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2. Supposed basic to study finances

Chapter 2

SUPPOSED BASIC TO STUDY FINANCES

 

by: josavere

Finances constitute a fundamental element understanding and offering judging elements to facilitate the analytical approach that must be prioritized in the study of these techniques, which are made enormously possible with the use of the computers.

1. VALUE OF THE MONEY IN FUNCTION OF THE TIME 

Concept explained in financier mathematics, where one assumes that all dollars generated as rent constitute so on in a greater value of the capital and, based on the interest rate and the regularity of liquidation. The effective rate of yield will higher be while the shorter the period is used to pay the interests. Using financial mathematics we can equate an amount to receive in a future determined by that could receive in return an immediate way. The fairness depends on the rate of interest, which is agreed upon between the parties. 

2. PAYMENT OF TAXES 

The companies work under the jurisdiction of a country. To the government corresponds to generate the infrastructure and to create the investment climate that requires the businesses; for that reason collects and redistributes 

While they contribute to the companies is more efficient, the government will improve the quality of life of the inhabitants and make the country more attractive for foreign investment, so desired as the capital source. The businessman must consider the government as a special partner and pay for taxes and to analyze the decisions, based on structured affluent calculations. 

3. YIELD AND RISK 

While the greater risk the investor must assume, the greater expectation of profit that appears; otherwise, he will look for another horizon. 
As a general principle, all investment implies a risk in a greater or smaller quantity and is very difficult to measure in quantitative terms, in spite of the great advances obtained, and measured by its degree of acceptance in the financial world. In practice, the handling of the risk requires a high dose of criterion combined with the probabilistic models. After the fall of the twin towers in New York (September 11 of 2001) and now with the crisis of the year 2020 caused by the COVID-19 or coronavirus, it is necessary to reevaluate a concept that prevailed for a long time: "zero risks, a US Treasury bond."

4. THE BENEFITS FOR THE SHAREHOLDERMUST BE TANGIBLE. 

This means that the results obtained by the companies must be concentrated in the value of the share in the market and a good possibility of negotiation (stock-exchange); it must be sufficiently attractive so that it generates a demand that allows the shareholder a change of investment when they wish it, (mobility of factors). This is obtained wit properly specific information; simple, ample, and transparent certified by an organization that generates credibility. It must be governed by the practice of the good corporative government. 

5. CASH FLOW—SUPREME MEASURE

The benefits are tangible and the companies are attractive if they pay dividends independently of the practice used to do it. Its payment implies to take care of the high-priority obligations that mean: governmental, labors, operation, suppliers, and financial organizations. Even though the cash flow discounted not always is the method correct in the valuation of companies, it constitutes the generalized tool. More important than the sale on credit, is the collection of the portfolio. The sales by cash constitute the ideal in normal conditions. The liquidity with an adecuad structure of assets and an efficient administration generates yield which as well provides feedback to the liquidity and so on.

6. STUDY OF ALTERNATIVES BY CASH FLOW 

Consequently with the previous assumption, evaluating a projected by cash flow; the initial situation must be simulated and the new one (including the income and debts of cash of the project to evaluate) and later settles down the difference between the new cash flow and the initial. If the treasury situation improves the project is viable; otherwise it is rejected.
All the projects are subordinated to the plan of the generation of value of the company and evaluate based on the capital cost (dynamic concept) and the consequences of possible cannibalism in the income are avoided.

7. PERMANENT COMPETITION

The competition is a constant in the world of businesses and sees it increased by the phenomenon of the globalization, which makes the situation every day more difficult. 
The excessively profitable businesses are very few; in this event, they last just a short time, because they quickly attract new competitors. It is important to take advantage of the maximum of the competitive advantages that the moment offers, while the new actors come to complicate the business and to reduce its yield. It is fundamental to use benchmarking consistent form as a tool of evaluation and continue improvements. 

8. OWNERS AND ADMINISTRATORS

In many cases, the owners delegate the direction to other people, and not always the interests of the administration are with it. 
Nowadays the human resources is considered to the intellectual capital as the most valuable resource of the companies and to a large extent is constituted by the director's team on which the company does own not have the property 
The salary of risk, expectation that appears, based on the plan of value generation that must be approved by the owners (through the board of directors) constitute an excellent mechanism to make an agreement the interests of the owners and the administrators and to avoid this type of conflicts. 

9. ACCOUNTING NORMS

The finances use as a basic tool, the accounting, which is not governed by universal accounting principles. For benchmarking effects the pertinent adjustments are required to make the financial statements comparable. The world needs to legislate on that matter before the phenomenon of the globalization settles in thus facilitating the analysis of investments. The measurement of all possible things; analyze financial statements using resort to a UNIQUE PLAN OF ACCOUNTS and the sector analysis.

10. SHORT AND LONG TERM HANDLING

The concept of the highest manages responsibility for the board of directors is the handling of the long term. It implies a high dose of responsibility; not to show apparent profits in the short term, sacrificing the future growth, and the predominant generation of value with liquidity, elements to value a company. 

The cash flow generates must allow sufficient appropriations to finance the positioning; the qualification of the human resource; investment in investigation and development; the preservation of the environment and the certifications of quality. Decisions like the modernization of the equipment, the preventive maintenance, accelerated depreciation especially when one works with advanced technology, the sufficient retention of profits to withstand the inflation and to finance the growth; the care of the principle of financial conformity, constitutes a very representative example that illustrates the balance between the handling of the short and the long term.

11. CLASSIFICATION OF THE RISK 

The risk is inherent to the businesses that operate in different countries. The risk country in general is equal for all the companies and therefore, in principle is not diversifiable. Nevertheless, its dispersion with operation in other countries can be obtained. The risk of the business is diversified with operation in another type of activity, based on a correlation analysis and at first a universal saying in finances: “don’t place all eggs in the same basket”. 

12. ETHICS IN BUSINESSES

Ethics makes relation to everything that has to do with the moral means to do the correct thing. The difficult thing for the subject is what the correct thing depends on the values of the people, the societies, and the times which in the end are codified in the laws of each country. 
The ethical behavior instills confidence and the confidence very especially constitutes a pillar in the companies of the XXI century; it also implies social responsibility framed in the old saying: who does not live to serve, does not deserve to live.” 
By subjective and the complex thing of the subject it can summarize it in a phrase of the Eastern culture: to decide always looking for inner peace.

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Josavere