Financial Analysis and Creditworthiness Evaluation

Posted on Oct 5, 2024 in Economy

Marketing Mix

Product or Service

A product is anything (tangible or intangible) offered to a market for purchase, use, or consumption that can satisfy a need or desire. Products have a life cycle that varies depending on consumer response and competition:

  • Launch
  • Growth
  • Maturity
  • Decline

Price

Price is the monetary amount associated with a transaction. It’s determined through market research and defines the rate assigned to enter the market. Price is the only element of the marketing mix that generates income.

Place or Distribution

Place defines where to market the product or service offered to the consumer. It involves the effective management of distribution channels, ensuring the product reaches the right place at the right time and under appropriate conditions.

Direct Channel (Short Circuits Marketing)

The producer or manufacturer sells the product or service directly to consumers without intermediaries.

Indirect Channel

A distribution channel is often indirect because intermediaries exist between the supplier and the end user or consumer.

Intermediaries

Intermediaries perform distribution functions. Distribution companies are located between the producer and the end user and are usually independent of the manufacturer. They:

  • Facilitate and simplify trade buy-sell
  • Buy large quantities of a product, then sell it in smaller lots or individual units
  • Provide funding to various figures in the distribution channel
  • Store products to reduce delivery time to the consumer

Promotion

Promotion involves communicating, informing, and persuading customers and other stakeholders about the company, its products, and offers to achieve organizational objectives. The promotional mix consists of:

  • Sales promotion
  • Salesforce or personal selling
  • Advertising
  • Public relations
  • Interactive communication

The Selection Process

Definition

The selection process is a sequence of steps taken to find the person who meets the requirements to fill a particular job. These steps must be followed carefully to avoid mistakes, as missing a step can hinder achieving the desired success.

Advantages

Properly conducting the selection process offers several advantages that translate into business benefits:

  • Hiring the right person for the right job
  • Performing a contract with a 100% success rate
  • Decreasing the turnover rate in companies
  • Avoiding costs

Disadvantages

If the selection process is administered appropriately, considering each step, there are no disadvantages. However, if not done correctly, it can lead to:

  • Loss of cost, time, and effort by the company

Many believe that applying this process is costly, but the benefits outweigh the costs if carried out optimally, as seen in the new employee’s good performance over time.

Selection as a Process of Comparison

It’s a comparison between two variables: the vacancy requirements (requirements of the position) and the profile and characteristics of the candidates.

Selection as a Decision Process

There are different selection models:

  • Placement model: one candidate for one vacancy
  • Selection model: several candidates for one vacancy
  • Classification model: several candidates for several vacancies

Obtaining Information About the Post

Information about the vacancy can be obtained in five ways:

  • Description and job analysis: Presentation of the intrinsic (job content) and extrinsic (conditions required) aspects of the position. The key is to gather information regarding the requirements and characteristics the person should possess.
  • Application of the critical incident technique: Involves systematic and careful annotation by the immediate supervisor about the skills and behaviors required for the position, leading to better or worse work performance.
  • Requisition of personal data: Verification of the information filled out by the supervisor in the personnel requisition, specifying the requirements and characteristics candidates must have.
  • Analysis of positions in the market: For new positions with no predefined definition, the alternative is to analyze similar companies.
  • Hypothesis: A rough idea of the job content and its requirements, serving as an initial simulation.

Choosing Selection Techniques

Various techniques can be used in the selection process:

  • Interview Selection: The most widely used technique, despite its lack of scientific basis and subjective nature. It’s highly influential in the final decision.
  • Tests or examinations of knowledge or skills: Tools to objectively evaluate knowledge and skills acquired through study, practice, or exercise. They measure the degree of professional or technical skills required by the post.
  • Psychological tests: Objective and standardized measures of individuals’ behavior patterns. They analyze these patterns under standardized conditions and compare them with standards based on statistical research.
  • Personality tests: Analyze different personality traits, whether determined by character or temperament.
  • Simulation techniques: Move beyond individual study to group study and involve verbal or social action.

The Selection Process Stages

The selection process consists of several consecutive stages or phases that candidates go through. Simpler and less expensive techniques are used in the initial stages, while more expensive and sophisticated techniques are reserved for the final stages.

  • Selection with a single decision act: Decisions are based on a single selection technique, such as an interview or a knowledge test.
  • Sequential selection with two decision acts: Aims to improve selection effectiveness through a sequential plan that allows the decision-maker to continue with another technique to assess the candidate.
  • Sequential selection with three decision acts: A selection process with a series of three decisions based on three selection techniques.
  • Sequential selection with four or more decision acts: Uses a greater number of selection techniques. Sequential selection is generally better than a single act. The main advantage lies in the cost-effectiveness of obtaining information about the candidate, tailored to each case’s needs.

Assessment and Monitoring of Results

The selection process must be efficient and effective. Efficiency means doing things right: conducting interviews effectively, applying valid and accurate knowledge tests, and ensuring the selection process is fast and agile. Effectiveness means obtaining results and achieving objectives: attracting top talent to the company and helping it improve with new staff additions.

Credit Analysis

A company must estimate the maximum credit granted to a customer, known as the Line of Credit. This prevents the credit check from becoming increasingly important with each credit purchase.

To evaluate a customer’s creditworthiness, we use the traditional five “C’s” rule:

  • Character: Defined as solvency, the probability that the client will honor their obligations, their morale.
  • Capital: Measured by the client’s overall financial position, determined using ratios.
  • Capacity: Determined by the volume of the client’s most liquid assets.
  • Conditions: Related to the effect of economic trends or special events on the client’s payment capacity.
  • Collateral: Represented by the assets the client can guarantee as security for the credit.

Another way to assess credit is through financial ratios like liquidity, solvency, and profitability. Analyzing two or more financial statements can help assess their financial projection.

Information sources for quantifying and assessing risk:

  • Financial statements provided by the customer
  • Bank references
  • Trade references

Cash Conversion Cycle

The cash conversion cycle is the time elapsed from paying for raw materials to manufacturing a product to collecting the sale proceeds. It’s also known as the cash cycle and is calculated as follows:

CCE = PCI + PCC – PCP

Where:

  • PCI = Inventory conversion period
  • PCC = Collection period of accounts receivable
  • PCP = Period in which accounts payable are deferred

The cash conversion cycle helps make better decisions about working capital. The maturation cycle is the time it takes to recover the money.

All companies seek to optimize their operations. Decisions about working capital must add value to the company.

Bank Reconciliation

Bank reconciliation matches the checking account balance reported by a financial institution with the balance in the company’s bank book or general ledger.

It’s an important internal control procedure, as it checks deposits, remittances, check payments, and other debits and credits incurred by the bank.

Companies should have a resource control policy by performing bank reconciliations at least monthly for each bank account.

Would you grant short-term credit to this company?

Based on the information provided, granting credit is advisable. The company has good liquidity and debt indicators and manages good margins, suggesting no complications in generating funds to repay the debt. Additionally, all ratios are above market average.

Would you invest in this business if there are market alternatives that deliver, at the same level of risk, a 4% return on investment?

Assuming the last line refers to a 9% income, investing in this business would be preferable to alternatives offering a 4% return, given the higher potential return.

For proper economic and financial analysis of the company, do you only consider the calculation of financial ratios and subsequent analysis?

No, a comprehensive analysis should also include the purpose of the credit, the five “C’s” of credit, the balance sheet to analyze the debt structure, and all enterprise data related to taxes for a complete picture of the company’s financial health and creditworthiness.