Summary
In the present work, a presentation is made of the aspects that support the management of finances, as well as the role of the financier in the organization, based on the inherent functions of the activity derived from financial principles and the international financial environment.
introduction
The age-old question of what to do when a certain amount of resources is available: acquire or replace assets or save them for future periods and its opposite, such as obtaining resources when new assets are required, remains fully valid and constitutes the essence of managing finances, both at the business level and in the domestic economy.
However, although throughout history, the monetary systems used have conditioned their impact, at all times the issue of managing finances and the financial health of the company has been a focal point in the elaboration of These, since the owners demand a return on the invested capital to maintain it, at the same time that a favorable Income Statement is not enough for new investors to participate with their assets in it, but it requires a solid image in the market, at the same time. which contributes with special connotation the historical financial performance.
In response to the double destination of finance activity, various tools have emerged to facilitate evaluation and analysis, which are essential in the current context, where the accelerated development of communications has contributed to reinforcing the participation of financial markets in business activity. and the mobility of capital is very high.
Taking into account the aforementioned in this work, a presentation is made of the aspects that support the management of finances, as well as the role of the financier in the organization, based on the inherent functions of the activity derived from the financial principles and of the international financial environment.
II. fundamental concepts
Convertibility: It is a necessity and convenience for the development of international trade. Inverted currencies are barriers to trade as potential customers are forced to obtain import licenses or central bank approval to buy goods from countries whose currencies are scarce.
Opportunity cost. Profitability of the capital market to which he renounces to invest in another alternative.
Badge. Currency of other countries that require individuals, companies, institutions to buy goods and services from other countries.
Uncertainty. It is a particular case of risk that occurs when there is no historical background of the probabilities of occurrence of events or situations and therefore an objective probability of occurrence cannot be determined.
Risk. It is a disadvantageous condition whose trend is known, where the difficulties are and what the benefit is, allowing the determination of a historical probability.
Financial risk. It is the risk of not being in a position to cover financial costs and is associated with the growth of the company's fixed financial costs, in exchange for which a higher increase than predicted by the linear model in earnings per share is obtained.
Operational risk. It is the risk of not being able to cover operating costs and is associated with the increase in the company's Fixed Costs, in exchange for which earnings before interest and taxes experience an increase higher than that predicted by the linear model with an increase in sales.
Exchange rate, exchange rate, price, currency or monetary parity. Quantitative ratio of a country's currency expressed in foreign currency. It arises from the need to relate some currencies with others, in the absence of a single currency that perfectly fulfills the function of world money and is the quantitative relationship of a country's currency expressed in foreign currency, that is, the value of the currency of a country reflected in terms of a certain amount of another foreign currency. It can be considered as the price at which the currency is bought and sold. In the United States and England it is defined backwards. The exchange rate can be considered as the price at which the currency to be bought and sold is acquired.
Convertible currency unit. National currency with which other currencies can be acquired in the money markets where the currencies are offered and demanded.
III. Latest International Monetary Systems
III.1. Gold Standard Monetary System
The gold standard system was developed in the mid-19th century to facilitate exchanges between the industrialized countries of Europe and North America, based on:
- a fixed exchange system, in which each currency is defined by its weight in gold. The exchange rates are determined by the ratio of the gold values of each of the currencies, which, in theory, guaranteed a stability of exchange rates and automatic balance of payments equilibrium, thanks to the free movement of gold between countries and the convertibility of national currencies into gold. Interest rates only fluctuated at the points of entry and exit of gold, called gold dots.
In this scheme, if a country imported more goods than it had exported, the demand for foreign exchange was greater than the supply, and a part of the agents that required to make payments abroad were unable to obtain the foreign currency they needed, by which they converted their national currency into gold and supplied the latter as payment for their imports. In this way, deficit countries lost gold and countries with surpluses gained it.
The international movements of metal mentioned above caused a decrease in the supply of the currency of the deficit country and an increase in that of the countries with surpluses, which according to the quantitative theory of the currency, led to variations in domestic prices: reduction in countries with deficits and an increase in those with a surplus, making exports from deficit countries cheaper than those from countries with surpluses.
This system collapsed with World War I, when excessive currency manufacturing and the consequent development of inflation made convertibility to gold impossible, which was suspended in 1914.
During the 1920s, a new stable international monetary system was established as a result of the Genoa Conference (1922), by which it was established that gold was no longer defined as the main regulatory instrument in transactions between countries, and was replaced for the pound sterling and the dollar, convertible into gold. However, since the beginning of the economic crisis, whose beginning was marked by the crash of 1929, many countries abandoned the convertibility of their currency into gold, thus precipitating the end of the gold standard stage.
III.2. Monetary system agreed at Bretton Wood (Dollar Standard)
After the turbulent period of the 1930s and the end of World War II, the main countries joined the Bretton Woods System in July 1944, in which the nations set their exchange rates with respect to gold and the dollar. When the exchange rates deviated considerably from the established parities against the dollar, the official parities were adjusted and whose main characteristics are:
- The dollar is assigned the role of the main international reserve asset, based on the dominance of the United States in international trade and finance, as well as the possession of the world's largest reserves of monetary gold.The dollar is the only officially convertible capitalist currency with respect to gold, according to the official price that is set at 35 Troy ounces, which strengthens the global role of the United States. Creation of the International Monetary Fund (IMF) as an institutional basis to establish, control and check the set of Mechanisms created. The official exchange rates of the other currencies with respect to the dollar are established, using as a common base, the gold content of the same, which is obtained from the purchasing power in terms of goods and services.Stable exchange rates in relation to the dollar are instituted, allowing only a ± 1% margin of oscillation of the official rate. The monetary authorities are obliged to intervene when the price of the currency approaches any of the limits. The modification of the exchange rates is only allowed in case of fundamental imbalances.
For 25 years, the relative stability of the Bretton Woods fixed parity system allowed for considerable growth in the world economy and trade, but in 1973 the last vestiges of that system disappeared, giving way to the prevailing system of floating or floating exchange rates. current, which has been called non-system.
Under the new conditions, gold no longer plays the key role it previously had and is increasingly a simple commodity, the price of which is determined in the same way as that of a company's corn, footwear, or stock.
When the Bretton Woods System broke in 1973, the main countries held numerous meetings to reach an agreement on the new system that should replace the previous one. After many discussions, the idea of the United States, Germany and other nations prevailed of not returning to the system of fixed exchange rates that had characterized the previous one. Thus, in fact, without reaching a general agreement, the world economy implemented the system of directed fluctuating rates.
Currently, the industrialized countries do not maintain fixed parities, they allow their currencies to fluctuate, but they intervene whenever the markets make the exchange rates move away from the level considered adequate. This system, based on the market but with state intervention, is called directed fluctuation.
III.3. Aspects derived from the Monetary Systems
III.3.1. The exchange rate
In the execution of commercial and financial operations abroad, every country must consider the link between the national and the foreign monetary unit and is of utmost importance for the accounting of external finances and for calculating the effectiveness in economic relations with the rest of the world and its evolution in the most recent Monetary Systems can be summarized as described below.
In the gold standard monetary system, the calculation of the parity of the currencies was carried out on the basis of their gold content (known as gold parity), which was established based on the amount of reserves of that metal in the issuing country, while fluctuations in prices were limited by the price of gold. When gold, both in bullion and in currency, functions as the center of the monetary system, there is a strong tendency for the balance of nations to balance, which is automatically reached in the long term, is stable and does not require tariffs or From no other state intervention and given the absence of restrictions on the export and import of gold, any country could settle its debts abroad with this or through the use of foreign currency.
In short, the explanation is: a country A (let's say the USA) in its relations with a country B (England) is supposed to have a deficit balance of payment, and therefore lose gold. Due to this loss of gold, the money supply decreases, thus lowering the prices of goods and services in the US. Simultaneously in England, which maintains a surplus (is receiving gold) the prices of goods and services increase due to the increase in the money supply.
US prices are now cheaper for the English and stimulate American exports, in parallel, and for the same reason, American imports from England decrease. As national prices in England are higher, this slows down exports and stimulates the importation of North American products. This restores the balance of international trade and finance to new relative prices that keep international trade and loans in balance without any net flow of gold.
Unlike its predecessor in the Monetary System agreed in Bretton Woods, the procedure for establishing exchange rates is the purchasing power proposed by Gustavo Cassel, according to which the exchange rate between two currencies is equal to the relationship between the purchasing power that currencies have within the respective economies, which is based on:
- The purchasing power of a currency is in inverse relation to the price level. As the purchasing power of the currency increases, so does its demand. This increase in demand improves the exchange rate of that currency to the detriment of the rest. Therefore, it can be concluded that the exchange rate of the currency decreases or increases according to its trade balance with the rest of the world, which in turn is conditioned by the price differential between the countries. This criterion, despite its fairness in relating external change to levels of internal costs and productivity, is criticizable in several aspects, among which the following stand out: Considering other factors unchanged, the exchange rate depends on the level of exports and imports from a country,which are based on the degree of competitiveness of its economy. However, the currencies are not demanded only for commercial transactions, but are also used for capital transfers: foreign exchange operations, the payment of external debt, remittance of profits and interests, which are not included in the analysis.
However, it is important to point out that in the conditions of monopolistic competition important price changes occur with a view to guaranteeing maximum profit levels regardless of the real level of cost and competitiveness, as well as that the application of trade policy instruments for competitive purposes offer advantages in the location of their products regardless of the real price, a high tariff is equivalent to a price increase, from the point of view of the importer, at the same time that the amount of exports can be reduced by other phenomena such as: poor harvest, depletion of natural resources, etc.
When the inconvertibility of the dollar became irreversible in 1971, the fluctuation margins of the currencies widened and their free movement was practically institutionalized according to supply and demand.
From all the foregoing, it can be seen that the strength of a currency lies, ultimately, in its productive potential, in the strength of its commercial position and in internal stability, in correspondence with which there are currently the two exchange rates between the national and foreign currency described below:
Permanent. It works like any price mechanism that stays fixed. The Central Bank has to face excesses or defects to maintain the exchange rate.
Flexible or fluctuating. The exchange rate is dependent on supply and demand and two modalities can be identified:
- Clean: Does not exist in practice. The Central Bank does not intervene and the exchange rate is determined by the relationship between supply and demand. Dirty or intervened (1973). The Central Bank eventually intervenes as buyer or seller, to try to keep the exchange rate within certain limits.
Quantitatively, the two modalities of the current exchange rate are expressed through rates, among which the following can be pointed out:
- Purchase rate. It is the one by which the bank buys the foreign currency and delivers the national currency to the claimants. Sales rate. It is the rate by which the currency is sold and the national currency is acquired.
Note that between the two previous rates there is a small difference that allows the institution to obtain a commission for the exchange service. The prevailing criterion is to buy the currency cheaply and sell it expensive.
- Direct rate. It is the most widely used internationally and it expresses the foreign currency as a unit. Indirect rate. It is calculated as the amount of foreign currency that is delivered by each unit of national currency. Multiple or differentiated exchange rate. It is present when the State stipulates various rates at the same time, taking into account the reason for requesting a currency exchange and pursues the objective of making certain imports more expensive and thus discouraging them, predetermining the geographical structure of foreign trade, achieving balance in the balance of payments and subsidize exports. cross exchange rate. This exchange rate is established based on the respective rates with a common third country. Spot exchange rate (spot). It is the rate that is in force today in the exchange markets.Future exchange rate (forward). It is the rate that governs the purchase and sale operations of currencies that were agreed upon today, but with a future settlement term and is determined according to the future forecasts of the currency.
Therefore, the movement of the above rates expresses the variations in the exchange rate, which can have four fundamental aspects:
- Appreciation. When one currency increases its purchasing power against another, due to an increase in its demand. It is the inverse of the appreciation, that is, the currency deteriorates its purchasing power against another because of an increase in its offer. In mathematical terms the same thing happens as the appreciation, but the cause is different, since this occurs when the state by decree so decides. It is important to point out that the increase in demand in the exchange markets does not necessarily cause a currency to be revalued. In the framework of a market economy, when revaluing a currency, it happens that: the country's exports are more expensive and therefore decrease; greater stability in the price level can be achieved and imports are encouraged. Devaluation.It takes place when the State lowers the exchange rate of its currency. The effect is the same as that of depreciation, but the difference is that it does not occur automatically due to fluctuations in supply and demand. It aims to improve the Balance of Payments, since they make exports cheaper and imports more expensive. It is important to point out that: it can cause a considerable rise in prices and wages due to the increase in the cost of imports, nullifying the competitive effect; other countries may take similar measures or retaliate with the nations that practice it; currency devaluation is a decision that is made in secret and applied at a certain time and has been used as an instrument to expand production and increase employment.The effect is the same as that of depreciation, but the difference is that it does not occur automatically due to fluctuations in supply and demand. It aims to improve the Balance of Payments, since they make exports cheaper and imports more expensive. It is important to point out that: it can cause a considerable rise in prices and wages due to the increase in the cost of imports, nullifying the competitive effect; other countries may take similar measures or retaliate with the nations that practice it; currency devaluation is a decision that is made in secret and applied at a certain time and has been used as an instrument to expand production and increase employment.The effect is the same as that of depreciation, but the difference is that it does not occur automatically due to fluctuations in supply and demand. It aims to improve the Balance of Payments, since they make exports cheaper and imports more expensive. It is important to point out that: it can cause a considerable rise in prices and wages due to the increase in the cost of imports, nullifying the competitive effect; other countries may take similar measures or retaliate with the nations that practice it; currency devaluation is a decision that is made in secret and applied at a certain time and has been used as an instrument to expand production and increase employment.
The factors that influence the supply and demand of the currencies are:
- Balance of Payments Status. Linked to the situation of the Balance of Payments is the state of the International Monetary Reserves, which are favored with a surplus which improves the external image of the country and consequently the currency exchange rate. Inflation. A high inflation rate implies an increase in prices and costs, reducing the country's competitiveness, thereby depressing the exchange rate. Monetary offer. The increase in the money supply that leads to excess liquidity in the hands of the public causes a demand for domestic and foreign goods and services, as well as financial assets, which has an impact on the Balance of Payments. Interest rate.If a country raises the interest rate above the rest of the countries, it produces an incentive for the influx of foreign capital seeking a higher level of profitability. The currency will be demanded by others to be deposited in national banks and its exchange rate increases. The obstacle is in the recessive effect that originates the elevation of the interests since it makes the credit more expensive to finance investments. Expectations. They originate a strong speculative movement before certain real events or that are expected to happen in the short term. Internal situation of the country. Changes in the political and economic situation of the country are reflected in the attitude of national and foreign investors, according to their perception of the security of investments in the productive or financial sphere.Cyclical situation of the economy. When a nation is in economic crisis, confidence by foreign investors is undermined, who will refrain from making investments and moving capital for that country, and may even try to withdraw capital, which conditions the decrease in the rate exchange. During the boom phase the situation is reverse, as it is stimulating for the massive inflow of capital, which will influence the appreciation of the currency. International speculation. If there is a strong enough speculative movement, it can cause variations in the exchange rate both downward and upward, depending on the dominant orientation of the currency market in relation to a currency. If bullish sentiment reigns, traders buy to sell more expensive later,the exchange rate tends to appreciate as a result of the increase in demand caused by the speculative movement.
Finally, it should be noted that the exchange rate as an instrument of economic policy is a very powerful instrument, because its variations have an effect not only within the country, but also in the countries with which it trades, at the same time that it has a strong component. emotional and its decreases (devaluation or depreciation) can cause loss of confidence in the national currency, which means that economic agents try to get rid of it in exchange for foreign currency, which in the limit makes the country's monetary policy become absolutely ineffective and become dependent on the foreign currency issuing country (the country is not the owner of the currency used in transactions).
III.3.2. Inflation
Inflation is usually defined as a persistent and appreciable rise in general or average price levels, as an expression of macroeconomic imbalance normally associated with development (expansion) processes and its presence highlights the conflict that designers face. economic policies, by trying to reconcile the three most important objectives:
- Monetary stability. It responds to the mechanistic concern of achieving general equilibrium and the objective is to control the money supply above all things. Full employment. After the crisis of 1933, economic policies were aimed at achieving full employment. Economic development. Currently, it is becoming increasingly important to establish economic development conceived as a more complete development of the human being and with the least possible ecological damage. There is talk of Human Development Indices and more recently of Social Progress Indices. There is also talk of changing the ways of measuring development.
In practice, Price Inflation is reflected by the rate of percentage increase in prices and contains:
- Consumer Price Index: describes the movement of prices of a basket of media (national and imported). Wholesale Price Index: measures a basket of products of greater weight that also has intermediate goods, describes the change in prices in the First most important commercial transaction GDP or GNP deflector: contains all kinds of national products
However, the relationship between money growth and inflation is not exact since non-monetary shocks that alter the level of production can alter the interest rate without changing the rate of money growth and changes in rates. Interest rates alter the alternative cost of having money and therefore affect the desired ratio of income to money.
These two reasons explain the short-term instability of the relationship between money and inflation, since an increase in the growth rate of the money supply causes an increase in inflation and production, but inflation increases less than growth rate of money and an increase in the expected rate of inflation causes an increase in inflation and a decrease in production.
Although all classification of a phenomenon is conventional and always involves the risk of oversimplifying things, despite which they are widely used since they allow organizing analyzes based on unified criteria, for their study, inflations are usually classified as follows:
a) Inflation according to the rate of growth of prices:
- Moderate: Price growth rate is less than 10% per year Hyperinflation: Price growth rate is above 50% per month (for one year), which is equivalent to approximately 12,900% per year. it is not moderate or hyperinflation.
b) Inflations according to their origins or causes:
- Demand: there is an increase in demand due to an increase in the money supply due to which there is an increase in the demand for goods and services, which normally takes place due to an expansionary policy of public spending. The equilibrium is restored by raising prices.Costs: it is supposed to have its origin in the push of costs (rise in costs) that translates into a rise in prices, which in turn leads to an increase in wages that increase the cost and the prices, presenting a cycle of spiraling cost increase made up of: increase in wages, costs and rising prices. There are three trends to explain the cause of this type of inflation: those who accuse the union, stating that the increase in costs is due to the increase in wages; those who pose,that is due to employers, who increase prices and that the increase in wages is a replica of the former and finally those who argue that the price of labor does not depend on supply and demand, are administered prices. In conclusion, there are three agents that can contribute to triggering cost inflation: government, union and businessmen. Structural: Starting in 1960, a group of ECLAC economists began to carry out work on the development of Latin America, which since WWII faces close or hyperinflation inflations. The approach of these economists is that inflation in Latin America could not be explained only by demand and / or costs, but lies in the economic structure. This approach is the first explanation of A's problems.Latin from a Latin American perspective and does not imply an abandonment that poor administrations of fiscal and monetary instruments lead to inflationary processes (instability in the exchange rate). Structuralists argue that in most of Latin America, monetary policy is trapped in a practically insoluble dilemma: on the one hand, it is necessary to maintain a certain fiscal deficit so that the government, lacking stable income, can finance an expansion of productive capacities. Monetary policy has to be necessarily expansive. The discussion between structuralists and monetarists continued in Latin America until 1980-85 when inflation went from 18-20% to levels in some cases of hyperinflation that cannot be explained by any of the previous types. Persistent or inertial inflation:For the analysis of high inflation processes, the emphasis is placed on distinguishing the basic pressures (causes) from the propagation factors that maintain inflation even after the causes that motivated it have ceased. Basic pressures: they give rise to inflationary processes by anyone of the previous causes and which have as a common element: budget deficit and inadequate management of fiscal and monetary policy. The most important consequences of inflation are the following: Redistributes income and wealth among the different classes or social groups. The distortion of the relative prices of the different goods, services and factors of production, modifies the allocation of resources and influences economic efficiency. Wealth in terms of liquidity decreases, increases the preference for specific goods.Not all prices vary in the same proportion, this makes the price variation relative. As a consequence of the relative variation in prices, goods are exchanged among themselves, without the price having to do with it. The population groups that depend on a salary, retirement or retirement are the most affected.
IV. Financial Principles
IV.1. First Principle
The First Financial Principle states that: "A monetary unit of today is worth more than a monetary unit of tomorrow" and is based on two following aspects:
- If the monetary units are invested in any activity for profit, an interest rate is obtained as payment to the holder of the money as payment for postponing its use in the present, which increases the equity contributed at the beginning of the operation. of the inflationary process, the purchasing power of the monetary units decreases, as a trend, over time.
Mathematically this principle can be expressed through the Present Value (VA), defined as the sum with which an operation is settled on the evaluation or expiration date, given by the following expression, in which the symbols have the meaning indicated then:
n: number of time periods that the operation lasts, which is generally expressed in years.
Ct: expected collection in time period t.
rt: discount rate applicable in period t, which is nothing other than the compensation required by the investor for a deferred payment, which is why it is also called the rate of return, minimum rate or opportunity cost.
The impact and practical utility of the previous definition in the decision-making of management of the company's finances can be seen in the analysis of the Tacaño-Prodigal case, which is presented below.
In every company, at the beginning of each accounting period the availability of financial assets (C0) and a projection of its amount for the following period (C1) are known with certainty, as illustrated in figure 1.a.
In financial terms, the situation presented shows two possible extreme cases of administration of these resources, which are shown in Figure 1.b and are characterized by:
Borrow the updated magnitude of the projected financial flow for the next period (1), which corresponds to the attitude of the prodigal. In this case, the total financial assets available (Ct0) for consumption in the current period (0), is given
Invest all financial assets available in the present to increase it by magnitude 1 + r in the following period (1), which corresponds to the stingy approach. In this case, the total of financial assets (Ct1) available at the end of the next period is given by
From the above, it is evident that the extreme financial behavior described above can be characterized through the two points that are related in Table 1.
Now, geometrically two points extreme behavior of the stingy and the prodigal determine a line, which in the plane can be expressed mathematically through the equation:, where m represents the slope and b the intercept with the Y axis (um1).
From the two known points, the slope can be determined as follows, as long as the Y-axis intercept is
Substituting the previous results in the expression
Note that the previous graph represents the particular case of a financial scenario, but it can be used in combination to carry out this type of analysis, knowing that the magnitudes susceptible to variation in this case are: the discount rate (r) and the projection expected in the next period (C1), since the availability of financial resources in the present is known, as illustrated separately for each of these magnitudes in Figures 1.d and 1.e
From all the above it is evident that a characteristic element of financial activity is the dependence on the value of money over time, which leads to the following statements:
- The strategy for managing the company's finances is based on the projection of the behavior of financial flows over time. In correspondence with the above, two possible aspects arise: penalties for late payment payments and its opposite, the Discount Operation understood as: "the liquidation of a debt or make effective the commercial document that represents it, by means of the payment of its Present Value in a determined date of evaluation", which represents a bonus from the lender to the borrower, for allowing him dispose of the resources in advance of the agreed date.
Therefore, in correspondence with the analyzed aspects, it can be established that the mission of the Finance area is "to efficiently transfer the scarce resources of the company over time, which includes valuation, selection of sources and financing methods".
IV.2. Second Principle
The Second Financial Principle establishes that: "A safe monetary unit is worth more than one with risk", which is based on the fact that most investors avoid risk whenever they can, without sacrificing profitability.
However, the risk is inherent in all human activity, from which the company is not exempt. Giving up risk is synonymous with doing nothing and doing nothing is suicide from all points of view, therefore it is not possible to give up your presence. So, what to do?.
Considering the universal nature of risk, the answer to the previous question can be obtained from the following example obtained from everyday life: the rational behavior of a person of the third age who is not physically disabled.
A rational person belonging to the selected age group, for the purposes of this analysis, can choose between two behaviors:
- Risk free: stay at home, forgoing the benefits of the outside world in exchange for security. As a result, his life becomes more monotonous, he loses interest and little by little he consumes himself. With risk: he carries out activities outside his home, which brings him the benefits of the exchange with the world, makes his life more full, but has associated various risks such as obstacles on the road, crossing of avenues, etc.
As you can see, the choice without risk has an element of destruction associated with the protection that the family environment provides, while the other alternative provides pleasure, a full life, in exchange for possible accidents.
Based on the assumption of this person's rationality, it seems that the best option is to sacrifice quality of life for the sake of protection, however, not a few choose the risk option based on empirically implementing a strategy that minimizes the dangers Potential: transfer the risk, present in such actions requesting help from other people to cross a road.
As can be seen, in the previous example the subject (elderly) has two rational options from which to choose, even when one of them decreases their quality of life and gradually reduces their condition of being social by decreasing their exchange with the abroad, but in business terms it is not possible to eliminate the risk because the owners, whether private or state, demand that their profits, at least, remain at the level reached, which requires the implementation of actions that guarantee this result in successive periods, whereby the variant of transferring risk becomes an everyday financial tool.
It is possible to include other examples from daily life where it can be seen that every act that is carried out has an associated risk: lighting a gas stove, etc., but in all cases the conclusion that can be drawn is the same: the important thing is not the risk or uncertainty associated with a decision, but those that are not considered or anticipated and, therefore, transferring the risk becomes a systematic tool.
At this point it is necessary to make an observation about the example used: the validity of its generality, that is, its application in the world of finance, which is based on an empirically established Principle of Economy that expresses: what does not work Nor will family level do it on a higher scale.
Before expanding the financier's work horizon, it is convenient to make the following two reflections:
- So important and universal is the activity of transferring risk for the business world, which gave rise to a new business: Insurance, in which a company assumes the risk transferred from many entities and as this does not materialize in 100% of the In these cases, it obtains benefits in exchange for which the insured organizations receive compensations that allow them to recover from risks that become realities. What is important is not the presence of risk or uncertainty, but rather that some of these are not adequately considered in the Financial Projection.
In correspondence with everything exposed in this section, the work content of the financial area established above should be transformed into the following: «transfer in time with the least possible risk and in the most efficient way the scarce resources of the company, which includes the valuation, selection of sources and methods of financing as well as the protection of these ».
V. The Financier
Conceptually, everyone who works in the sphere of finance, with special emphasis on its manager, should act as an intermediary between the operations of the company and the capital market, based on the analysis of the Treasury flow, whether real or projected and whose components are shown in figure 2.
The aforementioned flow can be expressed mathematically through the Financial Balance Equation, which includes the postulate that profits correspond to the difference between income and expenses.
UTI = IAF + IVE GOP PIN INV
Note that the detailed development of the previous expression is nothing other than the Income Statement, therefore it can be affirmed that the Equation of the Financial Balance is to the Income Statement what the Fundamental Equation of the Accounting to the Balance Sheet.
All of the above shows that the financier must face the following two fundamental problems:
- How much to invest and in what ?. Answer: investment decision. How to get funds for investments? Answer: financing decision.
From the above it follows that you must understand how markets act, which is to say "understand how assets are valued over time."
SAW. Final thoughts
The analysis carried out throughout the chapter shows the impact of the International Monetary System in the treatment of business finances, which ranges from a transnational company to a family with limited income, with special emphasis on the capital market, whose dynamics and mobility it can jeopardize the stability not only of a large company, but of a country.
From the aforementioned, the universal nature of this result is evident, which goes beyond the issue of finance as it is applicable to all economic aspects of life, be it business, family or national, masterfully included in the following statement: "what does not work at the family level, it will not work in the company either, much less in the country ”.
Another factor whose role is decisive in financial matters is Macroeconomic policies, where the magnitudes of interest and exchange rates, as well as inflation have the most prominent role, since they modify the purchasing power of the company and its clients, as well as the availability of resources in the economic agents, from which the company obtains its income and financing to implement its consolidation and expansion strategies.
On the other hand, as a result of the decision of when and how to use the available financial resources vary from one rational subject to another, a mechanism of wealth transfer arises and develops in society over time: the capital market, in its multiple forms, in which "interest is the compensation that the holder of financial resources receives for deferring their consumption and assuming the risk of losing these assets by lending them", taking into account the magnitude and forecast of the interest rate used in operations, it is a topic of vital importance for financial evaluations and the variable time becomes a magnitude with financial relevance, as the phrase: "time is money".
All that is exposed in this chapter highlights the relevant role of finance and the personnel in charge of this activity in the company, since they are in charge of establishing the financial strategies and policies that lead the entity from the current Income Statement to the projected one, in line with which the mission of the Finance area is «to transfer in time with the least possible risk and in the most efficient way the scarce resources of the company, which includes the valuation, selection of sources and methods of financing as well as their protection ».
Therefore, to achieve the aforementioned objective, they are obliged to choose the best alternatives for transferring scarce resources over time, based on an adequate balance between: risk, uncertainty and financial benefits of each of the current financial flows and the predicted future behavior, which turns him into an investigator with the mission included in the phrase of the Latin poet Horacio «not to get smoke out of the light, but out of the smoke, light».
In their favor, the financier currently has various tools, despite which it is not idle to point out that knowledge of these facilitates the identification and processing of relevant information for financial purposes, but leaves the decision among the various viable options, to the finance specialist, for which not knowing the tools is a weakness, but mastering them is not an opportunity, but a necessity so that the decision making is carried out in a scientifically grounded way.
VII. Bibliography
- White, AM; Domínguez, JC: «Elements of Financial Mathematics»; ENPES Editorial; Cuba; 1989.García, J.: Accounting of Costs »; McGraw Hill, 1999. González, B.: «The foundations of business finance»; Editorial Academia, Havana, Cuba, 2001 23,400 million dollars in 1943 Metal weighing system used in the United States and England, in which the ounce of gold contains 31.103481 grams
