Financial Management: Assets, Liabilities, and Capital

Posted on Dec 11, 2024 in Economy

Controller

Controller: Is responsible for modeling, construction, and maintenance of information systems and management models of organizations that adequately meet the economic dynamic and the information needs of managers and the lead during the management process. In this methodology, it is given the name of process control.

2Q ==

Risk, Return, and Uncertainty

Risk: Possibility of loss. The more certain the return of an asset or a portfolio of assets, the lower the variability, the lower your risk. Example: The deposit in a savings account is less risky than betting on races.

Return: Gains or losses arising from the owners of an investment over a period of time.

Expected Return: What one expects a stock to deliver in the next period. It’s just an expectation since the actual return may be higher or lower than expected.

Difference Between Risk and Uncertainty: Risk occurs when decision-makers of the application of an asset can estimate the relative probabilities of various outcomes, based on historical data, which we call the objective probability distributions. When there is no historical data to make accurate and acceptable estimates, i.e., subjective probability distributions, we are dealing with uncertainty.

Relationship Between Risk and Return: The return on investment should be commensurate with the risk involved. Risk is a measure of the volatility of returns and future results.

Volatility and Risk of Personal Assets

Volatility: It is the fluctuations that occur with a series of numbers when they deviate from a representative series.

Risk of Personal Assets: Although measuring the risk of individual assets in the same way that the risk of a portfolio, it is important to differentiate them because those who hold portfolios receive some benefits. In order to better understand the concept of risk on expected returns of a given asset, it is useful to assess risk for both points of view, quantitative and behavioral.

Sensitivity Analysis consists in considering several possible outcomes when evaluating a project. One of the most common approaches is to estimate the more pessimistic (worse), most likely (expected), and more optimistic (best) returns related to an asset.

CAPM Model

Risk and Return: The Model of Pricing Financial Assets (Capital Asset Pricing Model – CAPM) was developed to explain the behavior of security prices and provide a mechanism that allows investors to assess the impact of the proposed investment in a title on the risk and return the portfolio as a whole. CAPM starts by dividing the risk into two main parts: diversifiable risk and non-diversifiable risk.

Assets

Assets are all assets and rights that have an economic institution and that can be valued in monetary terms. These are classified as follows:

  • Current Assets – Is that group of accounts that represent assets and rights capable of being converted into cash or being consumed in the next normal cycle of normal business operations (usually has as a base year). The current assets are cash, account balances at banks, commodities, bank deposits, raw materials, and bonds.
  • Fixed Assets – Are securities, bonds, stocks, etc., represent investments acquired from other companies or the state, not with the intention of selling them in the short term, but to preserve them for earning money over time.
  • Long-Term Assets – Rights that have an economic entity, which will be recoverable or payable within one year or higher. Examples are taxes recoverable value and loan agreements.
  • Fixed Assets – Assets and rights acquired by the company and which are of a more or less permanent (lasts a long time) and the intention is to use them in normal operations business and not sell them. Fixed assets are classified into tangible and intangible.
    • Tangibles: Are made with all the features of fixed assets, i.e., that have materiality, an example is buildings, land, furniture, timber forests, oil wells, etc.
    • Intangibles: Are rights represented by legal or economic, which have as the main feature the lack of physical presence. As an example, copyrights, names and trademarks, patents, etc.
  • Deferred – Are classified as deferred the application of funds for expenses that contribute to the formation of the more than one fiscal year. Are included under this classification, among others, the expenses of the organization, costs of studies and projects, pre-operating expenses, spending on scientific and technological research to develop products or processes of production, and expenses incurred with the reorganization or restructuring of the entity.

Liabilities

Liabilities represent all obligations and debts incurred by the economic entity to persons or entities and also the services to be provided by already received for this. Liabilities are classified as:

  • Current Liabilities: Accounts that include all those debts or obligations that reflect the economic entity should eliminate next year, accounts payable, and taxes payable, for example.
  • Long-Term Liabilities – Are the obligations or debts that the economic entity to be contracted and paid within one year in May, among this group we can mention mortgages to pay and Bills, for example.
  • Deferred Income – The money is included here that the economic entity can receive in advance (such as charging an advance rent of their own property, for example).
  • Other Liabilities – Are those that do not fit the previous descriptions, we can mention here that social contributions will still be paid, for example.

Influencing Factors and Working Capital

Influencing Factors: Sales volume, seasonality, cyclical economy facts, technology, business policies.

Working Capital Management is intended for current assets, current assets, or working capital. Net Working Capital resulting from the subtraction of all short-term commitments to the company treasury, suppliers, employees, etc., of the total Gross Working Capital. I.e. Assets – Liabilities.

Net Working Capital Management The goal of Working Capital is to manage each of the current assets and liabilities of the company so that an acceptable level of working capital (CCL) is maintained, thereby guaranteeing a reasonable margin of safety.

Own Working Capital: CGP = Equity – (Fixed Assets + Long Term) Search shows how much of my capital is financing the current assets of the Company.

Administration Assets

Administration Assets:

  • Available: Cash, Banks.
  • Marketable Securities, Accounts Receivable, Inventories, Raw Materials, Work in Progress, Finished Product.

Need to Keep Cash Balance: Payment of transactions generated by operating activities as a raw material, professional service and wages, amortization of loans and financing; Disbursement for permanent investments, payment of unanticipated events, and Reciprocity in the average balance required by banks.

Administration of Cash and Marketable Securities: Cash and marketable securities are more liquid assets and enable the company to pay the bills at maturity, reducing the liquidity crisis. Marketable securities represent short-term investments, made by companies to obtain a return on temporarily idle funds without sacrificing liquidity. Example: Fixed Income Securities.

Fundamentals of Securities and Marketable Securities

Fundamentals of Securities: Instruments are short-term money market, which can be easily converted into cash.

Reasons to Keep Marketable Securities: A company should try to get a return on temporarily idle funds. The types of bonds always depend on the reason for the purchase, such as:

  • Transaction Reason: Invest in negotiable certificates whose maturity date coincides with the date of required payment commitments.
  • Reason for Caution: Titles are purchased with the money will be some day.
  • A Matter of Speculation: Investing in marketable securities when you have excess cash until you find the right destination.

Marketable Basic:

  • Government Issues: Bonds issued by federal, state, and local levels are available as investments in marketable securities.
  • Private Issuances: Are issued by companies and banks with rates and generally more attractive than those offered by government issues, the main ones being: Certificates of Deposits – Fixed Income, Bonds, Commercial Papers, Promissory Notes, Stocks, etc.

Stockpile Management

Stockpile Management: Who is Responsible? Financial Administrator or Administrators of production.

The Inventories Represent for Businesses? Investment, money stopped, or need.

LEC: The economic lot of shopping is the optimum amount of buying a stock item, considering claims costs, costs of holding inventory, and control administrative costs and payment.

Sources of Working Capital

Sources of Working Capital:

  • Current Liabilities: Sources of financing in the short term (costly) Trade accounts payable to suppliers, collecting taxes, wages, and social charges payable, financing, and bank loans.
  • Long-Term Liabilities: Long funding sources term (costly) Debenture Financing, Provision for deferred income tax.
  • Equity: Not expensive sources of financing, capital stock, capital reserves, retained earnings.

Basic Strategies for Cash Management

Basic Strategies for Cash Management:

  • Slowing down as much as possible, paying bills, without sacrificing the concept of the company’s credit, taking advantage of any favorable financial discounts.
  • Rotate stocks as quickly as possible, avoiding stock-outs that can result in an interruption of business activities.
  • Receive as soon as possible to receive duplicates without losing future sales due to very strict collection techniques.

Cost of Capital

Cost of Capital: The capital cost of the company reflects the minimum wage required by the owners of their sources of wealth creation when operational returns exceed the rate of return required by capital. The cost of capital is obtained through the average funding costs, weighted by the share of each source of funds in the capital structure in the long term.

Cost of Equity: Reveals the return expected by shareholders of a company in their decisions to apply capital own.

Procedures for Measuring the Cost of Equity:

  • Method of discounted cash flow of dividends the expected future market.
  • Asset Pricing Model (CAPM).

Economic Risk: The risk reveals the activity of the company, admitting he does not use third parties to finance capital assets.

Financial Risk: Additional risk assumed by the company to also decide to finance with debt (interest-bearing liabilities).

Relevant Factors Affecting the Cost of Capital:

  • The overall risk of the company.
  • The general economic conditions.
  • Funding requirements presented by the company.

Sources of Long-Term Financing in Brazil

Sources of Long-Term Financing in Brazil: Financial transactions capture and use of resources are developed by financial institutions and instruments that make up the National Financial System.

  • Financial Institutions: Banks or money, no bank or non-monetary.
  • Investments: Monetary, Non-monetary.

Resources for Third-Party Financing:

  • Loans and Direct Financing: Refers to fundraising operations processed directly by a company in financial institutions components of the capital market.
  • Transfers of Domestic Resources: Official resources are allocated to the financing of activities regarded as of national economic interest.
  • Transfers External Resources: Savings are captured overseas by domestic financial institutions, and then passed domestic.
  • Subscription Bonds: Issuance of private credit for public companies, placed on the market available investors interested.
  • Leasing: Enables a company to use a certain asset by establishing a rental contract (lease) with a lessor institution.
  • Working Capital Financing: It is practiced by investment banks and commercial banks/multiple and backed by resources or by borrowing in the market.

Capital Structure Theories

Lines of Thinking About Capital Structure:

  • Conventional Theory.
  • Theory of Modigliani-Miller (MM).

Disagree about the existence of an optimal capital structure.