Businesses are becoming increasingly competitive and corporate profitability is increasingly dependent on operational efficiency.
This situation is desirable from a social point of view, as consumers are getting higher quality goods at lower prices, but intense competition has certainly made life harder for corporate managers. Businesses can no longer afford to sit back and simply assume that the strategies that got them to where they are will continue to work in the future.
One point on which managers agree is the idea of making efficient financial planning through mathematical models to develop a series of assumptions for each state of the economy that bring them closer to reality. Knowledge of the future can be classified into three types: certainty, uncertainty, and ignorance; and each of them requires a different type of planning: commitment, contingency and sensitivity.
SOME CONSIDERATIONS ABOUT SHORT-TERM ECONOMIC AND FINANCIAL PLANNING IN BUSINESS FINANCIAL MANAGEMENT
1.1 Short-Term Financial Planning as the culminating phase of the business planning process.
It is unquestionable that planning is one of the fundamental elements of all acts or activities that every human being performs, and especially when these acts seek to obtain positive objectives within the operation of a company. Financial planning, which would be basically applicable within a company, is based on specific techniques, which aim to make forecasts of future events, but in the same way it aims to establish what are the goals and objectives that are sought, in the economic and financial; and the foregoing is established through "three core processes in every planning process, which are, in the first instance, to plan what is intended to be done, carry it out and verify if it was done correctly."
Planning is necessary for different reasons:
1. To prevent changes in the environment.
2. To integrate the objectives and decisions of the organization.
3. As a means of communication, coordination and cooperation of the different elements that make up the company.
It can be affirmed that planning is the first stage of the budgeting system, because to establish what the requirements of the companies will be, in monetary matters, it is necessary in the first instance to define what the company's environment is, what are the results of previous years in the sale of its products, the visualization of the market, the physical situation of the assets involved in production or distribution, etc. in order to be able to give an adequate margin in financial matters, according to the reality of the company.
For its part, financial planning is a three-phase procedure to decide what actions should be carried out in the future to achieve the objectives set: plan what you want to do, carry out what was planned and verify the efficiency of how it was done. Financial planning through a budget will give the company a general coordination of operation. Idalberto Chiavenato describes planning as: "the administrative function that determines in advance what are the objectives to be achieved and what must be done to achieve them, it is a theoretical model for future action."
Financial planning is an aspect that is of great importance for the operation and, therefore, the survival of the company. And it is this area that the research will focus on.
There are three key elements in the financial planning process:
1. Cash planning through the preparation of Cash Budgets. Without an adequate level of cash and despite the level of profits, the company is exposed to failure.
2. The profit planning is obtained through the Proforma Financial Statements, which show anticipated levels of income, assets, liabilities and capital stock.
3. Cash Budgets and Pro Forma Statements are useful not only for internal financial planning; They are part of the information that current and future investors require to make their valuations.
Through financial planning and analysis, the financial manager can be aware of the financial position of the business, assess production requirements and the extent to which they can be met, and determine whether additional financing will be required. In addition, it provides a guide to direct, coordinate and control the actions of the company to achieve its objectives.
The financial planning process begins with long-term, or strategic, financial plans. The strategic plans materialize the mission of the company, its vision of the future, the objectives it aspires to achieve, as well as the strategy it considers correct and the concrete actions that must be carried out to achieve them. In turn, these long-term plans guide the formulation of short-term, or operational plans and budgets. Short-term plans and budgets generally implement the long-term strategic objectives of the company.
Being current financial planning the topic to be developed in this research, its conception and application in companies will be deepened. Short-term financial plans make it clear which operational actions must be carried out and what their repercussions will be.
Generally, these are plans that cover a period of 1 to 2 years. For its preparation, information is taken from the sales forecast that constitutes the main source of data, in addition to other operating and financial statements with which various operating budgets, cash and pro forma financial statements are made. Figure 1 (Annex 1) shows a diagram that summarizes the short-term planning process.
As previously mentioned, short-term financial planning begins with the sales forecast, from which production plans are developed that take into account estimates of required raw materials, direct labor requirements, and operating expenses. Once these estimates have been made, the Proforma Statement of Income and the Cash Budget of the company can be prepared, which together with the disbursement plan for fixed assets, the long-term financing plan and the general balance of the current period, serve to conform finally the pro forma balance sheet.
As can be seen, the sales forecast is the fulcrum on which all phases of the financial planning process depend. By anticipating the levels of income that will be obtained from the sales forecast, financial managers will also be able to estimate what the cash flows will be. In addition, they will be in a position to forecast the level of fixed assets required and the amount of financing necessary for the forecasted sales to be achieved.
There are a multitude of factors that affect sales, such as pricing policies, competition, disposable income, the attitude of buyers, the appearance of new products, economic conditions, etc. The responsibility of establishing the sales budget rests with the sales department and can be carried out at different levels of the company.
Sales forecasting is done by doing an analysis that can be based on an internal or external forecast data set, or a combination of both. This is mainly handled by the commercial department in interaction with other areas.
Choosing the appropriate method for sales forecasting is not always an easy task. Some may be inappropriate in certain cases, while in others it is best to combine them to obtain a successful result. It is important to note that these techniques can also be applied to forecast other items in the budgeting process. The elaboration of the short-term plan of a company, obviously does not culminate with the forecast of income, costs and expenses, but requires evaluating through projections and analysis of the financial statements, the position in which said forecasts will place the company, if The prepared plan satisfies the entrepreneur's objectives, if it really supports the long-term strategy outlined and if it serves as a concrete, viable and satisfactory solution, from the Financial point of view,of the opportunities and problems that the company faces in the immediate future.
Finally, the CFO in charge of short-term decisions does not have to look too far ahead. The decision to seek additional financing (bank credit) may well be based only on the cash flow predictions for the coming months. However, this is extremely important because: “In a way, short-term decisions are easier than long-term decisions, but they are no less important (…) A company can detect extremely valuable capital investment opportunities, find the maximum debt ratio, follow a perfect dividend policy and, despite everything, sink because nobody cares about looking for liquidity to pay the bills this year. Hence the need for short-term planning ”.
1.2 Operational financial decisions and their impact on the financial position of the company.
Frequently, in specialized literature the criterion can be found that long-term decisions outweigh short-term ones, from the point of view that they are not easily revocable and commit the company to a certain line of action; however, thinking in this way can be very dangerous. An aspect of vital importance to guarantee the survival of the business, given the risk of falling into a situation of insolvency, is the search for liquidity to guarantee the existing commitments. Short-term financial decisions generally affect short-lived assets and liabilities. Short-term decisions are sometimes easier than long-term ones, but they are no less important.Although a company can detect extremely valuable capital investment opportunities, find the optimal debt ratio and follow a perfect dividend policy, it is not exempt from failure, since no one may worry about seeking liquidity to pay the bills for the year. This is why there is an urgent need for short-term planning.
Short-term decisions are interrelated and have an impact on the cash position of the company, since, finally, invoices are paid in cash, which is why financial management, and in particular cash *, has as one of its main objectives to directly or indirectly provoke an adequate flow of money that allows, among other things, to finance the operation, invest to sustain the growth of the company, pay, where appropriate, the liabilities when due and, in general, achieve satisfactory performance for the company. In short, a business is a business only when it generates a relatively sufficient amount of money.
From the foregoing, it can be inferred that the fundamental decisions of the company have a marked impact on the amount and opportunity in which the treasury enters and leaves, especially those that refer to operational management and on which short-term solvency depends. In this paper, those related to cash management and financial planting of resources will be specifically addressed. The appearance of the cash-flow concept was coupled with the evolution that finance had had since the 1950s, it carries an implicit time dimension and refers to the variation of the treasury during a certain period of time that will always be equal to the difference of two currents of opposite sign: cash inflow - cash outflow.
When speaking of cash-flow in its economic sense, according to Cañivano and Bueno to the “financial resources generated by the company during a period of time or, in other words, the self-financing of the period”.
Security analysts (so-called American financial analysts) are increasingly convinced that their vocabulary should reject the expression cash-flow taken in the sense of corrected profit. According to Riebold (1974) the concept of cash flows or treasury is the original of the term, and responds to the even literal sense of its translation into Spanish. Its definition would be: “Internal flow of money during a certain period. It is the flow of money available. ”As such, it would be the result of the confrontation of cash flows in the opposite direction, such as collections (cash-inflow) versus payments (cash-outflow). That is to say: Cash-flow = (Cash-inflow) - (Cash-outflow). The situations that could arise during an exercise would be:
a). Treasury (net cash inflow) if receipts> payments
b). Treasury (net cash outflow) if receipts <payments
For there to be financial solvency in the company, the permanent capital must be sufficient to finance not only fixed assets, but also a part of current assets. This surplus of permanent capital over fixed assets, called revolving fund or working capital, constitutes a kind of provident or guarantee fund to deal with the discontinuities or temporary lags between payments and collections generated by the operating cycle. In terms of its amount, this fund is commonly called working capital. According to James Van Horne in "Fundamentals of Financial Management": "(…) the determination of the appropriate levels of current assets and liabilities serves in setting the level of working capital,and includes fundamental decisions about the liquidity of the company and the composition of the maturities of its debt. In turn, these decisions are influenced by a compromise between profitability and risk (…) "
In this research, the term focused working capital will be used as the difference between current assets and current liabilities. Negative working capital puts the company in a very dangerous financial situation, especially in times of credit crunch or economic recession. In this regard, Suárez Suárez states: “average maturity period is, therefore, the time it takes on average for the current assets to turn around, that is, the time it takes for the money invested in the production process to mature…)
The longer the short cycle, the longer it will take to recover the liquidity initially invested and the greater the resource needs, that is, the working capital to be maintained must be greater. Efficiency in this area of financial management is necessary to ensure long-term success. If the financial manager is unable to efficiently manage the company's working capital, these longer-term considerations are no longer relevant, as it is likely that it will reach a state of solvency and still be forced to file. bankruptcy. A company has net working capital as long as its current assets are greater than its current liabilities.
Although the company's current assets cannot be converted into cash at the precise moment it is needed, the greater the amount of current assets, the greater the probability that some of them can be converted into cash to pay a past due debt.. However, it is important to analyze the specific liquidity of the accounts that make up current assets and the enforceability of those of current liabilities.
In this way, the origin and need of working capital is based on the cash flows of the company that can be predictable, they are also based on the knowledge of the obligations with third parties and the credit conditions in each one, but in In reality, what is essential and complicated is the prediction of future cash inflows, since there are assets such as accounts receivable and inventories that in the short term are difficult to convert into cash, which shows that the more The more predictable future cash inflows are, the less working capital the company needs. Now, having a large or small working capital also has its disadvantages.
Fred Weston in his work cited above, referring to this aspect, says: “… working capital represents the company's investment in cash, marketable securities, accounts receivable and inventories minus current liabilities. Working capital management is broadly defined to encompass all aspects of current asset management… ”.
On the other hand, as Stephen Ross states in his work “Corporate Finance” “… the management of current assets can be considered as the interrelation between costs that increase with the level of investment and costs that decrease with the level of investment … ”.
However, every financial decision implies the hope of a return to be obtained and a risk to assume; it is said that the higher the risk, the higher the profitability. In the management of working capital, profitability is calculated as earnings after expenses against risk, which is determined by the insolvency that the company may have to pay its obligations. The decision of the amount of working capital to maintain depends then on the individual risk propensity of the managers, which affects the characteristics of the business.
A concept that is gaining strength at this time is the way to obtain and increase profits, and by theoretical grounds it is known that to obtain an increase in these there are two essential ways to achieve it: the first is to increase sales income and the second is lower costs by paying less for raw materials, salaries or services provided; This postulate is essential to understand how the relationship between profitability and risk is linked to that of an effective management and execution of working capital.
As has been said: "The larger the amount of working capital that a company has, the lower the risk that it will be insolvent", this is based on the fact that the relationship between liquidity, capital of work and the risk is that if the first or second is increased, the third decreases in an equivalent proportion, that is, the lower the probability that an organization will be unable to pay its bills to the extent that they are due.
Considering the above aspects, it is necessary to analyze the key points to reflect on a correct management of working capital in the face of profit maximization and risk minimization. These points are:
• Nature of the company: it is necessary to place the company in a context of social and productive development, since the financial administration in each one is of different treatment.
• Capacity of assets: companies always seek, by nature, to depend on their fixed assets to a greater extent than on current assets to generate their profits, since the former are those that actually generate operating profits.
• Financing costs: companies obtain resources through current liabilities and long-term funds, the former being cheaper than the latter.
1.3 The analysis of the financial process of the company: prelude to the planning process.
As has been stated in other works on this subject, before carrying out the financial planning process, first an analysis of what has happened in previous periods must be made. Through a diagnosis of the financial situation of a company, goals and work strategies can be set. »It is far from any doubt that the increasingly frequent use of ratios has been enhanced by their informative capacity, being the norm in these moments the use of ratios as an alarm signal, which detects us when a situation is dangerous if the determined relationship is worse than the reference one ”. To assess the financial condition of a business,Generally, it begins with the calculation and analysis of financial ratios using the income statement and balance sheet for the period or periods under consideration as the main inputs.
The financial statements report on the position of a company at a certain time and on what its operations have been in relation to a previous period. By studying these documents, financial managers can predict future conditions and rely on them as a starting point for planning those operations that may influence the future course of events.
Utilizando los datos que brindan estos estados, se pueden calcular diferentes razones que permitan evaluar el funcionamiento pasado, presente y proyectado de la empresa. Esta constituye la forma más usual de análisis financiero y se ha diseñado para mostrar las relaciones que existen entre las cuentas de los estados financieros. Los ratios, como su nombre indica, razón o relación, expresan el valor de una magnitud en función de otra y se obtienen dividiendo un valor por otro. “El objetivo de los ratios es conseguir una información distinta y complementaria a la de las cifras absolutas, que sea útil para el análisis que nos propongamos ya sea patrimonial, financiero o económico”.
The financial ratios are grouped taking into account what you want to analyze with your calculation. In fact, the authors who address this topic classify them according to different criteria. In this research, the classification offered by Fred Weston in the tenth edition of his work will be used
Foundation of Financial Management.
For example, liquidity ratios can measure the ability of a company to meet its short-term obligations as they expire, while activity ratios are used to measure the speed at which various accounts are converted into sales. or in cash.
Within the first group are the following fundamental reasons:
1. Solvency index, which gives a measure of the proportion in which the most liquid resources of a company cover its current liabilities.
2. Quick ratio or acid test that is similar to the previous one, only it does not include the product inventory within current assets since this is the asset with the least liquidity.
Likewise, in the second group the most used indices are:
1. Total asset turnover ratio
2. Inventory turnover ratio
3. Accounts receivable turnover ratio
3. Accounts payable turnover ratio.
Another important group is made up of the ratios that measure indebtedness or leverage, that is, the amount of money from third parties that is used in the effort to generate profits. Here are the debt ratio that measures the percentage of funds provided by creditors, the liability-equity ratio that indicates the relationship between long-term funds provided by creditors and those provided by the owners of the company, among others.
There are other types of reasons that allow the analyst to evaluate the profits of the companies with respect to a given level of sales, assets or capital. These are the profitability measures. According to Weston, this set of ratios shows the combined effects of liquidity, activity and debt management on operating results. Certainly, a good level of profits will only be possible if the rest of the accounts of the financial statements have been well managed and to obtain acceptable profitability ratios, the liquidity, the activity and the indebtedness of the business must also be adequate. Some of the reasons that make up this group are:
1. Margin of Profit on Sales that shows the profit obtained by each sales unit.
2. Basic profit generation with which the basic profit generation potential of the company's assets is obtained before the effect of taxes and leverage.
3. Return on Total Assets which measures the return on total assets after interest and taxes.
4. Return on Common Equity which, as the name implies, measures return on common equity.
According to the author, of these elements, the most important related to short-term operations are liquidity, activity and profitability, since they provide the critical information for the short-term operation of the company. Debt ratios are useful when the analyst is sure that the company has successfully faced the short term and to assess the financial risk of the business.
There is another group of reasons that are not used in the Cuban economy due to the characteristics of its companies, however it is valid to mention them because they provide important data for the financial analysis of the company. These are the market ratios that relate the market price of the company's shares to its earnings and to its book value, providing the manager with an indication of what investors think of the company's past performance and its future projections.. Among these reasons are:
1. Price / earnings ratio, which shows the amount investors are willing to pay per dollar of reported earnings.
2. Market value / value ratio, in books that provides a criterion about the way in which investors value the company.
In addition to the reasons given, there are many others that can be calculated from the financial statements of a company and that express important measures to evaluate certain aspects of the operation of the company. However, it is necessary to take certain precautions when using this method to analyze the financial situation of a company. “When using the ratios, we must take certain precautions to avoid making incorrect decisions with the information they provide, or simply not making fatuous comments with them. In this sense, the ratios, in general, should not suppose a magnitude to temporarily increase in an obsessive way; which could tie up our decision-making capacity at Critical moments or make us make an unwise business decision. "
First, be careful with the number of ratios to use since you can define as many ratios as you want and to achieve a clear vision and a safe diagnosis of the company, it is essential that the most important reasons are carefully selected and in a limited way. significant. Also, there is no absolutely true value for any reason. Each industry has its own characteristics that differentiate it from the others and even within the same industry there may be a company that must define its own reasons.
Finally, the most important point to keep in mind is that the ratios must be applied consistently to similar periods in order to make accurate comparisons. “The analysis of financial ratios is certainly a useful tool (…)
When the financial ratio analysis is carried out mechanically and without further thought, it runs the risk of falling into error, but when used wisely and with good judgment, it can provide useful insights into the company's operations under study."
Some of the financial ratios analyzed above can be interrelated by applying the Dupont analysis system that is also known as the Pyramidal Decomposition of Financial Ratios. This method combines the Income Statement and the Balance Sheet into two profitability measures that are return on assets (ROA) *, and return on equity (ROE) *. This approach shows the relationships that exist between return on investment, asset turnover, profit margin and leverage. The Dupont system begins the analysis with the net profit margin, which measures the company's sales performance, as well as the total asset turnover that indicates how efficiently the company has used its assets to generate sales.In the Dupont formula, the product of these two ratios gives the return on assets.
ROA = Net Profit Margin * Turnover of Total Assets ROA = Net Income / Sales * Sales / Total Assets
ROA = Net Income / Total Assets
The Dupont formula allows companies to divide their performance into components of profit on sales and efficiency in the use of assets. The second step of the Dupont system uses the modified Dupont formula. This relates the company's return on assets (ROA) to its return on equity (ROE). The ROE is obtained by multiplying the ROA by the multiplier of the stockholders' equity which is the ratio that relates the total assets of the company with the common capital.
ROE = ROA * Equity multiplier ROE = Net Income / Total Assets * Total Assets / Capital in common shares
ROE = Net Income / Capital in common shares
The use of the Dupont system is an important diagnostic tool whose main advantage is that it allows the company to divide its return on capital into a profit on sales component, an asset use efficiency component and a financial leverage use component. (ROE = Net Profit Margin * Asset Turnover * Financial Leverage Multiplier) The Dupont analysis system makes it possible to evaluate all aspects of the company's activities to isolate the main areas of responsibility. This tool is used mainly in companies composed of several substructures.
Another method by which those interested in the financial situation of a company can obtain valuable information is the break-even analysis or cost-volume-profit analysis. This method allows the company to determine the level of operations it must maintain to cover all its operating costs and evaluate profitability or lack of profitability at different levels of sales, and from this point of view it can also be used as a planning tool. The operation can be performed algebraically or graphically. The breakeven point is defined as the level of sales with which the company covers all its fixed and variable operating costs. For its calculation algebraically, there are several methods. One of them is the one that uses the following equation:
P (x) = CV (x) + CF
Where P represents the unit sales price, CV is the variable cost and CF represents the fixed cost. Solving for the variable x, we can find the number of units that would achieve the balance between costs and sales. Another way to calculate the equilibrium point in units is through the following formula, which follows from the previous equation.
CF
PE = ______________________
Contribution Margin
The Contribution Margin is the difference between the unit sales price and the variable cost. If we wanted to know the volume in money of the breakeven point, it can be found by calculating:
CF
PE $ = ________________
CV (total)
1 - _____________
Income
This technique is of great value. When a company anticipates a sufficient volume of sales to cover all of its fixed and variable costs, then it can avoid accounting losses. The vertical and horizontal analysis (comparative analysis) of the accounts that make up the financial statements, is another tool to evaluate the financial health of a company. The vertical analysis method is used to study financial statements such as the Balance Sheet and the Income Statement. It consists of determining the percentage composition of each asset, liability and equity account, based on the value of the total Assets and the percentage that each item in the Income Statement represents from net sales.
On the other hand, the horizontal analysis method is a procedure that consists of comparing homogeneous financial statements in two or more consecutive periods, to determine the increases and decreases or variations of the accounts, from one period to another. This analysis is of great importance for the company, because it informs the changes in the activities and if the results have been positive or negative; it also allows defining which ones deserve more attention as significant changes. Unlike vertical analysis, which is static because it analyzes and compares data from a single period, this procedure is dynamic by relating the financial changes presented in increases or decreases from one period to another. It also shows the variations in absolute figures, in percentages or in ratios,This allows the changes presented to be widely observed for study, interpretation and decision making.
It is very common that when analyzing the past and current operation of a company, financial analysts prepare certain statements with which the flow of funds that occurs within them can be studied. This flow of funds can be viewed as a continuous process in which, for each use of funds, there must be a corresponding source. The term funds is used to designate cash or working capital, both strictly necessary for the proper functioning of the company, the first to pay outstanding bills and the second for long-term negotiations.
There are two approaches that allow the study of the movement of flows within a company. The first of them is the so-called State of Origin and Application of Funds that can be built based on both cash and working capital, however, taking into account that the present research focuses on short-term planning, only will frame the preparation of this statement on a cash basis. The second approach is a cash flow accounting statement which provides important information for business managers and complements the Statement of Cash.
Results and Balance Sheet.
The Cash Flow Statement must clearly show the variation that cash has had during the period, grouped into the activities of:
Operation: Those that affect the results of the company, are related to the production and generation of goods, as well as the provision of services. Cash flows are generally the consequence of cash transactions and other events that are considered in determining net income.
Investment: Includes the granting and collection of loans, the acquisition and sale of investments and all operations considered non-operational.
Financing: these are the flows determined by obtaining resources from the owners and the reimbursement of returns. All changes in liabilities and equity other than operating items are considered.
To provide an overview of changes in cash or cash equivalents, the cash flow statement must show the changes in all business activities. When preparing the cash flow statement, in addition to grouping the changes that have occurred in categories of operating, investing and financing activities, other elements must be taken into account. For example, changes that increase cash are shown with a positive sign, while changes that reduce cash are shown as negative numbers and all these results are placed in a single column.
So far, various financial analysis techniques have been referred to. It is a general criterion that the aforementioned methods are the most used when financially valuing a company. However, it should be clear that they are not the only ones, there are many more. Emphasis has been placed on those that most frequently appear in the bibliography consulted.
1.4 Operational planning as a premise of financial planning
The budgeting of companies makes it possible to predict what will happen in the future, whether there will be profit or loss, and the necessary corrections and diversification routes can then be determined to increase the efficiency of the entity. Many of the unjustified closings and creation of companies could have been avoided through a timely effort to quantify in monetary terms the objectives that were wanted to be achieved. From the beginning, planning has been concerned with foreseeing the future, and as far as possible, integrating as best it can to the evolution of this future, in order to obtain certain objectives.In the second half of the 20th century, planning has undergone a strong evolution to become, together with the Organization, the basic elements for the implementation of business strategy. However, planning without the corresponding Control System is totally useless because through Control compliance with the objectives is verified and possible corrective actions are applied. Budgets constitute the quantitative expression of the objectives to be achieved, becoming an auxiliary for organization and control, and must be closely coordinated with the board of directors and the accounting system, so that all those who perform tasks of management participate in its preparation and know their responsibility so that they are operational.Budgets are basically anticipated financial statements and constitute objectives that cover all phases of the company's operations (sales, production, purchases, financing). This idea is clearly shown in Annex 1 to which reference is made at the beginning of the chapter and is reaffirmed in the graph shown below.
Master budget structure
Based on Annex 2, it should be taken into account that the processes of preparing a budget part of the master budget that includes two types of budgets: operational and financial budgets, the research takes the sales budget as a base to finally reach the flow of box. The master budget is the one that provides the overall plan for a future economic period, including the profit target. One of them, the operating budget is made up of smaller ones. The sales budget, where you anticipate how much you expect to sell, allows you to know how much to produce and how much it costs to produce. It will then be necessary to see what raw material is needed, how much labor will be used, what will be the indirect production costs and most important of all, how much will it cost.Once you know how much raw material you need, you can plan or budget for purchases with every opportunity so that you do not start with the rush and can get good prices. Nowadays it is common to use mathematical models that make the work less tedious and others more exact.
Mathematical models applied to economics or economic-mathematical models have become increasingly important in all aspects of economic life. Starting in 1992, mathematical models ceased to be just that to become techniques applied to economic sciences. Optimization problems are called those types of problems in which the maximum or minimum of a function with a certain number of variables is sought, its values being subject to certain limitations. The linear programming problem is a particular case of optimization problems and can be described as follows.
Given a linear function of several variables, we want to determine non-negative values for said variables that maximize or minimize the value of the linear function, subject to certain conditions that assume the form of a system of linear equations or inequalities. Considering that r is the number of variables and that the system of equations or inequalities consists of m elements, with m <r the previous statement can be formulated mathematically as follows: We
must determine the values of the variables xj that make the maximum or minimum value of the linear function.
Z = C1 x1 + C2 X2 + ……………………. + Cr Xr (3-1)
Y that satisfy the following conditions:
A11X1 + A12 X2 + ………………………. + A1r Xr {≥, =, ≤} b1
A21X1 + A22 X2 + ……………………… + A2r Xr {≥, =, ≤} b2 = (3.2)
Am1X1 + Am2 X2 + …………… ……….. + Amr Xr {≥, =, ≤} bm
XJ ≥ 0 J = 1 ………..R (3.3)
Where each of the expressions contained in (3-2) maintains one and only one of the signs. {≥, =, ≤} The values cJ, j = l… r, bi i = l… m, and aij, i = l… m, j = l… r Known and constant are assumed to represent the data that will be used in the model. The mathematical approach represented by (3-1), (3-2) and (3-3) is known as the linear programming model or linear optimization model. The variables Xj are called DECISION VARIABLES Ö ESSENTIAL VARIABLES representing each of them, within the framework of the problem, of a certain activity. The function (3-1) is called the objective function and expresses the optimization criterion that will be used in the problem.
The values C1, C2… Cr are called the coefficient of the objective function. It can be seen that in expression (3-1) no constant terms appear. This is because the Xj values that provide the best value for Z, that is, the optimal value, are independent of whatever constant quantity is added. If such a constant exists in the concrete problem, it can be ignored during the process used to find the values of Xj and after being added to the value of Z found.
The system of linear equations or inequalities (3-2) is called a system of linear restrictions. The bi i = 1… m constitute the so-called independent term while the ai ji = 1… m, j = 1… r are known as technological coefficients or coefficients of the restrictions.
Expression (3-3), which indicates the requirement that all variables xj be non-negative, is called the non-negativity condition. If in a specific case it is stated that a variable is not restricted in sign, we see that this could be expressed mathematically in such a way that condition (3-3) is respected. To do this, the following would be done: Suppose that the variable xp = X´ñp - X´ññp, where xp, X´ñp <X´ññp we have xp <0.
It should be noted that from a purely mathematical point of view there are no differences between (3-2) and (3-3) in the sense that both constitute limitations to the possible Xj values. The difference between the two lies in the different treatment given to (3-3) when we proceed to solve the linear programming problem. This will always consist of m restrictions in addition to the condition of non-negativity. A solution to the linear programming problem will be constituted by any set of values for the variables Xj that satisfy the conditions (3-2). A solution that also satisfies the condition of non-negativity is called a possible or feasible solution. Note that this implies that the possible solution must satisfy (3-2) and (3-3).
We will denote by M the set of possible solutions to the linear programming problem. Any possible solution that provides the optimal value (maximum or minimum) for the objective function constitutes an optimal possible solution. The linear programming problem must normally consist of an infinite number of possible solutions. The goal in solving the problem is to determine the optimal solution from all possible solutions. The linear programming model is a deterministic model. This means that the coefficients aij j, cj and the independent term bi are known and constant. The linear model does not admit probabilistic values. So far we have stated the assumptions of the linear model and its implications.Finally, we would like to point out that the linear programming model will always be applicable to all situations in which:
• There is a well-defined objective to be achieved with the solution of the problem.
• There are a large number of factors that limit the solution of said solution, these factors must be handled simultaneously, there being an interaction between them.
• The proportionality and additivity assumptions that characterize the linear model must be valid, or in other words, the interrelationships between the elements of the problem must be able to be expressed through a system of linear equations or inequalities.
The procedures for building the model can be summarized as follows:
Step 1 Definition of variables.
Step 2 Construction of the constraint system.
Step 3 Construction of the objective function.
The definition of the decision variable is the first step in the construction of the linear programming model. Each decision variable is identified with each of the activities in which the problem under study is broken down. The name of the decision variable that is given in the activity responds to the fact that they are variables on which a decision can be made directly to solve the formulated problem, in other words they are the elements through which the objective is achieved. it is pursued with its solution of the problem. The definition of the decision variable has two basic stages: the conceptual and the dimensional and an optional third stage, which is the temporal one, which on some occasions it is necessary to analyze. The conceptual definition is one that refers to the determination of the variables,that is, what does that variable mean in the context of the problem. When defining a variable conceptually, the principle of uniqueness must be kept in mind. Uniqueness can be of four types: Origin, Destination, Technological structure and economic coefficient. The same product can be defined by many variables depending on the uniqueness criterion. There are problems in which it is necessary to take into account the definition of the variable in time, since it is possible to have some semi-annual data, other annual, monthly, etc.The same product can be defined by many variables depending on the uniqueness criterion. There are problems in which it is necessary to take into account the definition of the variable in time, since it is possible to have some semi-annual data, other annual, monthly, etc.The same product can be defined by many variables depending on the uniqueness criterion. There are problems in which it is necessary to take into account the definition of the variable in time, since it is possible to have some semi-annual data, other annual, monthly, etc.
The system of equations or inequalities (3-2) together with condition (3-3) constitutes the limitations that form the possible set of decisions to be taken; Since, in linear programming, the objective function is not optimized in general, but subject to restrictions that must be respected. Since the model is linear, each and every constraint has to meet the linearity requirements. When to build a constraint Recommended.
1. Make sure of the limited nature of the supposed restriction, and define (if it can be classified as such) the physical and temporal dimension of the constant that will be placed in the independent term (bi), as well as the sign of the restriction as follows: a maximum availability with the sign less than or equal to (≤); a minimum bound to meet the sign greater than or equal to (≥) or an exact requirement, which is represented by an equation (=).
2. Analyze which variable (s) are part of the restriction.
3. Once the corresponding variable (s) have been placed in the restriction, and with a view to fulfilling the additivity assumption of any linear model, it is necessary to discuss how the conversion coefficient will be defined - known as “ai j - which will allow adapting the dimension of the decision variables to the restriction, and will make it possible to add homogeneous results.
The objective function is a linear function that includes all the variables of the problem (although there are some that have a null coefficient) and expresses the central purpose that is pursued with the solution of the problem. A linear programming problem hardly has only one goal. There are primary objectives, secondary objectives etc. The primary objectives are raised directly in the objective function, and the secondary ones, through restrictions. The objective function serves several interrelated purposes. In the first place, it is the mathematical instrument that allows to find the solution of the linear programming program in the context of the proposed restrictions. Secondly,It is the concrete quantitative way to demonstrate that a given solution (proposed a priori or by any means not scientifically substantiated) is less efficient than the one proposed by the model; and thirdly, it is a powerful persuasive instrument for the application of a solution, especially when it comes to modifying working methods.
QM for Windows software.
To calculate the equilibrium point in units and for modeling, the QM Software for WINDOW (Version 1.41) was used as a tool, which is a program specifically designed to facilitate work in the field of mathematical techniques applied to economics. This can be used to solve problems related to Decision Analysis, Game Theory, Simulation, Transportation and others. The results of its application to the problem of the present investigation are shown in Chapter III.
1.5 Techniques for Short-term Financial Planning.
The general idea of financial planning is to determine where the business has been, where it is now, and where it is going. So far, the most common techniques have been exposed to analyze the financial situation of companies and find out what their past and present behavior has been.
In this section, a set of tools that are used to develop forecasts and economic and financial goals to be achieved in a company will be presented, taking into account the means that are available and those that are required to achieve it.
The budget system has become the most powerful weapon available to modern administration to minimize risk, make optimal use of financial resources and decide in advance the needs of money and its correct application, seeking the best performance of companies and maximum security financial In business practice, different types of budgets are used for short-term financial planning that help forecast future financial needs such as the Cash Budget and the Projected Financial Statements or Proforma Statements. In addition, there are other techniques that are put into practice when conditions exist in business organizations that are not conducive to the application of the above methods. One of these methods is simple linear regression.The attention of this section will focus on the cash budget because it is the applied tool. Companies estimate their cash needs as an integral part of their general budget or forecasting process, since in this way those in charge of a company's financial dependence have a very broad perspective on the occurrence of inflows and outflows of cash. effective in a given period, allowing you to make appropriate decisions about its use and management.They have a very broad perspective on the occurrence of cash inflows and outflows in a given period, allowing you to make appropriate decisions about its use and management.They have a very broad perspective on the occurrence of cash inflows and outflows in a given period, allowing you to make appropriate decisions about its use and management.
A Cash Budget is reached through a projection of the company's future cash income and disbursements over various periods. This statement shows the timing and amount of expected cash inflows and outflows during the period studied.
This information allows the company to program its cash needs in the short term, also paying close attention to the planning of cash surpluses, since when obtaining surpluses these can be invested, and on the contrary, if there is a shortage, it can plan how to search short-term financing, although you will first need to carefully analyze the projection made to assess whether the shortfall can be avoided. Thus, the financial manager will be able to exercise control over the cash and liquidity of her company. Cash Budgets can be prepared for any period. For short-term projections, companies typically use a forecast monthly cash budget over the next year.Daily or weekly budgets are also built that are used for actual cash control.
Below is one of the models to prepare the Cash Budget:
Source: Gitman, Laurence Fundamentals of Financial Management, Volume I, Editorial MES, P: 119
The fundamental factors in the analysis of the cash budget are in the forecasts that are made on the sales. It has previously been emphasized that the sales forecast is the starting point of financial planning. Once completed, the next step is to determine the cash income that is obtained from them. In the event that sales are made in cash, the money is received at the time of sale; If the sales have been made on credit, the income will be received later, depending on the terms of sale that the company uses and the collection patterns. The most common examples of cash inflows are cash sales, collection from credit sales, and other cash receipts. Following income is the forecast of cash disbursements.This includes all those cash outlays that result from the total operation of the company. Several of these cash outflows are also dependent on sales. There are other expenses that do not fluctuate with sales, such as: cash purchases, cancellation of accounts payable, payment of dividends, leases, wages and salaries, payment of taxes, purchase of fixed assets, payment of interest on liabilities, the payment of loans and payments to sinking funds and the repurchase or withdrawal of shares.leases, wages and salaries, payment of taxes, purchase of fixed assets, payment of interest on liabilities, payment of loans and payments to sinking funds and the repurchase or withdrawal of shares.leases, wages and salaries, payment of taxes, purchase of fixed assets, payment of interest on liabilities, payment of loans and payments to sinking funds and the repurchase or withdrawal of shares.
After all the foreseeable cash inflows and outflows have been considered, the net cash flow for each month can be calculated, deducting the disbursements from the inflows obtained. Subsequently, this result (the net cash flow) is added to the initial cash for the period considered and the final cash balance is obtained for each subperiod. The required balance or target balance is the cash balance that a company must keep available in order to carry out business operations in the short term. This data can be calculated through various methods such as: mathematical models such as William Baumol and Miller Orr, the average cash cycle method or the study of historical cash behavior. By subtracting the target balance from the ending cash balance,you can get a cash surplus (if the result is positive) or a cash deficit (if the result is negative).
Financing will only be required if the final cash balance is less than the minimum cash balance, so the company will have to resort to some means to address this deficit. If, on the other hand, the final cash balance is greater than the minimum balance in operations, then there is a surplus cash balance which will be used in temporary investments. Finally, any deficit or surplus must be added to or subtracted from the ending cash balance to obtain an ending cash balance with appropriate adjustments. The most significant utility of the Cash Budget is that it indicates whether a shortage or excess of cash is expected in each of the months covered by the forecast. If the company expects to obtain a cash surplus, it can reduce loans,schedule short-term investments or use this in some other part of the business; While the company expects to run a cash deficit, it must plan how to obtain short-term financing.
In order to reduce the uncertainty of the forecasts, in addition to being very careful when making the necessary estimates, you can also prepare several cash budgets, one based on optimistic forecasts, another on pessimistic forecasts and a third based on the most probable forecasts.. The financial manager will then be able to make smarter short-term financial decisions as he will have an idea about the danger of the alternatives. In addition to taking measures to face an uncertain environment, we must prevent the risk that is assumed with financial forecasts. To quantify and measure it, scatter statistics can be used. The variance and standard deviation provide considerable information for making assessments of risk.One way to calculate it is to observe what is the variance on the average value of the treasury in each of the periods in which the year is subdivided to make the forecast.
If M is taken as the mean value of all net cash flows, then:
kkk
∑ FNt ∑ Ct - ∑ Pt
t = 1 t = 1 t = 1
M = ¬¬¬ _________________ = _______________
kk
Where:
M = Average calculated of net cash
flows FNt = Net cash flows in period t
Ct = Receipts of period t
Pt = Payments of period t
k = Number of periods t
t = k - th component of the time interval total
The variance for this case could be calculated as follows:
k
∑ (FNt - M) 2
t = 1
or2 = ¬ ____________
K
Source:
In addition, as a measure of relative risk, the coefficient of variation can be determined, which is expressed in percentage form the variability of the possible results.
Standard deviation
Coefficient of variation (%) = ___________________
Mean
Source:
As the standard deviation decreases, the risk of error is lower, which means that the deviations are smaller. Although charges and payments are subject to different fluctuations, in this analysis they are not considered as random variables, that is, these components have been calculated for each of the time intervals under the hypothesis of an environment of certainty.
The risk that is determined through the analysis described above cannot be eliminated but it can be mitigated with an organizational effort and with decision rules that affect internal and external aspects as a means of harmonizing the values or net flows of each period. that includes the treasury forecast. After analyzing how the cash flow of a company is projected over time, it will be explained how a balance sheet and an income statement can be projected for future dates, which is sometimes very useful for the financial management of companies. These budgets are not totally independent, since much of the information used to prepare the cash budget can be used to obtain a pro forma statement.The projected statements incorporate estimates of all assets and liabilities, as well as the income statement items.
Conclusions
1. There is no efficient short-term financial planning in companies.
2. The main source of financing for entities is capital, so they do not take advantage of commercial credit to its full potential.
3. The planning process does not take into account factors that affect the objectivity of the plans.
4. The preparation of the cash budget allows to know if there is a deficit or excess of cash.
Bibliography
1. L. Back, Philppa: Company Treasury Management; Editorial Diaz de Santos SA: - 1990.
2. Meigs and Meigs: Accounting. The basis for managerial decision making; Editorial MES.
3. Murray R. Spiegel: Theory and Problems of Statistics, sixth reprint; Editorial MES: -1987.
4. PCC: Economic resolution V Congress of the Communist Party of Cuba. Political Editor: - 1998.
5. Ministry of Tourism: Manual of the Reception Cashier Post.; Editorial Noriega - Limusa: - 1991.
6. Ramírez Padilla, David Noel: Administrative Accounting, Second Edition, Editorial Mac Graw Hill de México 1980.
7. Suárez Suárez, Andrés: Optimal investment decisions and company financing; Editorial Pirámide SA: - 1993.
8. Van Horne, James: Fundamentals of Financial Management; Editorial Prentice Holl Hispanoam'erica SA: - 1988.
9. Villalba Garrido, Evaristo: Cuba and Tourism; Social Sciences Publishing: - 1993.
10. Weston, Fred and Copeland: Fundamentals of Financial Management Volume I; Editorial MES.
11. Weston, JF and Brigham, EF: Finance in Administration; Editorial Interamericana SA: - 1987.
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