise it ”(Pentrose, 1962).
A new structure, legal changes or any relevant event that I know from within the company, its historical safeguard is of utmost importance. Since this information becomes the cover letter, the average of the studies completed and finally the company's curriculum vitae. It will therefore be the figure before the others (clients, suppliers, competitors, financial institutions, etc.).
In the first part, reference was made to the entrepreneur and his complete levels of knowledge, during which at this point they take on greater relevance, but now not only his knowledge comes into play, but the help of other new human elements, I mean the senior managers.
A Profile of Success
Throughout our journey, ideas have been sketched that are likewise interwoven with each other, forming a synergy that gives body and soul, giving long life to any company.
Returning to some ideas and concepts mentioned above, such as that of <
To complement the above with our directive figure, the part <
- The search for a new professional challenge (a project of new growth, with new people). That accepts the challenge and gets fully involved with it (looking at it from a surfing perspective would be taking a good wave and wanting to get wet). That he is able to identify successful situations for as long as possible and with the highest intensity (work under pressure that produces the necessary adrenaline that results in enjoying everything he does, as well as the virtues and disadvantages). " Observe the company from a close but prudent distance, evaluate external factors such as the stock market price, economic health or strategic partners, analyze internal variables such as <
> specific to play, his team and the perceived chemistry with the future boss and also displays all his < > relational to know the opinions and feelings of those who at some point have joined this project ”(Caces, 2004). Be 100% proactive.
Human capital can actually be something very expensive for companies and more, when it comes to senior managers, but depending on the value one wants to invest in the permanence of good managers, it will reciprocally be the results in the medium and long term for the company.
It will also be necessary to consider professional and specialized training since one needs: “Ability to evaluate data and risks that allow a successful business for the bank, avoiding those that could represent losses for it” (Baethge, 1995).
And what better evaluator for any company than a former bank employee, the ideal person who knows the other side of the financial mirror. With his experience and training, he will establish a position in favor of our company.
The Subcontracting of Services
Services such as: tax or legal advice, consulting, marketing and advertising, financial or economic evaluation, personnel selection; They tend to be cheaper and tax deductible, but for certain sizes and interests of companies, these types of services tend to fall short or even become ineffective for the companies' objectives.
From this moment on, the growth of any company requires its own specialized, reliable departments that provide results as required.
Therefore, middle managers or departmental managers will be needed for this stage of internal expansion. What, depending on your responsibilities and expected results, will be the magnitude of the requested profile.
Final Considerations About the Directive Limit
The businessman and owner of the company, emancipates his limbs of control, which help him to perfect the internal work, as well as, to improve the results, the high costs of the creation of departments and the hiring of senior and middle managers, will be a temporary cap, good professional management will consolidate a solid and effective pillar for any company.
The Financing Problem
Many think that the problem related to credits and forms of financing are only characteristic of underdeveloped and developing countries. But this is not the case, the problem is the same throughout the world, what makes the difference between developed and third world countries is the way to face them.
While it is true that in the US and European countries, there are more commercial supports and measures that protect and solve their SMEs, these programs, measures, credits, are not a significant response to their development.
There are authors who blame the government and its ineffective programs, as well as the promises of credits by commercial banks.
Ana María Rosas Peña, reporter for the Mexican newspaper “La Jornada”, decided to verify the real and current situation of SMEs with respect to government financing programs, and those that commercial banks usually announce:
Another position regarding the problem of SMEs is due to the misuse of capital making it dead capital.
The Institute for Liberty and Democracy carried out a study in several underdeveloped countries, and this was the result of Mexico: “6 million unregistered MSMEs which: produce approximately 35% of the Gross Domestic Product and employ 47% of the Economically Active Population "
The Peruvian economist Hernando de Soto, a possible future candidate for the Nobel Prize in Economics, establishes in his theoretical assumptions related to problems of access to credit, that these are largely due to the problem of <
Finally, whatever the position and the analyzes made, the situation is always the same resulting for all countries, to a greater or lesser extent, this was what I showed some years ago after analyzing the general advantages and disadvantages that all SMEs have in the world:
The reality shown above reveals that short-term credits destined to get out of trouble will not get us anywhere, they will only make our agony longer (in most cases).
Credit must be temporary for any company, and not a constant need for survival, the key is to know how to finance yourself:
Many entrepreneurs have forgotten the fundamental principle of every company <
Based on the Theory of Capital of the Classical School. Few people really understand and have as their primary objective the creation of active capital by the same capital. When a company learns to finance itself, it automatically controls, in a total and not partial way, the size and direction decisions in the company, both in the medium and long term.
Alternative Investments
The decisions about where to invest our money will be very simple, provided that risks, timing, and expected benefits are considered, among other variables. But the most important criterion will always be the same. How much are we going to earn? and the answer will be seen depending on the instrument and risk that we wish to adopt.
Said alternative investments that will help companies to finance themselves will be the following: Investment funds, venture capital and finally derivatives.
All are financial instruments that respond to the economic-financial principle <> therefore also the technical difficulties of their management will be elements of risk, but do not worry, risk is something that will always be present in our lives, it is simply the uncertainty that already exists that nobody knows the future, but that it is always important to consider and take into account what could happen if the scenarios were negative.
What I would call being a person <
The above quote makes mention of four instruments, but the real estate call is simply the acquisition of land, buildings and houses. Therefore, this topic will not be touched upon just focusing on financing instruments.
Investment funds
By Investment Fund we will understand by: “a collective investment company in which the participants receive greater profitability for the sum of their capital than what they would earn individually” (Zorrilla, December 2004, 3b).
According to its nature of profit distribution, we can distinguish 2 types of investment funds: income or distribution funds; that they are those in which the benefits of the institution are distributed periodically, via dividends to the participants, and the capitalization or growth funds; where the management company accumulates the income and reinvests the income in the assets of the Fund.
Another way to classify them is through their expiration time:
On the other hand, a fund is made up of several parts that are: The management company (a corporation that has as its sole and exclusive purpose, the administration and representation of the Fund, being also responsible to the participants for the good progress of the same), the entity depositary (it is where the deposits of the titles of the Fund and the treasury are made, generally it is a bank or a savings bank), and finally the participants (all the assets resulting from the collective investment called the Investment Fund, will be divided into participations of the same characteristics, without nominal value, which gives the owners a property right over said Fund).
The following types of funds are usually found in the market: guaranteed funds (offers the participant the possibility for the participant to obtain a guaranteed return), monetary funds and fixed income (they offset existing risks in the portfolios or to provide liquidity, leaving aside fixed-term funds), mixed funds (combination of the 2 aforementioned funds), domestic or national equity funds (pay an interest rate according to each country and its indicators), international equity funds (higher risk on stock markets) international, but these are usually quite profitable according to the macroeconomic analysis and international expectations) and finally, multi-managed profiled funds (international funds managed by various international entities, maximum profitability, lower risk, yes,are more expensive).
The latter use diversification techniques such as: <
The aforementioned (multi-management profiled funds) is the latest in Investment Funds in Spain.
Therefore we can conclude the following:
Venture Capital
Venture capital shall be understood as the financing system aimed especially at small and medium-sized enterprises (SMEs) "through which a company specialized in investments (Investment Company) <
Venture capital has been an essential element of financing innovative projects, mainly in the USA, as this is a new financing system for flourishing companies.
The so-called Receiving Company (the company to be financed) obtains as a benefit of this financing system a significantly lower price than traditional bank loans, the risk is assumed by the Investment Company and this risk is much greater than that usually assumed by banks.
According to Aranda (1989), there are four different stages in which SMEs can benefit from venture capital companies:
- Seed Financing or seed capital. Capital granted to an investor or entrepreneur to test the possibility of success of the project presented (mainly serves to enable the entrepreneur to prepare a specific project). Start-up Financing or demarrage capital. Financing for the transformation of an idea into a prototype (it is for companies that have not yet commercialized their products and need resources to start production - commercialization). Expansion Financing. When the company begins to generate profits, the granted capital is used to finance growth and expansion. Briding Financing. It is the phase in which the entrepreneur is in the process of attracting capital from different sources to venture capital companies such as, for example, the stock markets.
Cazorla (2000) emphasizes the existence of other risk capital entities that have launched new operations that specialize in reorientation >> (finance a change of direction in companies experiencing difficulties) and <
- Management Buy-out. The investor who acquires the company belongs to the management team of the acquired company. Management Buy-in. The investor who acquires the company are managers from outside the acquired company. Buy-in Management Buy-out. It is a mixture of the previous two. Leverage Employee Buy-out. It consists of a leveraged buyout transaction in which investors are employees of the acquired company.
Derivative Financial Instruments
Finally, we come to the financial instruments with the most difficult risk management and administration. But at the same time, they are state-of-the-art financing tools, safe and highly liquid.
Risk Management
The risk manager is the specialist in charge of identifying the risks that the company could run, as well as its measurement and monitoring. Where its functions will be: to guarantee the returns on the capital of the shareholders and to identify the alternatives where these returns will be reallocated.
There are several and different types of financial risks that any company may incur such as: market, liquidity, exchange, credit, operational, legal, interest rate, stock exchange, transfers, etc.
The risk manager goes through an analysis process that starts from: identifying the risk, evaluating it, selecting the methodology to manage it, implementation and finally reviewing what the results were.
The financial manager must consider the following points for his decision making (Zorrilla, November 2004):
- The type of risk to be hedged. The quantification of the risk according to its adopted position (terms, percentage representative of the risk in relation to its assets, etc.). Delimitation of the degree of coverage (type of coverage). Analysis of the available derivative financial instruments and assess its application in your company. Finally assess the coverage costs of each instrument, the effectiveness, speed and prices.
Risk management commonly makes use of three derivative instruments: futures, options and swaps. These in turn are usually exchange rates, on interest rates, stock indices, etc.
The Futures
The definition of a futures contract usually goes hand in hand with the definition of a forward contract:
The future contract is simply to sell a merchandise at a future price now and the merchandise will be delivered within a previously established term in the future.
Getting the businessman the financing now and not in the future.
The options
The option contract is an instrument, a little more complicated than the future one.
The options are of two types, the option to buy (call) and the option to sell (pull).
Swaps
Swap contracts are less used instruments, the most common in their use and number of operations by modern entrepreneurs, are usually futures and options.
Swaps are tools of an even more specific type (unlike futures and options that are usually on other financial assets), swaps are used to hedge credit risk, this type of contract is more used by financial institutions (banks, insurance companies, savings banks, etc.) of all sizes.
The swap "is a contract whereby both parties agree to exchange cash flows on a certain principal at regular intervals of time during a given period" (Zorrilla, July 7, 2004, 2b).
Even so, there are cases of swaps used on exchange rates, interest rates, stock or stock indices, etc.
Therefore, the contract called swap, is an instrument with wide possibilities of use and is not as specific as it is usually used, it is simply disinformation or that in some poorly developed stock markets, they do not offer it much.
Bibliography
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