It does not matter how large the company is, nor the activity to which it is dedicated, or how old it is, it is always subject to falling into a situation of financial imbalance marked by insolvency and lack of liquidity, all of which is a product in many cases of bad financial policies, but in most of the opportunities generated by serious strategic errors or the accumulation of errors in financial, productive, commercial and administrative matters.
The current situation prevailing in the world characterized by very strong global competition, sudden and sudden economic-financial changes that generate strong changes in the price of currencies and interest rates, significant variations in the prices of raw materials, and continuous changes in the tastes and preferences of consumers, results in companies having to constantly monitor their financial situation. Precisely the objective of our work is to analyze the Financial Situation of Company X in the first quarter of 2006 and 2007 starting from the ratio pyramids and with the analysis of the Management of Working Capital,the analysis of indebtedness and economic and financial profitability to demonstrate where the main problems lie in order to draw up strategies aimed at solving them.
For all this, it is very important to carry out the Economic analysis in a systematic and periodic way, as an instrument to measure the activity of the company, the behavior of labor productivity, the efficiency in the use of assets, the fulfillment of obligations. contracted by the company in the development of its activity.
financial analysisTo carry out our work, it was necessary to use highly useful techniques and tools to obtain and process information such as: document review, direct observation, interviews, surveys, teamwork, brainstorming, Microsoft Excel, Microsoft Word, etc.
Theoretical fundament.
When the cause (s) that gave rise to the financial problems are known, it is necessary to define the tools, methods or systems to be implemented, then proceeding to select the ones that best suit the possibilities, needs and restrictions that exist. Once these steps have been carried out, the implementation of these measures must be planned, then proceeding to their execution, evaluating the results obtained in such a way as to make the necessary corrections.
The first thing to do is have the financial indicators such as profitability, liquidity, solvency, indebtedness, inventory turnover, speed of income, collection and payment terms, and total benefits. Application of analysis of expenses and income by total and sectors. Index evolution.
Let's see what this initial analysis would look like. Knowing the results tables and their evolution over time is essential to know how these expenses and income are made up, and to see which ones have deteriorated over time. The importance of each expense and its composition is of importance, so is the evolution of their respective indexes to recognize the relationship they have in relation to sales, but also the percentage that each expense represents of sales, as well as expenses by category, concept and total.
It is so important to know the total benefits, such as by activity, and products or services marketed, in such a way that by accumulating the benefits by product or item from highest to lowest we will be able to know which are those that instead of adding are subtracting from the total benefit and which add a lower benefit than expected or required.
The solvency and debt indicators, such as current and dry liquidity, give us a clear sample of our ability to pay in the short and medium term.
The inventory turnover shows the excesses of the same and the financial costs that this originates, also if we analyze this analysis by item or product we will be able to detect those that generate the greatest financial and operating costs.
The analysis of benefits and rotations by products can also be carried out by branch in the event that this occurs, and even apply the same type of analysis by profit and rotation by each branch. In this way we will know that branches add or subtract to general benefits, and if there is the possibility of improving the performance of branches by eliminating certain product or service lines.
The study of unpaid and delinquent debts, as well as that of unpaid credits and their level of arrears allow to determine the total amount of them, the relative importance of creditors and debtors based on both the amount and the risks involved in arrears or non-payment.
On the other hand, it is necessary to have the indicators and ratios related to: total productivity or by product line, levels of customer and consumer satisfaction, both in relation to the company and its products or services. The levels of turnover or loyalty of customers and employees. The levels of failures and malfunctions by products and processes.
And finally, to have clear and precise information on the evolution of indicators concerning the evolution of the market, of the prices of raw materials and various inputs, of interest rates, of consumption levels, of the exchange rate, of the market share of the different competitors, the change in tastes, change in legal matters and any significant change in the relationship with suppliers / customers / competitors / substitutes and changes in barriers to entry and exit that may alter relationships.
Once all this information is available, we can correlate the deterioration over time of the financial indicators in relation to the changes that have occurred in the operational and functional matters of the company, as well as in relation to the changes that have taken place and are taking place in the environment.
Knowing this will not only allow us to know the causes of financial problems, but also to assess the different levels of risks and the possibilities of salvage, and therefore to know what actions should be taken and in what way.
In this way, for example, we could know that sales are falling due to falls in satisfaction levels caused by lack of on-time delivery, billing errors and poor after-sales services. Furthermore, they may be related to an increase in staff turnover and considerable reductions in process productivity levels. To this should be added the absence of benefits caused by the excess costs associated with non-value-added activities.
Definition of financial analysis:
The financial analysis allows to interpret the financial facts based on a set of techniques that lead to decision-making, in addition to studying the financing and investment capacity of a company from the financial statements.
For the analysis and interpretation of the Financial Statements we will use the financial ratios, which allow a quick diagnosis of the entity's economic and financial situation. The analysis through ratios consists of determining the different dependency relationships that exist by comparing the figures of two or more concepts that make up the content of the financial statements.
A single reason generally does not offer the necessary information to know how the entity works, taking into account this a group of reasons will be used that will pre-issue determine the financial situation of the company.
These reasons are divided into four groups:
(See PDF)
Working Capital:
The use of net working capital in the use of funds is based on the idea that available current assets, which by definition can be converted into cash in a short period, can also be used to pay current debts or obligations, such and as is usually done with cash.
The reason for the use of net working capital (and other liquidity ratios) to assess the liquidity of the company is found in the idea that the higher the margin in which the assets of a company cover its short-term obligations term (short-term liabilities), the more payment capacity you will generate to pay your debts when they are due. This expectation is based on the belief that current assets are sources of cash inflows, while liabilities are sources of cash disbursement. In most companies, inflows or outflows and cash outflows or outflows are not synchronized; therefore, it is necessary to have a certain level of net working capital. Cash outflows resulting from short-term liabilities are somewhat unpredictable,the same predictability applies to accumulated documents and liabilities payable. The more predictable the cash inflows, the less net working capital a company will require. Companies with more uncertain cash inflows must maintain adequate current asset levels to cover short-term liabilities. Since most companies cannot match money receipts with money disbursements, sources of income that exceed disbursements are necessary.Since most companies cannot match money receipts with money disbursements, sources of income that exceed disbursements are necessary.Since most companies cannot match money receipts with money disbursements, sources of income that exceed disbursements are necessary.
Return on Capital:
Average labor and asset productivity data for different types of branches within each industry serve as the basis for estimating differences in return on capital between firms. Using the observed levels of average productivity of labor and capital in different types of companies as well as the levels observed in the remuneration of the other factors (labor), it is possible to obtain as residual the differences in gross returns to capital between different branches within from the same sector.
Financial Analysis Company X
To carry out an analysis of the Financial Statements it is necessary to evaluate the data they contain, in order to reveal the comparative and relative significance of the information represented.
This study includes ratio analysis, comparative analysis, percentage analysis, and examination of relative data. It is difficult to say that one of these is more useful than the other, because each one in the situations facing the analysis is different.
Net Working Capital:
| Years
(I Trimester) |
U / M | Current Assets | Current Liabilities | Outcome |
|
2007 |
MP |
12781.9 |
13182.1 |
(400.2) |
|
2006 |
MP |
11422.6 |
12166.8 |
(744.2) |
Due to the aforementioned, working capital must be positive, so it is striking that when determining this liquidity measure the result is negative, making it clear that it is unfavorable, which means that short-term debts and obligations are greater than the payment capacity of the company. In 2006, current liabilities are greater than current assets by 744.2 MP and in 2007, despite an increase in assets of 1,359.3 MP and liabilities of 1,015.3 MP, the current liabilities are still greater than current liabilities in 400.2 MP. However, it is necessary to analyze its quality as a measure to assess the company's ability to pay its obligations, the following should be considered:
- The nature of the current assets that make up working capital The time required to convert these assets into cash.
The following table shows an unfavorable change in the composition of the company's working capital during 2007, cash decreased by 1,732.0 MP compared to 2006, representing 23% of total assets for 2006 and 7% for 2007, while the inventory being a less liquid resource increases by 911.7 MP, representing 45% of the total assets for 2006 and 47% for 2007, this being an unfavorable situation for working capital. Regarding current liabilities, the most significant items are loans received, representing 26% of total current liabilities for 2006 and 30% for 2007, increasing by 1,369.8 MP with respect to 2006 and provision for general repairs 37 % for 2006 and 20% for 2007 despite having decreased in 1792.2 MP.
Analysis of Working Capital.
I Quarter 2006 - I Quarter 2007
|
Current assets |
2007 |
2006 |
Increase o Decrease (MP) |
% Increase or Decrease |
2007% Integral |
2006% Integral |
| Cash | 888.7 | 2620.7 | (1732.0) | 66 | 7 | 2. 3 |
| Accounts receivable from CP | 4525.8 | 2874.5 | 1651.3 | 57 | 35 | 25 |
| Counter value M / N * collect | 83.3 | 8.3 | one | |||
| Advance payments | 40.7 | 19.6 | 21.1 | 107 | one | |
| Advances to justify | 0.3 | 0.2 | 0.1 | fifty | ||
| Budget debits | 1210.2 | 786.4 | 423.8 | 54 | 9 | 7 |
| Inventories | 6032.9 | 5121.2 | 911.7 | 17 | 47 | Four. Five |
| Total Current Assets | 12781.9 | 11422.6 | 1359.3 | 12 | 100 | 100 |
| Current Liabilities | ||||||
| Accounts Payable CP | 1058.8 | 476.9 | 581.9 | 122 | 8 | 4 |
| Against M / N value * pay | 34.4 | 34.4 | ||||
| Obligation. Est Budget | 614.6 | 241.6 | 373.0 | 154 | 5 | two |
| Payroll | 365.8 | 630.5 | (264.7) | 42 | 3 | 5 |
| Withholdings payable | 27.6 | 19.8 | 7.8 | 39 | ||
| Loans received | 3909.9 | 3195.5 | 714.4 | 22 | 30 | 26 |
| Estimated cane purchase payable | 4089.9 | 2720.1 | 1359.8 | 66 | 31 | 22 |
| Provision for general repairs | 2660.3 | 4452.5 | (1792.2) | 40 | twenty | 37 |
| Provision for holidays | 384.6 | 376.9 | 7.7 | two | 3 | 3 |
| Other operating provisions | 36.2 | 53.0 | (16.8) | 32 | one | |
| Total Current Liabilities | 13182.1 | 12166.8 | 1015.3 | 8 | 100 | 100 |
| Working capital | (400.2) | (744.2) | 344.0 | 46 |
Current Ratio:
| Years
(I Trimester) |
Current Assets |
Current Liabilities |
Outcome |
| 2006 | 11422.6 | 12166.8 | 0.94 |
| 2007 | 12781.9 | 13182.1 | 0.97 |
When observing the behavior of the same in the company it can be argued that it is negative, since there is not at least $ 1.00 to pay its short-term obligations in the two years analyzed. In 2006, $ 0.94 and for 2007 $ 0.97, being an unfavorable situation for working capital in the company.
Immediate Liquidity or Acid Test:
|
Years (I Trimester) |
Current Assets |
Inventory |
Current Liabilities |
Outcome |
| 2006 | 11422.6 | 3553.3 | 12166.8 | $ 0.65 |
| 2007 | 12781.9 | 4705.7 | 13182.1 | $ 0.61 |
In the analyzed years the behavior of this index is unfavorable for the company, in 2006 it had $ 0.65 and in 2007 with $ 0.61 of rapidly available Assets for each peso of short-term obligations, making the significant role clear that have inventories in the company. In 2006 it represented 45% and in 2007 47%.
Activity reasons:
| Indices | Year 2007 | Year 2006 |
| Accounts Receivable Rotation
Collection Cycle |
4 times
23 days |
7 times
13 days |
| Accounts Payable Rotation
Payment Cycle |
4 times
22 days |
5 times
18 days |
| Indices |
Year 2007 |
Year 2006 |
| Inventory Rotation | ||
| Raw material and materials
Average Inventory Term |
3 times
30 days |
4 times
22 days |
| Production in process
Average Inventory Term |
13 times
7 days |
11 times
8 days |
| Finished Production
Average Inventory Term |
14 times
6.5 days |
23 times
4 days |
The average inventory term for both years of raw material and materials is slow, more efficient for the year 2006, behaving with a shorter rotation cycle of 8 days than for the year 2007. This slow inventory process is given by the magnitude of idle inventories that the company has representing 18% of the total inventories with an amount of 621.3 MP, not being the Production in Process and the Finished Production that have an adequate and fairly fast behavior rotating the Production in Process for the year 2007 13 times every 7 days and for the year 2006 11 times every 8 days and for the Finished Production 14 times every 6 days and 23 times every 4 days for each year respectively, slowing down the rotation of the Production in Process in 2006 and faster the Production Finished in 2007.
Taking into account that both periods of the analyzed years the company is in full sugar production, thus accelerating the cycle of production rotation.
AC rotation (2007) = Sales / AC
= 0.85
FY rotation (2007) = Sales / FY
= 0.25
CT rotation (2007) = Sales / CT
= 10925.3 / (- 400.2)
= - 27.3
Operations Cycle (2007) = (PMI + PPCC) - PPCP
= 53 - 22
= 31 days
On account of the operations, cash is obtained every 31 days.
2007 Cycle of Operations Chart.
Debt Reasons:
| Index | Year 2006 | Year 2007 |
| Indebtedness | 18% | twenty-one % |
| Debt quality | 0.94 | 0.98 |
When comparing 2006 compared to 2007, we noticed an increase of 3%, since in the first year it behaved with 18% and in the second 21%, being more favorable for the company in 2006 since it was less financed by third parties than in 2007, also noting that the quality of the debt is bad for both years and in 2007 the Current Liability represents 98% of the Total Liability mainly given by short-term loans received (26%) and for the purchase of cane from suppliers (22%).
Profitability Reasons:
| Index | Year 2006 | Year 2007 |
| Total Assets Ratio | $ 0.15 | $ 0.17 |
When comparing 2006 with 2007, the variation is not significant in both periods, since the sales levels in relation to total assets are much lower, making it clear that the use of assets is very deficient to generate income., unfavorable situation for the company. For each peso of assets invested in 2006 $ 0.15 has been sold and for 2007 $ 0.17.
Return on investment
Determine the total effectiveness to generate profits with available Assets.
|
= *
| Index | Year 2007 |
| Net margin | 0.014 |
| Return on investment | 0.00% |
| Economic profitability | 0.00% |
For the determination of the Net Margin, the profit before tax and interest must be used, but this coincides with the profit for the period, since the analyzes have been carried out in the first quarter that has not yet concluded the fiscal year. For the year 2006 the company presents a loss of 796.9 MP, so the analysis of this index does not proceed and for the year 2007 the profit is only 150.7 MP, so it is not significant for its analysis.
Required Working Capital
| Concepts | Natural days | % | Days of Sales |
| Raw Materials | 30 | 0.40 | + 12 |
| Production in process | 7 | 0.90 | + 6.3 |
| Finished Production | 3.5 | 0.90 | + 5.9 |
| Customer collection period | 2. 3 | 0.90 | 20.7 |
| Suppliers payment period | 22 | 0.40 | -8.8 |
| Days of sales to be financed | + 36.1 |
Average daily sales calculation = Sales / 360 days
= 10925300/90 days
= 124392.22
Determination of the CTN = Average Daily Sales * Days of Sale to be financed
= 121399.22 * 36.1 days
= 4382259
The Net Working Capital for the company in the year 2007 is 4382259.14, which is nothing more than the capacity needed to face the debts.
Situation Charts
(See PDF)
When establishing the comparison in relation to the 2007 real, the results are favorable because there is a profit of 150.7 MP while in 20 there is a loss of 796.9 MP. Total income decreases by 29.3 MP and from product subsidy of 49.5 MP, which is balanced with an increase in other income of 45.3 MP.
Total expenses decreased by much more than income by 976.9 MP, influencing the decrease in cost of sales of 1,156.9 MP, among others.
In relation to what is planned, there is a non-compliance in the profit of 732.7 MP, since of 883.4 MP planned there is a real of 150.7 MP, this noncompliance is due to a decrease in sales of 3601.0 MP, since from 14527.2 MP planned, 10925.3 MP was sold, given for the breach of the sugar production plan of 10581.4 MT.
Statement of income
|
Indicators |
Real 2006 |
Plan 2007 |
Royal 20070 |
Increase Y
Decrease |
% increase
And decrease. |
| Net sales | 10965.6 | 14727.2 | 10925.3 | -40.3 | -0.4 |
| Product Subsidy | 3730.4 | 4912.1 | 3680.9 | -49.5 | -1.3 |
| Sales tax | 0.9 | 1.8 | 1.4 | 0.5 | 55.6 |
| Other income | 89.5 | 106.1 | 134.8 | 45.3 | 50.6 |
| Income from services To communities and bateyes | 107.4 | 125.9 | 123.4 | 16 | 14.9 |
| Total revenues | 14892.2 | 19669.5 | 14862.9 | -29.3 | -0.2 |
| Sales cost | 13834.9 | 16968.1 | 12678 | -1156.9 | -8.4 |
| Distribution and sales cost | 15.8 | 34.9 | 8.4 | -7.4 | -46.8 |
| General and administrative expenses | 887.5 | 766.5 | 711.7 | -175.8 | -19.8 |
| Financial expenses | 319.3 | 502 | 74.6 | -244.7 | -76.6 |
| Missing expenses and property losses | one | 0.3 | 0 | -one | -100.0 |
| Exc. Of expenses in prod. Self-consumption | 0 | 0 | 0.5 | 0.5 | |
| Expenses from previous years | 215.3 | 0 | 613.4 | 398.1 | 184.9 |
| Other expenses | 266.6 | 307.3 | 401.7 | 135.1 | 50.7 |
| Serv. Expenses.And communities and bateyes | 148.9 | 207 | 223.8 | 74.9 | 50.3 |
| Total cost | 15689.1 | 18786.1 | 1471.2 | -976.9 | -6.2 |
| Profit or loss for the period. | -796.9 | 883.4 | 150.7 | 947.6 | -118.9 |
RATIOS PYRAMID
See PDF
With the completion of this work we reach the following conclusions:
- The Company has a significant lack of solvency and liquidity as working capital is negative. Low sales levels: Due to non-compliance with the sugar production plan. Accounts Payable are very high.
It is recommended to the directors of the entity:
- Make a commission with trained personnel to reach conclusions about idle inventories. Carry out studies on the payment system used. Guarantee resources in due time and form for the fulfillment of the Industry's repairs and its quality.
Bibliographic references.
- Perdomo, A, Analysis and interpretation of the Financial Statements. / Mexico /: Accounting and Administrative Editions.
Bibliography
- Intermediate Accounting. Part 5 and 6. Summary brochure of Analysis and Interpretation of Financial Statements. Pérez, Annia. Analysis and interpretation of financial statements. C. Univ. Vladimir I. Lenin.Perdomo, A, Analysis and Interpretation of Financial Statements. / México /: Ediciones Contables y Administrativa, SA, 1986, Page 87. Polimenin et al. Cost Accounting: Concepts and applications for making managerial decisions. -/ The
