Overview on Finance

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* General concepts on finance

* Development and chronological evolution of finance

* Economic Principles – Financial Finance

* Considerations on profitability, risk and liquidity

* The accounting, financial statements and financial

* Bibliography

INTRODUCTION

The highly complex and competitive markets, this product of changes, deep and fast in a global environment requires a maximum of efficiency and effectiveness in the management of companies. Ensure minimum levels of profitability today implies the need for a high contribution of creativity aimed at finding new ways to ensure success.

The first thing to understand in this new context is the interrelationship between the various sectors and company processes. Analyze and think in terms of these relationships is to think about how or systemically.

Keep only financial indices without knowing the reason for them is useless. Currently it takes a team effort involving both planning, as in all other administrative functions to each and every one of the sectors or areas of the corporation.

So to settle a financial budget it must take full account of the various sectors, processes and activities that affect organizational performance and composing. Therefore not only have to take into account the indexes and financial ratios, but also those of an operational nature, since the latter are mainly the reason for the first.

Besides the financial budget should interact with both planned and actual conditions, in order to monitor the evolution of these indicators and take appropriate preventive and reactive, always based financial objectives, which are four fundamentals of any organization: The maximum return on investment, higher value added per employee, the highest level of satisfaction for customers and consumers and increased market share.

The finance department is in charge of achieving these goals and optimal control, management of economic and financial resources of the company, this includes obtaining financial resources both internal and external, necessary to achieve the business goals and objectives and to while ensuring that external resources are required by the company acquired favorable terms and interest.

The field of study encompasses both financial asset valuation and analysis of financial decisions designed to create value. The interrelationship between the analysis and the decision to take the valuation is given from the time an asset either should only be purchased if necessary the condition that its value exceeds its cost (this condition is not sufficient because may have other assets that generate more value for the company). Under the name of finances we can see three important areas: Corporate Finance, Financial Investment and Financial Markets and Intermediaries.

1. GENERAL FINANCE CONCEPTS

Finance is the art and science of managing money, man is surrounded by financial concepts, the businessman, the shopkeeper, the farmer, the father of the family, everyone thinks in terms of profitability, prices, costs, good bad business and regular. Each person has their consumption policy, credit, investments and savings.

Finance from the Latin “finis” meaning end or end. Finances are caused by the completion of an economic transaction with the transfer of financial resources (with the money transfer transaction is finished).

So finances already defined as the art of money management, financial management refers to the work of the financial manager, which has the basic function of planning funds necessary for the operation of a business.

The general areas of finance are three:

* The financial management (efficient use of financial resources).

* Financial markets (conversion of financial resources in economic resources, or what is the same conversion of savings into investment)

* The financial investment (acquisition and efficient allocation of financial resources).

While the basic responsibilities of the financial manager are:

* Acquisition of funds at minimum cost (called the money and capital markets, as well as the mechanisms for acquiring funds in them).

* Convert the funds in the optimal asset structure (evaluates alternative programs and projects).

* Control the use of the asset to maximize the net income, ie, maximize function: net profit = revenue – costs. 2. CHRONOLOGICAL DEVELOPMENT AND DEVELOPMENT FINANCE

* For early twentieth century, focused finance its emphasis on legal matters (consolidation firms, formation of new firms and bond issues and actions with primitive capital markets.

* During the depression of the 30’s, in the United States emphasized finance bankruptcy, reorganization, firm liquidity and government regulations on securities markets.

* Between 1940 and 1950, finance continued to be viewed as an external element of no great importance to production and marketing.

* In the late 50s, they begin to develop methods of financial analysis and give importance to the key financial statements: the balance sheet, income statement and cash flow.

* In the 60’s, finance focus on the optimal combination of securities (stocks and bonds) and capital cost.

* During the decade of the 70 ‘, focuses on portfolio management and its impact on the finances of the company.

* For the decade of the 80 and 90′, the topic was inflation and financial treatment and the beginning of adding value.

* In the new millennium, finance has focused on creating shareholder value and customer satisfaction.

3. ECONOMIC PRINCIPLES – FINANCE FINANCIAL

There are ten (10) financial-economic principles underlying the student theoretical financial analysis:

* As an investor expects more profit, more risk you run. Investors are risk averse, ie for a given level of risk seeking to maximize performance, which can also be understood that for a given level of return seek to minimize the risk. Ultimately the required return, Ko will:

Ko = Rf +

Rf = Risk Free Rate

risk premium

* The dilemma between risk and benefit is better to have some money now that the same in the future. The owner of a financial resource you have to pay something, for no such recourse, if the depositor, is the interest rate, if the investor’s rate of return or return.

* The value of money in the long run time maximize the net profit, ie the function:

NET PROFIT = REVENUE – COST.

* Maximize the wealth of the investor’s long-term investments should be financed with long-term funds, and likewise should be financed with short-term investments Short-term funds.

* Financing appropriate Humans prefer to have cash, but sacrifice liquidity in hopes of earning interest or profits.

* The dilemma between liquidity and the need to reverse the prudent investor should not expect the economy to continue always the same. The level of business of a company or investor can vary in response to economic forces local, regional, national or global. Some are favored in times of booms and others thrive in times of difficulty.

* The business cycle The proper use of funds acquired by debt serves to increase the profits of a company or investor. An investor who receives funds lent to 15%, for example, and bring to a business that pays 20%, is increasing their own profits with the proper use of other resources.

* Leverage (use of debt) The wise investor diversifies its total investment, distributing its resources among several different investments. The effect of diversification is to spread the risk and reduce the overall risk.

* Efficient Diversification In a free market economy each economic resource ideally be employed in the use promises more performance without any hurdle.

* The displacement resource

* Opportunity Costs

Consider that there are always several investment options. The opportunity cost is the rate of return on the best investment alternative available. It is the highest yield that will not be won if the funds are invested in a particular project.

4. PERFORMANCE CONSIDERATIONS, AND LIQUIDITY RISK

Profitability

Profitability is a percentage ratio that says how much you get over time for each unit of resource invested. Can also be defined as “change in value of an asset, plus any cash distribution, expressed as a percentage of the initial value. Others simply defined as the ratio between revenues and costs.

* Return on assets: “Business is the engine and corresponds to the operating performance of the company. Measured by the ratio of operating income before interest and taxes, and the asset or operational investment.”

* Return on equity: is the profitability of the business from the point of view of the shareholder, ie “how you get on equity after deducting the payment of the financial burden.”

* Total return: “corresponds to the performance measured in terms of the ratio of net income to total capital.”

There are other measures of profitability, such as:

* Return on Equity (Return On Equity / ROE) which measures the performance obtained by the shareholder on its investment in the equity of the company. Is determined by the ratio of net income, after tax, and the average equity.

* ROI (Return On Investment / ROI): Measures the performance obtained by the shareholder on the total investment. It is measured by the ratio of net income, after tax, and total capital employed (equity + loans).

Risk

Risk is the possibility that actual results to differ from those expected or chance that some unfavorable event occurs, it can be classified as:

* Operational Risk “is the risk of not being able to cover operating costs.”

* Financial risk: “The risk of not being able to cover financial costs.”

* Total Risk “possibility that the company can not cover the costs, both operating and financial”.

There are other ways of classifying the risk:

* Systematic risk (non-diversifiable or Inevitable) affects yields of all securities in the same way. there is no way to protect the investment portfolios of such risk, and is very useful to know the extent to which asset returns are affected by such common factors. such a policy decision affects all titles alike. the degree of systematic risk is measured by beta ().

* Unsystematic risk (diversifiable or avoidable) risk arises from the variability of yields values unrelated to movements in market performance as a whole. You can reduce it by diversifying

* Total Risk: Systematic risk + unsystematic risk

Liquidity

The liquidity of a company is measured by its ability to meet its short-term obligations, as these are due. Liquidity refers to the solvency of the overall financial position of the company, ie the ease with which it can meet who would owe.

The flow of resources in a company is given by the following figure:

 

5. ACCOUNTING, FINANCIAL STATEMENTS AND FINANCE

Investors want to know the basic financial statements, such as: The Income Statement, Balance Sheet and Cash Flow, for it rests on the counter, which tells the story of what has happened in a given period, in contrast with finances which looks to the future.

The general accounting and cost accounting, supported by other tools are important for financial projections, which are support for economic research analysts.

The Balance Sheet and Income Statement

* Basic report showing the financial position of an economic entity, on a given date. Contains information about the assets, liabilities and equity, which should relate to one another to reflect that financial situation.

The balance sheet allows us to know the financial position of the company at a particular time: the balance sheet tells us what the company is and what it should.

The balance consists of two columns: the active (left column) and liabilities (right column). In the Active lists the destinations of funds and in Passive origins.

For example: If a company asks for a loan from a bank to buy a truck, bank credit will in Liabilities (the origin of the funds that come into the company), while the truck going in the Assets (the destination that has given the money that has come into the company).

Assets and Liabilities The terms can be confusing, since one might think that the asset reflects what the company has liabilities and what you owe. This is not correct, since for example in equity are liabilities.

And why are the equity in liabilities the answer is because they are sources of cash. If, for example, in the above case had financed the purchase of the truck with input from partners: what would be the source of the funds that come into the company equity contributed by shareholders.

* Balance Sheet

* Income Statement

Basic report that shows the net result of the operations of the economic entity during the reporting period. Its elements are: revenues, costs, expenses and restatement.

The income statement reflects the profit or loss that the company gets over its fiscal year (usually one year). The Income Statement is like a counter that is reset at the beginning of each year and closes at the end.

While the balance sheet is a “snapshot” of the company at a particular time, the income statement is a “movie” of the activity of the company over a year.

Balance and Income Statement are interrelated, their main link is the last line of the income statement (one that includes the gain or loss), which is also reflected in the balance sheet, increasing equity (if they were benefits) or decreasing (if they were losses).

The General Ledger and Daybook are the documents where these movements are collected daily, and allow all accounting information have ordered and available when needed for preparing the Balance and Income Statement.

Cash Flow

Sample applications that are given to the different types of capital, which leads to incur costs and revenues, interest and profits as payment for the use of capital.

The movement of cash flow in the company can be expressed in this way:

REFERENCES

* WESTON, J. Fred and Eugene F. BRIGHAM: Fundamentals of Financial Management, 10th. edition, Mc Graw Hill Publishing. Mexico, 1993.

* Accounting I Rondon Francisco Gomez semester “Theory and Practice” Editions heat.

* Harry A. Finney, Herbert E. Miller Accounting Course Introduction

* VAN HORNE, James: Financial Management. 7th edition, Prentice Hall Publishing. Mexico, 1988.

* Http://www.monografias.com/trabajos16/finanzas-operativas/finanzas-operativas.shtml

* Gitman, Lawrence, 1990, basic financial management, Harla, Mexico City, 723 p.

* Braley, Richard and Myers, Stewart, 1992, Principles of Corporate Finance, 3rd. ed., Mc Graw-Hill, Caracas, 1300 p.

* PASCALE, Ricardo, 1993, Financial Decisions, John Wiley & Sons, NY

 

 

 

Submitted by:

Mr. Cruz Lezama Osan

Industrial Engineer – Specialist Finance

Production and Operations Specialist

Master in Management, Major in Finance

Diploma in Teacher Training and Development

Puerto Ordaz, Venezuela, May 2006

* Maintain balance between dividends and retained earnings, thus ensuring the participation of members and funds for reinvestment.