In Cuba, a considerable number of companies suffer from insufficient liquid resources. This concern constitutes a common topic in the scientific debate held by scholars of finance, for which numerous research works have been carried out in this field, with a high practical application and an inestimable methodological value, which apply the analysis and management tools of liquidity recognized and used in the international financial arena.
However, most of them, when studying economic-financial information, are oriented more to the static balance approach than to the dynamic flow approach, which limits the identification of problems associated with the availability of cash. In this way, the main objective pursued is to demonstrate the limitations of the generally accepted liquidity analysis and management methods in research work carried out by specialists on the subject in Cuban companies.
Towards the end of the 1980s, scholars who examined the issue of corporate liquidity were investigating the causes of the accumulation of excessive levels of cash. On the one hand, it was proposed that companies should take advantage of investment opportunities that would generate higher profits, compared to projects financed with external capital. On the other hand, some theorists held that surplus cash should be distributed in the form of dividends, as shareholders could waste it on investments with negative expected value. In this way, it was determined that the accumulation of liquidity generates value to the point where the company exhausts its investment opportunities with positive benefits, since from this level, the costs of cash immobilization exceed the benefits,destroying shareholder wealth.
Thus, the research carried out in this area was exclusively aimed at solving the problem of what to do with excess liquidity, however, it was still pending to analyze what happens to companies that generate insufficient cash levels.
Already at the beginning of the last decade of the last century, the fact that in some companies liquidity was frequently generated below the levels necessary to satisfy in time the obligations agreed in the short term, began to be a concern worthy of the attention of all the factors that interact in business and financial circles.
In our country, a considerable number of companies suffer from insufficient liquid resources, which is why this issue is of vital importance; This is due to the fact that the shortage of money in Cuban entities not only compromises the existence of the company itself, but also the fulfillment of transcendental programs of the Revolution and, in general, the well-being of all actors in social life.
This concern is also a common topic in the scientific debate held by scholars of finance since if a company cannot meet its current obligations at maturity, its continued operation is doubtful and this fact relegates the remaining results measures to a secondary place.
Experts assure that the most general causes of this situation lie in the imperfection of functions or levels of the economic system, and in the exacerbation of the economic, commercial and financial blockade that for many years has threatened the existence of the Cuban nation. Such arguments explain, essentially, the interest and usefulness of its theoretical approach.
In this way, numerous research works have been carried out in this field, which apply the liquidity analysis and management tools, recognized and used in the international financial field, to different entities of the Cuban business environment. All these works have a high practical application and an inestimable methodological value, as noble attempts to influence the continuous improvement of efficiency in response to the need for survival and organizational development in the current historical context.
However, most of them, when studying economic-financial information, are oriented more to the static balance approach than to the dynamic flow approach, which limits the identification of problems associated with the availability of cash.
In this way, the fundamental objective that this research has outlined is to demonstrate the limitations presented by the generally accepted methods of analysis and management of liquidity, in research works carried out by specialists on the subject in Cuban companies.
A meticulous review of a sample of 10 research works carried out in production and service companies, belonging to different sectors of the economy, was carried out. The study allowed us to conclude that the liquidity measure most used in the diagnosis was Working Capital, because this constitutes a reserve close to becoming cash and because it also measures the impact of working capital management on liquidity.
The results of the study carried out are shown throughout this article as follows: firstly, the comments that the process of analysis and identification of the problem or problems related to the generation of cash below the levels required to honor the current obligations; and later, what is related to the management or evaluation of these problems, that is, the foundation of the solution proposals.
Before proceeding to explain the main limitations that, in the author's opinion, the analysis and liquidity management present in the researches analyzed and in any other that uses the methods described here, it is necessary to specify that these limitations only justify that the conclusions that are formulated about the analysis of financial statements should be done with sufficient precautions, which does not prevent their use, since they constitute the only source of information that a company has to know its history, development and current situation.
Diagnostic process for the analysis of business liquidity in selected cases. Main limitations.
To diagnose the liquidity situation, the following procedure is followed in the selected works:
1. Analysis of the financial situation of the company based on the Balance Sheet and the Income Statement, for two or more periods.
2. Use of horizontal analysis techniques and / or financial reasons for the diagnosis of the financial situation, and in some cases comparison with the average branch or at the corporation level.
3. Survey of the deficiencies detected from the financial analysis carried out.
The first thing that should be pointed out regarding the first step is that the Balance Sheet, although it is true that it reflects the situation of a company at a given time, does so at historical cost, so sometimes there is a lack of sufficient perspective on where the company goes, in addition to the fact that this practice prevents the true market value of the assets or obligations from being recognized.
On the other hand, due to the monetary duality present in almost all Cuban companies, this analysis fails to get to the bottom of the problems in each currency, despite the fact that the official exchange rate used for legal entities within the national territory is 1CUC = 1CUP, the purchasing power of both currencies in practice is not the same.
Another deficiency is that the Balance Sheet usually refers to the closing date of the fiscal year, normally December 31 of each year; however, in many companies the situation at the end of their fiscal year is not fully representative due to the existence of large seasonality in sales, production, expenses, collections or payments, etc.
On the other hand, it is true that this is an official document issued by the companies, but in some cases its use bets on the good accounting practice of the specialists, in addition to the fact that these data are sometimes manipulated, so that they cease to represent properly reality.
Finally, the accounting information is not usually adjusted to correct the effects of inflation, so that some items such as inventories, fixed assets, equity and reserves or amortizations, are not always distinctive of reality.
Regarding the Income Statement, it can be affirmed that the final product (profits) is easily manageable and may in many cases be designed in such a way that it "adjusts" to the requirements established by the requesting entity (finance or credit entities) or the interest of the company in showing its results in one way or another.
The issue of accounting manipulations and the makeup of the annual accounts is usually omitted in financial analyzes, since, in general, it is assumed that the information taken as a basis is totally reliable. Unfortunately, accounting information is not always reliable, so appropriate precautions must be taken to avoid incorrect analysis due to problems in the data used.
For this reason, to formulate an accurate diagnosis, information that adequately represents reality must be used. If this is not possible, the accuracy and usefulness of the analysis of the financial statements will be greatly reduced.
Another important aspect is the trend towards the use of the last section of the State, without taking into account the income and expenses that make up the Result. One of the most frequently detected problems in the cases studied has been the high level of costs and expenses presented by the companies; However, it has not been possible to offer a specific solution because the items in which these are grouped have not been matched with the different areas of responsibility or cost centers, in order to determine where exactly the problem lies.
Last but not least, accounting profit is used as an indicator that measures efficiency. This incorrect practice, inherent in the origin of funds, constitutes a basic aspect of the finance function, and is fundamentally due to the fact that accounting recognizes income and expenses at the time they are made, regardless of whether they are collected or not. Instead, the analysis tool that should be used is cash flow, which reflects the actual inflows and outflows of cash, that is, the income that has been collected and the expenses that have been paid. This approach shows once again the inclination towards the use of static methods of financial analysis.
Finally, as already explained, the Financial Statements show the situation of the company at a given time and the result in a given period, but they do not project this situation for the future of the company. Hence, one of the fundamental deficiencies of this part of the procedure is that financial planning is not used as an indispensable tool to project the action measures that lead to better business decisions. For their part, companies do not do it either, moreover, financial planning works more as a control mechanism for higher levels than as internal control for the management of the company itself.
Regarding the second step, that is, the use of ratios or ratios as a tool to diagnose the fundamental problems of the financial management of a company, it is convenient to point out that:
1. These are based on the information contained in the aforementioned States with the problems referred to.
2. Some offer very ambiguous decision criteria and others do not even have a fixed parameter of comparison, except for the change they experience from one period to another.
3. It is not always possible to obtain data from the sector in which the company operates in order to be able to make comparisons.
4. Its use is limited to detecting those difficulties generated by the internal operation of companies, and therefore does not include external factors that may affect the economic-financial situation.
5. Decision-making based on the use of these analysis techniques is limited as they are not combined with additional data on legal, general, commercial, technological and human resources aspects.
The treatment of business liquidity management in previous investigations. Critical analysis of the main deficiencies.
The proposals analyzed are based in all cases on the basis of certain basic principles of modern financial administration, which involve the fundamental items that make up the working capital and are also used for the correct administration of cash. The relationship that is manifested between them is that the greater the turnover of current items, the faster the cash will turn. In essence these strategies are summarized as follows:
1. Accelerate collections as much as possible without using very restrictive techniques so as not to lose future sales. Discounts for cash payments or prompt payment, if economically justifiable, can be used to achieve this objective.
2. Reduce inventory as much as possible, always taking care not to suffer losses due to product shortages.
3. Delay payments as long as possible, without affecting the Company's credit reputation, but take advantage of any favorable discounts for prompt payment.
4. Not having more cash than necessary.
The first strategy is based on reducing the collection cycle and that is very good, because as it is shortened, the risk of non-payment and financing costs and expenses decrease, however, in general this proposal loses of view three important aspects, namely:
1. The reduction in the turnover of collections is not an indicator that can be manipulated overnight, it leads to an internalization by the company and its clients.
2. In general, it is fixed at a random figure chosen from the "optimal values" of textbooks, life being much richer and influencing a series of external factors that a financial model can hardly capture.
3. It is not taken into account that the fundamental objective of granting payment facilities is to increase sales, on the other hand, it is never assessed whether the proposal actually produces an increase in sales greater than the growth of accounts receivable.
4. It is not applicable to companies whose position in the market is privileged, that is, they monopolize a product or service, which is not obliged to grant payment facilities and can demand that they pay them in cash, thus taking advantage of their high negotiating capacity with the clients.
Commercial credit is used as an instrument to encourage sales in two ways: 1) to get them to buy from your company and not from another that offers greater payment facilities or 2) to increase the number of customers who can buy from you. However, this phenomenon has two important counterparts or unwanted effects: first, the more the horizon of customers who expect to have money in an increasingly distant future expands, the more the risk of not being able to collect those sales increases. Second, by providing payment facilities to clients, our own financial needs are increased to cover expenses already incurred and not yet recovered.
Finally, each company must choose the credit policy that best suits its position in the market and its ability to negotiate with its clients, and why not, the strategy proposals made by specialists, but it does not have to apply it equally to all negotiations.
The second strategy is derived from the above, although more ingredients are always added to this, for example, methods for the valuation and control of inventories are usually proposed, which is totally correct, since in Cuban companies rarely Products are classified according to investment levels. But when inventories reduction is proposed, in many cases the efficiency of the company's replenishment system is not valued, which, although it is true, reduces immobilized resources, the risk of dispensing with them for the continuity of the business is increased. productive process.
The third strategy is strongly influenced by the success of the first two, taking into account that both are the ones that produce sufficient resources to cover the company's obligations. The fundamental limitation of this proposal is that it ignores that the apparently free financing provided by some suppliers is sometimes too expensive, since the supplier incorporates into the price of the merchandise all the financial costs incurred by the payment “facilities” granted.
It happens that “in Cuba nowadays the variation in the value of money over time is not recognized, unlike the rest of the world, and the debtor pays the same whether he pays in cash or if it takes a year to cancel his obligation, therefore which the company does not feel compelled to request credit to pay its obligations, especially when non-payment of them does not entail direct costs ”.
This very important concept in finance has not yet been internalized by many of the specialists in this area. Its essence is that current money is worth more than future money. “This occurs not only because of inflation problems (possible increases in prices that make money worth less) or risk situations (because of what is worth more bird in hand than hundreds flying…), but also for an essential reason: the money you have today can be invested and generate a certain return, so that within n years it would be increased; therefore, if it does not have it today, it is failing to obtain the profitability that it could achieve ”.
Finally, and that sums up all the previous strategies, have only the necessary cash. To find out, the Cash Flow or Cash Budget is generally prepared. Although, to effectively manage the finances of the company and work with the minimum levels of inventories and cash, as well as properly manage the collection and payment policy, it is necessary that it be prepared for a time long enough to allow anticipation necessary and for a sufficiently short time to ensure the reliability of the forecast.
It is also necessary to draw up more than one alternative of the plan, which may be viable and satisfy the objectives of the company in different scenarios than expected. The last observation regarding the proposition of this policy is that the Cash Flow cannot be seen as something immovable, that it is elaborated once and remains unchanged, on the contrary it must be modified and adjusted as more information is obtained.
The isolated implementation of these strategies does not lead to any favorable result for the company, however, their joint application has an impact on one of the most used indicators for measuring liquidity: the Cash Cycle or Cash Conversion Cycle.
Almost all of the studies analyzed use this procedure to a greater or lesser extent. The most relevant criticism that can be made, regardless of whether this indicator classifies within the class of dynamic tools for the analysis and management of liquidity, is that, when applying the basic strategies, the desired values are "estimated" of the cycles that compose it. This estimate has no basis other than the very personal criteria of the evaluator.
These comments constitute the fundamental limitations that, at the author's discretion, the analysis and management of liquidity in the selected works presents. Up to this point several ideas can be specified:
1. The generation of cash below the required levels prevents a company from meeting its current obligations at maturity. This issue is a concern in both social and academic circles. An example of this is the large number of investigative works that are carried out each year in this area.
2. The treatment that specialists give to the issue of business liquidity presents some limitations that must be recognized so that decision-making is carried out with sufficient caution.
3. As a result of the application of the procedure described, it has been possible to diagnose weak points in the cash generation process. The common thread of this research points to the realization of a study of the factors that originate the current liquidity situation of Cuban companies.
Causal analysis of the liquidity situation of Cuban companies.
Any process of deepening the knowledge of a certain phenomenon presupposes an analysis in which it is possible to identify the essence latent in it. Although the phenomenon is related to the external aspect, the essence points towards the internal, the hidden. According to the criteria of different authors, the causal relationship between phenomena, as a specific form of their conditioning, is expressed in that every isolated phenomenon or set of interdependent phenomena causes or produces another; and conversely, every phenomenon has been caused by another or others. The phenomenon that originates or generates the appearance of another is called cause, while the one caused or produced is called effect.
That is why it is necessary to carry out a brief analysis of the causal factors of liquidity problems in Cuba. All the causes that are listed below constitute a systematization of the results achieved in the selected works from: empirical studies carried out, financial analyzes carried out according to the procedure described above, and interviews with experts on the subject.
1. Extension of the production cycle: occurs from an increase in the duration of the periods of storage of raw materials, manufacturing, storage of finished products or collection from customers, as well as a reduction in the period of payment to suppliers. This leads to an increase in the need for working capital and a decrease in liquidity.
2. Inefficiency in operations: business efficiency is affected on many occasions by poor sales management, which does not allow to produce a minimum income that at least manages to cover the costs generated by the production process itself. They are also influencing this aspect: the excessive expenses in the production process, strongly influenced by the incorrect preparation of the cost sheets or by not having a product costing system, and the high volumes of shortages and losses of inventories.
3. Execution of investments from the fund for current operations: sometimes because the approval mechanism of the Ministry of Economy and Planning (MEP) is so cumbersome, first, and then before the bank the presentation of the required documentation, as well as completing the Precedent conditions that were established in the approval of the loan, companies choose to start investments with working capital.
For this reason, some entities make investments and finance them with the fund destined for current operations, although it may be the case that later the entity receives compensation for investment expenses from the State Budget; however, during the time between the execution of the investment and the collection of the compensation, you will see your working capital decrease. All this leads to the deterioration of the working capital and causes an imbalance in the financial structure of the company, and induces that current assets are financed with long-term funds.
4. Periodic cash outflows, which do not correspond to the normal operation of the company, or its availability: an element that is currently influencing the cash shortages of the Cuban company, is given by the cash outflows that occur regularly, based on the profit generated. It refers to the tax on profits and the payments of the State Investment Yield Contribution.
The current regulation states that Cuban, mixed and foreign private capital companies incorporated under Law 77 of Foreign Investment pay the tax applying a tax rate of 35% on their net taxable income. Excluded from this regulation are those joint ventures and international economic association contracts established under Decree-Law No. 50, dated February 15, 1982, which continue to be governed by it, which contains a special tax regime for such associations with a tax rate of 30% on net taxable income.
Additionally, all state entities that obtain profits at the close of the fiscal year are also subject to the payment of the Contribution for the performance of the State Investment, as a concept of non-tax income. As stated in Resolution No. 50/2004; the source for the payment of this obligation is the real accounting profit after the payment of the Income Tax.
It is necessary to highlight that the existence of a certain amount of profit should never be interpreted as that it is in the form of cash. In addition, the most general global practice is for the company to pay its tax on the income created annually, once the fiscal year has concluded. For this, it has a time period of one quarter, and in some countries up to one semester, for which the entity makes use of these financial resources for almost half a year, or even more.
On the other hand, as stated in Resolution 379/2003, companies are obliged to make partial payments on account of the Tax in their first three quarters, calculated on the basis of the tax rate that corresponds to the real taxable profit obtained each quarter.. Payments are made within a period of no more than fifteen business days, after the period corresponding to each payment.
It should also be considered that the fundamental axiom of modern financial theory rests on the directly proportional relationship that exists between risk and return, with which it follows that the performance of providers, from the fact that their risk is lower than the rest of the financing providers, is also lower. This means that, if in Cuba the priority of payments corresponds in the first instance to the State in its capacity as owner, with which the supplier's risk increases, then inevitably this increased risk will be reflected in some way in the consequent increase in the prices of credit sales and, in turn, will also contribute to the deterioration of profit generation.
It is unquestionable that the State is entitled to the dividends that correspond to it because it is the sole shareholder, in order to finance the expenses that it is responsible for at the level of society, and that in a socialist society they are extraordinarily high to guarantee the protection of citizens. However, it is not recommended that companies be extracted almost all of the profit generated, since in fact their growth possibilities are being limited, which in turn influences the growth of the national economy.
5. Limited concession by the bank of medium and long-term loans: at the present time, the credit granted by the national bank for the operation of the company is mostly short-term, with medium and long-term credit mainly for investment financing, and mainly in national currency, always upon presentation of the corresponding feasibility study.
The existing restrictions for the granting of credit in foreign currency in the medium and long term are largely due to the strict economic blockade imposed by the US on Cuba, which makes it very difficult for financial institutions to obtain external financing, both because they prevent international transactions in US dollars, such as country risk, which induces a high interest rate to pay for the financing received.
What has been said explains to a great extent why in Cuban state companies, the debt structure has a very low weight of debt in the medium and long term; and it also shows that non-payment is not only due to poor management of the company, but can also be favored by the current regulations themselves.
Additionally, the banking entities themselves are increasingly restrictive in granting loans, as they require a guarantee from the borrowing entity, which not only covers the payment of interest but also the principal.
In this sense, when faced with a specific request for financing, the bank carries out an exhaustive analysis of the financial statements of the applicant, deciding from the results of this analysis whether or not to grant said loan, a procedure that is not criticized at all. only that in most cases the companies that meet the requirements to benefit from obtaining a loan or credit are the ones that really need it the least.
6. Inadequate collection management: non-payment by customers may be due to insufficient collection management by the organization. Pressure exerted from higher levels, motivated by social, political or ministerial interest, may also be influencing the collection management of entities, so that sellers continue to distribute the goods, even when buyers do not pay.
7. Little use of bank credit: the limited use that Cuban companies make of short-term bank financing today has a significant influence on the insufficient cash they experience.
Among the causes that explain this behavior are that the credit induces an interest expense for the company, as well as having a loan contract with the bank, impunity for non-payment is much lower, since that bank manages your accounts.
It happens that, at present, the Cuban company is measured by compliance with the "plan", and the use of bank financing induces interest expenses, which will inevitably reduce the total amount of real profit, if these were not planned.
8. Non-use of instruments to speed up the availability of cash: experience in the use of financial instruments ranges from the collection order (in all its variants) to the check, the bill of exchange, the payment of invoices, and the local letter of credit. Many of these payment instruments have been kept within the reach of the Cuban business community so that it can select which one best suits the characteristics of its company, its rotation cycles, its physical location (for example, a company far from the center should not use checks as a means of payment), etc. However, it can be said that the degree of implementation and dissemination of these is very low.
9. Centralized operation of the treasuries at the corporation, union or ministry level: this can induce a slow flow of money between the centers in charge of collection, and those that execute payments, which causes lack of liquidity in the latter and excess in the first. This situation can occur both in national currency and in foreign currency. The companies subject to such centralization lack the autonomy to make their payments, they must also ensure that an exact planning of the moment in which they must be executed and the amounts is carried out.
10. Poor cash flow management: deficit of monetary resources may occur as a consequence of poor cash flow management of the entity, as explained below, or inadequate management to obtain bank loans, although some Cuban companies they are prone not to use them, as discussed above.
One of the fundamental limitations that the administration presents in many companies is that the consequences that the different decisions will have on their economic and financial situation are not evaluated well in advance. The importance of the planning process is that it serves as a tool for the entrepreneur to anticipate the future and prepare for it. Among the budgeted statements, the statement of Cash Flow, Cash Budget or Treasury Budget is of special importance.
A significant number of companies in Cuba do not plan their cash inflows and outflows, either they do not carry them out on time or they do so using a format pre-designed by higher bodies, without taking into account the peculiarities of each entity, and therefore present as Only report your cash availability the auto fill of "the table". These three aspects have their genesis in the following cause.
11. Inadequate qualification of management personnel and / or specialists: inexplicably a factor that may be inducing liquidity problems of companies in Cuba is the inadequate qualification of some of their leaders or specialists in relation to the management techniques of the working capital, which induce, among others, the existence of excessive inventories, or the granting of credit for a longer term than is permissible for the organization, or the sale to clients who do not have the ability to pay, or the signing of contracts with inadequate terms, in those that the collection of clients becomes very difficult, or the lack of foresight. However, every year hundreds of professionals graduate with preparation to work in the accounting and financial areas.
Together with this, specialists perform insufficient integration of the generally accepted liquidity analysis methods, they do not identify in a timely and detailed manner the problems that limit the generation of cash in the operating company, because when studying the economic information - The financial sector is oriented more to the static balance approach than to the dynamic flow approach.
All the aforementioned causes have caused the current situation of liquidity in the Cuban business environment and the impact it has had is reflected in the crucial problem of collections through a phenomenon known in Cuba as a "chain of defaults".
The main consequences of the development of the chain of defaults have been described in the Cuban financial literature as follows:
1. Immobilization of profits that at different times must be contributed to the State Budget. As a result of the above: tensions in the execution of budgetary expenditures that pressure the monetization of the deficit.
2. Inflation and loss of purchasing power of wages caused by the transfer of inefficiencies between companies, from these to the State Budget and finally to the consumer. As a consequence, potential loss of confidence in the security and stability of financial institutions.
3. Increase in financial expenses to maintain immobilized working capital in companies that do not charge.
4. Increase in administration expenses for collection procedures.
5. Difficulties in measuring the individual efficiency of the company. Liquidity accumulates in companies that do not meet their obligations on time, enabling them to cover their inefficiency with someone else's money without major consequences.
6. Disorganization, lack of control and cover-up of the crime. Failure to reconcile economic activity through collection and payment means that collectors and payers are indifferent to discrepancies in billing, reception or other types of incidents. The accounting records of both cease to correctly reflect the economic facts and it is impossible to accurately assess the efficiency of each.
Making an assessment of all the causes that may affect the availability of cash, it is striking that there are a large number of causal factors that have an internal origin, as well as others that are caused by negligence or inadequacies in the business management.
On the other hand, the fact that this phenomenon of the chain of defaults, which has such a strong manifestation in Cuba, occurs very rarely, or does not occur, in other countries is disturbing.
In most countries there is some legislation that regulates both the declaration of suspension of payments, as well as bankruptcy, which can ultimately lead to the disintegration or failure of the company. And a process of these characteristics can be initiated before the competent authorities by entities outside the organization itself. For this reason, it is understood that companies are very careful to fall into a situation that could lead them to such a process, so the vast majority analyze the characteristics of the client and their availability of payment, before granting goodwill.
However, economic legislation in Cuba, regardless of whether it may be incomplete, is not adequately exploited by the business system, which is why it frequently happens that a company may be inefficient over time, or even not pay its debts, without that they go to court in order to adopt the corresponding corrective measures in this situation.
In this way, Cuban companies study the process of generating liquidity through the application of generally accepted methods. In this research, value judgments are made about such approaches, which illustrate the need to achieve a systemic perception regarding the management of said variable. Academics and administrators, especially those who deal with finances, must reason and act in a timely manner based on the increasing and continuous generation of money. Political and administrative bodies at different levels have declared this imperative.
