Undoubtedly our economy is emerging towards an international context and structural transformation, in which productivity is the key to success. Executives are committed to achieving the necessary technical-administrative-financial adequacy in companies, so that the challenge before us becomes successful.
For several decades our economy was isolated (protected), during which time there was no true competitive market, being an economy in which price prevailed over volume.
Inevitably in light of the changes, we will have to modify our vision towards the market, since it will no longer be possible to continue with high-margin policies, if we want the leasing companies to be able to stay in the future that has already begun.
Thus, it is vital to implement analysis tools that allow financial leasing companies to compete in this new market in formation and that provide alternatives to reach the market with low-margin policies and higher volume of placement.
The use of the breakeven technique provides an auxiliary tool for analysis and reflection, which, used with ingenuity, provides support to the management of financial leasing companies to achieve better decision-making.
CONCEPT
It is convenient for a better understanding to make clear what we understand as POINT OF BALANCE. We say that it is that level at which income "is equal to costs and expenses, and therefore there is no utility," we can also say that it is the level at which losses disappear and profits begin, or vice versa.
ELEMENTS THAT FORM IT
To determine the equilibrium point, the existence of four basic elements is required: income, financial margin, variable costs and fixed costs.
For the purpose of this article, we will consider income as those that were directly originated by the operation, such as: income from financial leasing operations, commissions, benefits from purchase option. Variable costs will be those that are modified depending on the volume of operation, these being: interest paid. The financial margin will be the result of reducing variable costs to income. The fixed costs will be given by the amount of the operating expenses.
In this way, in order to facilitate development, we will say that:
BALANCE POINT = PE
INCOME FROM FINANCIAL LEASE OPERATION = V
INTEREST PAID = CV
FINANCIAL MARGIN = MF
OPERATING EXPENSES = CF
DETERMINATION OF BALANCE POINT
According to what has been conceptualized above, we can express in terms of a formula that the equilibrium point will be equal:
BALANCE POINT = INCOME FROM FINANCIAL LEASE OPERATIONS - INTEREST PAID - OPERATING EXPENSES.
Substituting in equality, with the terms defined above, we would have the following equation:
V - CV - CF = 0
This equality represents the point of equilibrium.
So:
PE = V - CV- CF
PE = (V - CV) - CF
MF $ = (V - CV) EXPRESSED IN PESOS
MF% = (FINANCIAL MARGIN / V) X 100 EXPRESSED IN PERCENTAGE
PE = MF $ - CF
PE = CF / MF%
It is necessary to establish a unit of measurement that allows the calculations to be carried out correctly and without complications.
In financial leasing companies, fundamentally they work with «pesos» in terms of volume and with a rate (%) in unit function. In other words, when we refer to the equilibrium point, we visualize it in terms of pesos, by expressing "that with a portfolio of $ xx million and which generates an income of $ yy million, we are above the equilibrium point." However, when analyzing an operation individually, we initially carry it out in terms of rate (%), whether it is the placement rate or the financial margin that it produces.
ANALYSIS OF A PRACTICAL CASE
To apply the above and proceed with the analysis, suppose the following information as of December 1998:
FINANCIAL LEASE INCOME: $ 58,837,000
FINANCIAL MARGIN $ 25,300,000
OPERATING EXPENSES: $ 12,800,000
AVERAGE PORTFOLIO (DAILY) $ 195,750,000
STOCKHOLDERS 'EQUITY: $ 27,500,000
A) DETERMINE THE POINT OF BALANCE IN INCOME AND IN PORTFOLIO
It is first required to know what is the financial margin expressed as%:
MF% = FINANCIAL MARGIN / INCOME X 100
MF% = 25,300,000 / 58,837,000 x 100 = 43 %, this percentage represents the financial margin.
The equilibrium point will be obtained by using the formula:
PE = CF / MF%
Substituting with the information we would have:
PE = 12,800,000 / 43% = 29,767,442, this amount represents the income level of the lessor in which it does not lose or win. It is important for the director of the lessor to know this information, since it will allow him to visualize at all times the behavior that the company is registering and according to the objectives set how far above this level it is.
As we said, the level determined previously refers to the income collected, but how much portfolio will it be necessary to have placed? It is possible to determine the portfolio, by including an additional element in our analysis, this element is the AVERAGE PLACEMENT RATE, and which is defined as : TPC.
To obtain the average placement rate, it will be necessary to know the average daily portfolio placed, since if it were based on final balances, the calculation would be altered and would not present real information.
To continue with the analysis, suppose that the average portfolio is 195,750,000. The determination of the average placement rate will be:
TPC = INCOME / AVERAGE PORTFOLIO; substituting
TPC = 58,837,000 / 195,750,000 =.30057 x 100 = 30.06 %
BALANCE PORTFOLIO = PE $ / AVERAGE PLACEMENT RATE
EC = 29,767,442 / 30.06% = 99,026,637
The amount obtained is the equilibrium portfolio that produces the necessary income to reach the equilibrium point of 29,767,442, with an average placement rate of 30.06 %.
B) DETERMINE THE POINT OF BALANCE WITH AN OBJECTIVE - PROFIT.
If the lessor wishes to obtain for 1999 a profit equivalent to 80% of its stockholders' equity, what would be the average portfolio that would be necessary to place and how much would be the income that would make it possible to cover the profit-objective?
For the above, the following assumptions are established:
Operating expenses will have an increase of 15%
The financial margin will be 44%
Operating expenses 1998 = 12,800,000
15% increase for 1999 = 1,920,000
Operating expenses 1999 = 14,720,000
Stockholders' Equity = 27,500,000
Target profit = 50% of 27,500,000 = 13,750,000
PE = CF + PROFIT / MF%
PE = (14,720,000 + 13,750,000) / 44%
PE = 64,704,545
This would be the level of income required to meet the target-profit and the new operating expenses for 1999.
The average portfolio to be placed would be determined as follows:
REQUIRED PORTFOLIO = PE / AVERAGE PLACEMENT RATE
Given that the behavior of interest rates are based on various economic variables and that is not the purpose of this article, we will assume that rates will have a downward behavior, according to expectations for 1999, in this way it is projected that the average placement rate will be 20.96%.
REQUIRED PORTFOLIO = 64,704,545 / 20.96%
REQUIRED PORTFOLIO = 308,704,890
This amount means that an average placement increase of 57.7% would be needed compared to 1998. Obtaining this data can be the starting point to carry out various sensitivity analyzes that consider, for example: a higher increase in the contribution margin, different average placement rates, improve the efficiency in the operation, so that there is a reduction in operating expenses, etc. and thus be able to reach a projection closer to reality that allows the management to meet the objective-utility.
C) DETERMINE THE POINT OF BALANCE WITH A MIX OF PLACEMENT RATES.
It is interesting to delve into the break-even analysis when considering the mix of placement rates, since this is a real fact, since portfolio placement is not operated on the basis of a single rate.
There are various causes that arise for the existence of different placement rates, some of these are: market competition, the cost of funding, interest in keeping or winning a client, the importance of the lease for its amount, the desired or expected growth, surplus in treasury, objective-profit, etc.
The strategy will then be to define the political placement rates at different levels depending on their amount. This point will be dealt with in a separate article, as it requires a different analysis from the one we are dealing with at this time, however we will assume that the previous analysis was carried out, in order to continue with our development.
Assumed placement rates are based on the amount placed:
RATE% OF THE MF PORTFOLIO
up to 100,000 22% 40% 41%
up to 500,000 21% 25% 38%
above 500,000 19% 35% 32%
Operating expenses are estimated to be 20,500,000.
It is required to determine the breakeven point as well as the breakeven portfolio.
First, it will be necessary to obtain the WEIGHTED MF:
up to 100 million = 40% x 41% = 16.40%
up to 500 million = 25% x 38% = 9.50%
above 500 million = 35% x 32% = 11.20%
---
FINANCIAL MARGIN = 37.10%
PE = 20,500,000 / 37.10%
PE = 55,256,065
At this level of income, the equilibrium point would be located with different levels of placement rates.
Now we want to know what would be the equilibrium portfolio resulting from the rate mix.
For the above, it is required to follow the same procedure to weight the financial margin, only substituting the percentage of financial margin for that of the rate.
up to 100,000 = 22% x 40% = 8.80%
up to 500,000 = 21% x 25% = 5.25%
above 500,000 = 19% x 35% = 6.65%
---
WEIGHTED PLACEMENT RATE = 20.70%
In this way, the weighted placement rate is 20.70%
CE = PE / WEIGHTED PLACEMENT RATE
EC = 56,256,065 / 20.70%
EC = 271,768,430
The result is the equilibrium portfolio that is required to be placed with the rate mix, and its distribution would be as follows:
up to 100,000 = 108,707,372
up to 500,000 = 67,942,108
above 500,000 = 95,118,951
Once the development is known to work with a mixture of rates and financial margin, let us now determine, with the same information as above, the level of income and placement portfolio, which would be required to reach an objective-profit of 18,000,000.
PE = (CF + PROFIT) / MF%
PE = (20,500,000 + 18,000,000) / 37.10%
PE = 103,773,585
CR = 103,773,585 / 20.70%
CR = 501,321,667
The distribution of this portfolio would be:
up to 100,000 = 200,528,667
up to 500,000 = 125,330,417
above 500,000 = 175,462,583
We can say that when an increase in the volume of placement occurs, and a greater amount of resources is necessary to finance said increase, and under the assumption that the placement rate does not change its financial margin, it will tend to fall.
Therefore the financial margin will increase if:
There is an increase in the placement rate.
The borrowing rate for financing decreases.
Capital is increased.
The combination of the above.
The presence of an increase in the financial margin will require a lower equilibrium portfolio, likewise the equilibrium point will be located at a lower income level.
When managing an increase in the placement rate, it is important to consider the elasticity of financial leasing, since it is very sensitive to increases.
CONCLUSION
We can appreciate that it is interesting to use this technique in determining income levels, as well as the required volume, which satisfies the planning expectations considered in financial leasing companies.
Using the equilibrium technique in a computational model allows the sensitivity analysis to be carried out in a simple way, since it is possible to involve several variables and handle a range of alternatives that allow the management of financial lessors to establish strategies with sufficient opportunity and assess the effect. of volume vs. price (rate) in earnings.
In decision-making, it will be necessary to have agreement between the mission of the financial leasing companies and the penetration objectives to be achieved, since a reorientation to the market will be necessary, implementing commercial and financial strategies with greater creativity, since the market in its process of development, will seek more competitive international services.
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