Business Financial Planning is a process that reflects the projection of the financial situation of the company. It helps set concrete goals that motivate managers and provides standards to measure results such as:
using-financial-reasons-to-analyze-business-management- Analysis of the mutual influences between the investment and financing alternatives open to the company. Projection of the future consequences of present decisions, in order to avoid surprises and understand the connections between current decisions and those that occur in the future. Decision of the alternatives to adopt Comparison of subsequent behavior with the objectives established in the financial plan.
The financial plan will describe the planned Capital investment, broken down by category and by division or line of business. A literal description will be made of why these amounts of investment are needed and also of the business strategies to be used to achieve financial objectives.
Financial planning involves preparing sales, income, and asset projections based on alternative production and marketing strategies, and subsequently deciding how the forecasted financial requirements will be met.
TC administration covers all aspects related to the administration of current assets and current liabilities and determines the liquidity position of the company and the liquidity necessary for survival.
If the company cannot maintain a sufficient level of TC, it is likely to go into insolvency and be forced to file for bankruptcy. The company's current assets must be large enough to cover its current liabilities and to be able to ensure a reasonable safety margin.
Importance of the administration of Working Capital.
- Financial managers have to spend time on the day-to-day operations of the business. Current assets require careful attention from the financial manager as they represent a very large proportion of assets and because these investments tend to be relatively versatile. It is important for small businesses as they cannot avoid investing in cash, accounts receivable and inventory.
Taking into account the above, we define as a scientific problem the need to analyze the state of financial administration in the company VASCAL Jobabo.
Therefore the object of study will be the analysis of the Financial Statements of the VASCAL Company in 2010.
Objectives of the work: To carry out an analysis of the situation presented by the financial administration of the VASCAL Jobabo company, using financial analysis as a tool.
The field of action: Financial analysis of the Financial Statements of the company VASCAL Jobabo
Hypothesis if the state presented by the financial administration in the VASCAL company is determined, through financial analysis, it will enable the management to make decisions to improve its management.
Development
The company estimates its cash needs as an integral part of its overall budget or forecasting process. First, you forecast your fixed asset and inventory requirements along with the dates by which payments are due. This information is combined with projections about the delay in the collection of accounts receivable, the dates of payment of taxes, interest, dividends and the like.
The cash budget provides much more detailed information regarding the future flows of the business than the forecasted financial statements.
The cash budget is a short-term financial instrument (up to one year) that includes a projection of future cash inflows and outflows during the projected period. The difference between these two aspects will give us a net cash flow that together with the cash at the beginning (end of the previous period) allows us to calculate the final cash that is compared with the cash balance that the company must maintain to fulfill its obligations, thus reaching to determine if there is a cash deficit or surplus in each period analyzed, this being its fundamental objective.
The second fundamental reason for holding cash is determined by bank requirements for the operation of credit and other banking services.
Having cash, the company will be able to face certain needs such as:
- Take advantage of possible discounts for prompt payment, which constitute an opportunity for immediate payment. Maintain good liquidity indicators (of solvency and immediate liquidity) which are required in the analysis of credit granting. Take advantage of expansion opportunities to grow. Meet emergencies and maintain the compensatory balance that must be agreed with the bank.
The Operating Cycle takes into account:
- The inventory conversion period, which is the average time a business takes to convert its accumulated inventories of raw materials, work in progress, and finished items into products to sell to customers. This cycle is measured by the average age of inventories. The accounts receivable conversion period is the average time it takes a company to convert its accounts receivable into cash. This cycle is measured by the average collection period.
The total operating cycle is an amount of time spent buying raw materials to produce goods and collecting cash as payment for those goods after they have been sold.
The Pay Cycle focuses on the timing of cash inflows, but circumvents the timing of outflows (when we have to pay for purchases and labor). However, the financing requirements of the company will be influenced by its ability to delay payments. Therefore, the company must strive to manage cash inflows and outflows (the longer it can delay payments, the less severe the problems that the operating cycle can cause).
Working capital (TC) is a company's investment in short-term assets (cash, marketable securities, accounts receivable, and inventories). Net working capital is defined as current assets minus current liabilities. Current liabilities include accounts payable, notes payable, bank loans, commercial paper, and accrued wages and taxes.
Current ratio is calculated by dividing current assets by current liabilities and measures the liquidity of a company.
The quick ratio, or acid test, measures liquidity and is obtained by subtracting (less liquid) inventories from current assets and dividing by current liabilities.
The broadest picture of liquidity is shown by the cash budget, as it predicts cash inflows and outflows, focusing on the company's ability to meet its outflows.
The working capital policy refers to:
1) target levels for each category of current assets.
2) the way in which current assets will be financed.
Working capital, sometimes referred to as gross working capital, refers simply to current assets, while net working capital is defined as current assets minus current liabilities.
The working capital policy refers to the basic policies of the companies regarding the levels set as goals for each category of current assets and the way in which they will be financed. Therefore, the management of working capital refers to the management of current assets and liabilities within certain policy guidelines.
Accounts Receivable Administration.
Sales on credit, which result in accounts receivable, typically include credit terms that stipulate payment in a specified number of days. Although all accounts receivable are not collected within the credit period, most of them are converted into cash in less than a year; consequently, accounts receivable are considered as current assets of the company.
Inventory Management.
With such high costs, holding excessive inventory levels can literally ruin a business. On the other hand, inventory shortages can lead to lost sales, interruptions in the production area, and lose the trust of your customers. For this reason, the shortages can be as harmful as the excesses.
On the other hand, inventory management has an effect on the cash conversion cycle. Remember that one of the components of the cash conversion cycle is the inventory conversion period. Naturally, the larger the inventory level, and therefore the longer the inventory conversion cycle, the longer the cash conversion cycle.
Characterization of the Company:
The VASCAL Jobabo Company; quote in Hermanos Acosta # 48 Jobabo. Las Tunas subordinate to its Provincial Company with a staff of 123 workers. It has the following corporate purpose:
- Produce, assemble and wholesale finished products and intermediate productions in Cuban and convertible pesos. Market the productions of the company itself, the Local Industries throughout the country and the Light Industry at retail stores. Wholesale items of high popular demand in Cuban pesos. Wholesale idle and slow moving products in Cuban pesos.
Taking into account that the company is an economic entity, that it is in charge of keeping reliable accounting, this plays a very important role, as it is the maximum responsible for supplying information, analyzing it, interpreting it to record and process all economic facts..
Starting from the foregoing, we will begin the analysis of the financial reasons of the entity but not without first making references to:
- Concept of Financial Analysis and Interpretation Reasons involved in Analysis techniques Calculation and Interpretation of the company's financial ratios.
Financial Analysis and Interpretation.
The situation of assets and current liabilities reflects the accounts that are converted into money in a short period of time and the liabilities the obligations payable in the short term, showing the situation in the period analyzed.
Analysis of assets and liabilities (MP)
| Current assets | 2009 | % | 2010 | % | Variation |
| Cash and Bank | 28.9 | 4 | 73..8 | eleven | 44.9 |
| Accounts Receivable | 239.4 | 31 | 146.2 | 22 | (93.2) |
| Inventories | 430.8 | 55 | 377.2 | 57 | (53.6) |
| Other assets | 76.3 | 10 | 67.1 | 10 | (9.2) |
| Total | 775.4 | 100 | 664.3 | 100 | (111.1) |
| Current liabilities | |||||
| Debts to pay | 6.8 | two | 12.0 | 4 | 5.2 |
| Payroll payable | 30.7 | 8 | 28.0 | 8 | (2.7) |
| Withholdings payable | 4.6 | one | 4.7 | two | 0.1 |
| Loans received | 102.9 | 26 | 27.7 | 8 | (75.2) |
| Vacation provisions | 12.1 | 3 | 10.3 | 3. | (1.8) |
| Other passives | 235.3 | 60 | 250.7 | 75 | 15.4 |
| Total liabilities | 392.5 | 100 | 333.4 | 100 | (59.1) |
The most liquid cash represents 4 and 11% for the year 2009-2010 respectively with respect to the total assets, which indicates that the company cannot meet its short-term debts, inventories represent 55 and 57% of the least liquid assets for both years, decreasing in 2010 by 53.6 MP, affecting this year's productions. There is a decrease in total assets of 111.1 MP in 2010 compared to 2009, significantly affecting inventories and accounts receivable.
With these reasons, a comparative analysis will be carried out in the period of March 2009 and March 2010 with respect to the general balance of said unit.
(See Annex I)
Reasons involved in the analysis techniques:
- Liquidity Reason Activity Reason Indebtedness Reason Profitability Reason
Liquidity Ratio: It is nothing more than the payment capacity that the company has to face its short-term debts.
Within them we have:
Working capital: It is the difference that exists between current assets and current liabilities, it allows the company to measure its liquidity, it must be positive, that is, that current assets are greater than current liabilities.
Working Capital = Current Assets - Current Liabilities
Year 2009
AC: $ 775380.19
PC: $ 392548.71
CT = AC- PC
CT = $ 775380.19 - $ 392548.71
CT = $ 382831.48
The company has $ 382,831.48 to start its operations in April and pay its short-term debts, which constitutes a favorable situation
Year 2010
AC: $ 664297.17
PC: 333381.00
CT = AC- PC
CT = $ 664297.17 - $ 333381.00
CT = $ 330916.17
This year the company's situation is favorable as it has $ 330,916.17 of financial resources to start its operations and pay its short-term debts.
The situation of the company with respect to working capital in 2009
The period analyzed was higher compared to 2010 by $ 51,915.31, influencing the decrease in inventory (Raw materials and materials) and therefore affected the finished production in 28.1 MP.
General Liquidity: Represents the payment capacity of the company in the short term, the result means that the company has x pesos of current assets to pay each peso of short-term obligation, the optimal ratio being 2 to 1.
General Liquidity = Current Assets
Current Liabilities
The company has $ 1.97 of current assets to pay each peso of short-term obligation, which is a favorable situation.
The company this year has $ 1.99 of current assets to pay each peso of short-term debt, so it is still an efficient result.
It was found that although there is no great difference between the two periods, 2010 behaved more favorably.
Acid Test or Immediate Liquidity: it is similar to the previous one but in this case inventories are not included because they are considered the least liquid within current assets, therefore it indicates the degree that the available resources can meet short-term obligations. This index must be equal to or greater than 1.
Immediate Liquidity or Acid Test = Current Assets - Inventory
Current Liabilities
The company has $ 0.87 of current assets immediately to pay its short-term obligations, so it tends to be an unfavorable result.
In 2010 the company has $ 0.86 of current assets available to quickly pay each peso of short-term obligation.
After analyzing the two periods, we were able to conclude that the situation is very even in both cases with results lower than 1, so the company cannot face its short-term debts.
Activity reasons: These are those that measure the efficiency of accounts receivable and payable, consumption of materials, production and sales, among which are:
Turnover of accounts receivable: allows you to know the number of times the average number of clients of the company is renewed and the number of times the business cycle is completed in the period referred to in net sales.
Turnover of Accounts Receivable = Net Sales
Average Accounts Receivable
It can be seen that this year the company does not have a very favorable turnover of its accounts receivable, since it was 2 times, being the optimal and planned for the period analyzed 3 times.
The planning for the rotation of accounts receivable was accomplished well because in the analyzed period of 2010, the company rotated 3 times in the quarter.
After analyzing the two periods, it was possible to reach the conclusion that the year 2010 behaved more favorably than 2009 with approximately 1 time more turnover than the previous year.
Accounts receivable cycle = days in period
Turnover of accounts receivable
The company has an unfavorable collection cycle in 2009, since it was 45 days, so the company did not comply with the established parameters.
The company shows a favorable collection cycle as it charges every 30 days as established.
The company has a favorable collection cycle in 2010, which was 30 days, not being the case in 2009, which was 45 days, which did not meet the established parameters.
Turnover of accounts payable: It indicates the number of times that the average of accounts payable to suppliers is removed in the period to which the net purchases refer. It allows to know the speed or efficiency of payments, it is also necessary to know the company's payment cycle.
Turnover of accounts payable = purchase on credit
Averages accounts payable
Payment cycle = Number of days in the period
Turnover of accounts payable
Note: In this company, the analysis of these reasons does not proceed because 90% of the transactions related to this account, which appear in the Statement of Situation, correspond to transactions between agencies.
Inventory turnover: Indicates the speed of the company in consuming raw materials and carrying out production.
Inventory turnover = cost of sales
Average inventories.
The company kept its inventories in rotation 3 times a month, so it is still an efficient result for the entity.
When comparing the two periods, it was possible to conclude that in 2009 the turnover of its merchandise was much more efficient than in 2010, although in both cases it can be said that it was acceptable because it did not give rise to idle inventories.
Inventory cycle: It allows knowing how many days inventories rotate.
Inventory Cycle = Days in Period
Inventory turnover
In the 2010 period analyzed, the inventory cycle behaved satisfactorily as it was carried out every 28 days.
After the previous analysis, we reached the conclusion that 2009 was more efficient as inventories rotated more frequently.
Debt ratio: allows to measure the total proportion of assets, contributed by the company's creditors, the higher this index, the greater the amount of external financing that the entity is using.
This ratio should not be greater than 50%.
Debt ratio = Total liabilities X 100%
Total active
The company has a favorable situation of 49.06%, complying with the established parameters that establish that this ratio should not be greater than 50%
Debt ratio = 49.56%
In the period of March 2010, we can say that the company behaved favorably because in this case it met the established parameter, which is indebtedness of up to 50%.
When evaluating the two periods, it was found that the situation is quite even in both cases, with an indebtedness of less than 50%, that although it is considered a favorable situation in 2010 the company increased its indebtedness by 0.5%.
Profitability ratio: It allows evaluating the profit of the company with respect to a given level of sales, assets or capital.
Total asset ratio: Indicates the efficiency with which the entity can use its assets to generate sales, the higher this turnover, it will indicate that the asset has been used efficiently.
Total asset ratio = net sales
Total active
It means that for each peso of assets invested in 2010, 0.59 pesos have been sold.
The situation of the company in 2010 is less favorable than in 2009 since, although it is quite similar in 2010, it has 0.02 pesos less than in 2009.
Return on investment or return on total assets: indicates that for each weight of available asset how much profit has been obtained.
Return on investment = Net income
Total active
The company shows a favorable result because for each peso of available assets, 0.19 pesos of profit are obtained.
The company shows a favorable result because for each peso of available asset, 0.14 pesos of profit are obtained
When calculating the investment return ratio, we could see that the company has a favorable situation in this regard, although it has decreased by 0.05 pesos in 2010 compared to 2009.
Utility-capital ratio: It means the amount of utility pesos to be obtained for each peso of invested capital.
Profit-capital ratio = Profit
Capital
After performing the analysis of this ratio, we reached the conclusion that for each peso of capital used in this entity, 0.38 pesos of profit are generated.
R / For each peso of capital employed, 0.28 pesos of profit are generated.
The company in terms of capital profit in both years maintains a favorable situation, although in 2010 it has 0.10 pesos less than in 2009.
Profit margin: it means that for each peso of sale, x pesos of profit have been obtained.
Profit margin = Net profit
Sales
It means that for each peso of sale, 0.31 pesos of net profit are obtained, which is a favorable situation.
It means that for each peso of sale, 0.24 pesos of net profit are obtained, which is a favorable situation.
In general, the profit margin in the analyzed period behaved favorably, obtaining better results in 2009 where 0.07 pesos more profit was obtained for each peso of sale than in 2010.
Analysis of the variation of the reasons.
|
Reasons |
U / M |
Period |
Variation |
|
| 2009 | 2010 | |||
| Working capital | MP | 282.8 | 330.9 | 48.1 |
| General liquidity | Pesos | 1.97 | 1.99 | 0.02 |
| Acid test | Pesos | 0.87 | 0.86 | (0.01) |
| Turnover of accounts receivable | Times | 2.11 | 2.87 | 0.76 |
| Accounts receivable cycle | Days | Four. Five | 30 | (fifteen) |
| Inventory turnover | Times | 4.34 | 3.18 | (1.16) |
| Inventory cycle | Days | twenty-one | 28 | 7 |
| Debt ratio | % | 49.06 | 49.56 | 0.50 |
| Profitability ratio | Pesos | 0.64 | 0.59 | (0.05) |
| Return on investment or total assets | Pesos | .0.19 | 0.14 | (0.05) |
| Profit - capital ratio | Pesos | 0.38 | 0.28 | (0.10) |
| Profit margin | Pesos | 0.31 | 0.24 | (0.7) |
Conclusions:
By way of conclusion, we can say that financial analysis is a tool that allows determining how the administration of financial resources is in a given period of time, being an effective tool to improve the management of financial administration.
Financial analysis is not used as a tool to have a better administration of financial resources, in the company VASCAL Jobabo.
Taking into account the calculations made before and after the corresponding comparisons, we conclude that for this company 2009 was better than 2010 in terms of the situation generally presented by liquidity ratios, activity reasons, debt ratio and profitability reasons, so these tools should be taken into account for decision making.
Recommendations:
Implement financial analysis through the systematic calculation and analysis of financial ratios.
Use financial analysis to better manage your financial resources and avoid deteriorating the financial situation of the Company from one period to another.
Bibliography
Weston, J. Fred and Brigham, Eugene F. "Fundamentals of Financial Management." Tenth edition. Mc Graw Hill Interamericana! From Mexkco. SA de CV Year 1994
Brealey, Richard A. & Myers, Stewart C. "Foundations of Business Financing" Fourth Edition. Mc0Graw Hill Interamericana de España SA Year 1995
Ross, Stephen A. Westerfiel, Randolph W.! Jaffe, Jeffrey “Corporate Finance” Third Edition. Richard D. Irwin Inc. Year 1993
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