1. Which are the main financial decisions and participants which conduct financial
operations?
There are two categories of financial decisions that are made inside a company:
Investment decisions (and disinvestment) decisions concerning up and middle
management of asset portofolio and Financing decisions are determining the
financing structure. These decisions are taken by four categories of stakeholders:
shareholders, managers, creditors or the state.
INVESTMENT DECISIONS
Any payment decision, leading to the acquisition of an asset, in order to obtain future
cash flows and is aimed at increasing the wealth of shareholders, constitutes an
investment decision
We can consider the following:
The increase in value means that the investment is profitable.
In order to create value is required to obtain a superior return on investment over the
cossts which are used to finance it.
This broad definition allows to be considered investments all acquisitions of assets (an asset
can be intended for production or a financial asset is held for speculative reasons)
The portofolio of assets resulting from investment decisions includes 2 components:
A main component assets or fixed assets, including intangible, tangible and financial
assets. These assets are associated with operations and investments which are owned for a
relatively long period.
An accessory component current assets (inventories, receivables, cash or bank
accounts), representing the operating assets needed for operation of the company. They
are subject, in most activities, to a faster rotation. Their ownership is subordinated to the
estate owned assets, so they are incidental.
All these must be taken into account in order to make investment decisiond.
The liabilities from current operations (mainly debts to suppliers) if substracted from the
value of the circulating assets detained by the company, are obtained the net operating
assets (Economic asset = Fixed assets + Net operating assets )
DISINVESTMENT DECISIONS:
The reasoning in determining disinvestment decisions is identical to that of investment
decisions.
The objective is to increase the wealth of the company. In other words, it is considered
disinvestment if the amounts of funds released by the sale of assets are used to start a
much better cost-effective activity, or if are reinvested in-house by the company or if the
funds are returned to the stockholders.
FINANCING DECISIONS:
There are 3 types of decisions:
1. Selection of the Financing structure the repartition between the capital provided by the
stockholders and by the funds provided by financial creditors. These decisions are having an
influence over the size of the risk born by shareholders. An increase in indebtness also
increases the risk for shareholders.
2. Divident payout policy
3. Selction between internal financing (self-financing) and external financing funds brought
by the shareholders or contracting of financial liabilities
The financing structure resulting from the financial decisions includes equity and financial
liabilities.
Financial liabilities do not include liabilities arising from current operations (eg. Debts to
suppliers).
Financial liabilities correspond to the remunerated liabilities (contractually fixed financial
expenses).
PARTICIPANTS IN FINANCIAL OPERATIONS:
Stockholders are owners of property titles issued over the company, these titles are
especially under yhe form of shares.
The stockholders are taking risks, their payment is determined by the financial results
obtained by the company.
The risk can be appreciated compared with the evolution of the stock market.
Compensation of the shareholders is influenced by random factors: dividents, evolution
of the value of financial securities, the evolution of the economic environments (market
risk), policy of the company in terms of investments and financing.
Managers in small and medium enterprises (SMEs) is frequent the confusion between
the managers and shareholders. Sometimes the manager coicides with the shareholder
However in this case, the manager receives on the one hand a salary for his position as
director and on the other hand remuneration as shareholder. Frequent absence of
dividents in SMEs does not mean that the role of a shareholder is not paid. Remuneration
of invested capital is achieved through a higher salary. The leader who is also a
shareholder receives a remuneration superior to that which would receive as an employee
who is not a shareholder. Also the shareholder benefits from other advanntages.
In large enterprises, the managers were entrusted by shareholders with the role of leading
the enterprises. Of course their main objective is to preserve their managerial position,
but they are forced to manage it in accordance with the interests of shareholders, who
have various means to control how leaders handle the company.
Creditors may be current lenders or lenders for investments, as their receivables are
related to current operations or investments made by the company. These types of
creditors are not listed explicitly in representeing financial structure. We have to study, in
this structure, the financing decisions related to contracts made between the enterprise
and financial creditors.
Lenders receive the contractual interest rate and recover the loan capital at the maturity
of the loan. Since are not the owners of the company, their remuneration is not variable,
is not depending on the result of the company
There are three main categories of financial lenders:
Bond owners, creditors whose claims often appear as a quoted market title and easily
negotiable bond. Only large enterprises have access to the bond market.
Bank and various financial institutions which are financing most businesses
The lessors, financing operations being made as location or location-purchase (leasing).
These operations are analysed as a particular type of loan.
The financial creditors are influenced by three types of risks:
1. The first two are originated by the variation of the value of receivables, which is ifluenced
by the fluctuation of the loan interest rate and by variation of the price. An increase in interest
in the future entails a loss of opportunity for creditors that could place their funds with higher
interest. If the loan is a structured bond, bonds for which the interest has a low value receive
a lower quotation.
2. On the other hand, an increase in the price of bonds in the future, may lead to a loss of
purchasing power for the capital to be lent. Some forms of debt, such as bonds with variable
interest, are designed to protect lenders against these two types of risks. These two types of
risks are assumed even if the loan is made to a risk-free interest, such as, bond
underwriting bonds (state guaranteed bonds).
3. The risk of bankrupcy, is already present for shareholders, caused by the inability of the
company to meet debt payments. Within the loan relationship only this component of the risk
is influenced by the company and its scrutinized carefully by most financial creditors, under
the form of a suplimentary default risk premium fee.
State intervenes at various levels of the financial circuit and affects all financial
decisions, changing variable values underlying economic calculations.
Opportunities for the action of the state are multilateral, between which can be mentioned
changes in the taxation (for companies and private owener) and modification of the offer
and the request of capital.
State objectives (the fight against inflation, the fight against unemployment) determines
monetary policy.
Stockmarket
VALUE
Asset value
Calculated
value Return value
(intrinsec) Fundam. An.
Mixt value
The anticipated value integrates internal and external information on:
Economic and financial performance of the issuing company: profit, dividend policy,
financial risk caused by borrowing rate, operating risk caused by breakeven point etc.
Information on the performance of the national economy which the company is operating
in: the minimum acceptable rate of return in the economy, inflation rate, rate of return on
the specific market
D1
V 0=
k g
Allocation of results:
FUNDING SOURCE = INVESTMENT
CAPITAL SURPLUS = CAPITAL NEEDED
Role of finance is making transfer efficient, safe and force of capital to entreprenours
available from savers
Protection of investors:
Financial agents:
Financial institutions (insurance, investment, savings, stock brokerage etc) specializing
in the transfer of capital in the medium and long term
Commercial banks, clearing houses and warehouse, stock exchange etc, which have
vocation to attract and placement of short term capital.
Stock exchange and OTC transactions continue performing securities in the secondary
market capital
Investor protection is accomplished by regulators and control: BNR, CNV, etc.
Contents of private finances:
PRIVATE FINANCES
FINANCIA FINANCIAL
FINANCIAL
L THEORY
POLICY
PRACTICE
In terms of accounting the balance sheet provides information regarding the patrimony of
the company at a certain period in time, or the condition of assets and liabilities at the
beginning or end of the accounting year.
From a legal point of view, the balance sheet summarizes all rights (ownership,
receivables) and commitments that the company must honor at a particular time. The
presentation of the financial balance sheet highlights the relationship between sources of
funds (resources) and uses of allocated funds.
From the economic point of view, the balance sheet shows the value owned by equity
holders. The capital is presented both in terms of their origin or resources (capital
contributions, reserves, debts, benefits etc.) and their way of usage (economic goods,
receivables, losses, etc.).This way of interpretation generates the economic balance
equation.
According to the economic and legal concept
The patrimony consists from all assets (tangible and intangible), the rights and
obligations that refer to the economic entity at a particular time.
The patrimonial structure that is reflected using the balance sheet may be
interpreted in several ways. From the economic point of view, the balance sheet
represents Value of the Equity Holders Patrimony.
The capital is expressed in terms of its origins resources (capital contributions,
reserves, debts, benefits, etc.) and their usage (economic goods, receivables, losses, etc.).
This concept is establishing the economic equation of balance.
USES = RESOURCES
Equivalent to equation:
ASSETS = LIABILITIES
The financial analysis based on the balance sheet reflects the way in which the financial
resources are formed and how they are used, how they are included in the balance sheet,
according to the two concepts of drawing up the balance sheet, namely: the patrimonial
design and the functional design.
Based on legal balance sheet equations results that net situation equals:
SN = A-D
WHERE:
SN = Net Situation
A = Assets
D = Liabilities
Net situation represents the value of rights the owners possess, the value of debts the company
has to the shareholders.
The net situation is equivalent to net equity. The literature includes other equivalent terms:
net patrimony and Patrimony.
Functional approach to the balance sheet:
The new accounting system used by Romanian companies (since 1994), is inspired by the
French model, comprising the following structure of the balance sheet: classification of
assets by destination and classification of passive elements by their origin.
Investment Fixed assets Own capital
function
Operating Stocks (+) Finance
function Receivables function
(-)
Suppliers
debts
Treasury Investment Financial
function securities debts
(+)
Cash and
current
accounts
The transition from functional balance to the financial one is done only after processing the
balance sheet. Assets and liabilities are grouped after duration criteria:
With a term over a year;
With a term smaller than a year.
The two parts of the financial balance sheet reflect the financial stability in the short and
long term.
Financially, any balance sheet is broken down into three large structures:
Revolving fund,
Need for Revolving fund,
Net Treasury.
These are the three structures of the financial stability of a company, expressed in terms of the
following equation:
Revolving fund (FR) Need for Revolving fund (NFR) = Net Treasury (TN)
The financial approach reflects short term financial stability (inventory management,
commercial credit policy to customers, relations with suppliers settlement) and long term
financial policy (investment and covering them with are source of permanent funding.)
The balance sheet according to the anglo-saxon conception
Liabilities;
Presentation of balance sheet in a vertical position has a legal nature and reflects the companys
creditors: third parties who have legal priority to the owners. Net situation (equity) is
considered to be a residual part.
The analysis of the economic and financial performance of the company allows making
judgments and assessments on the formation of the companys results and their
correlation with the financial structure and its solvency.
The analysis of the economic and financial performance of the company has as
main source of information the profit and loss account and it is focused on
highlighting the formation of the companys results, studying its structure and
taking into account the interdependencies between the constituents and the factors
that influence the level of these performances.
The result, either favorably or unfavorably (profit or loss), as an expression of
partial or overall adjustments between different types of revenues and expenses
generated by the complexity of economic and financial processes occurring in the
company, over a given period, is indicated by the profit and loss account.
Based on the result of the Income Statement there can be calculated a series of
indicators on the work load and on the effectiveness (profitability) of the activity.
Operational results or accumulation margins are analyzed by using financial
indicators, which provide details on the origin of the result and on the causes that
generated those results.
Operational results are in fact the final result in the formation of successive levels.
The construction of the indicators is done steps from the broadest (production of the
year and trade margins) and ends with the most synthetic (result after tax). Operational
results have as main feature, namely representing, on each step of significance, the
value accumulation margin up to that stage.