ADMINISTRATION OF PORTFOLIO
Dr. Carlos Restrepo Dumit, my grand teacher, defined the portfolio as the "own bank". In effect, within the conception of an industrial business, the operative cycle begins with a design and the purchase of raw materials; continuing with the productive process, payment of manual labor, and other expenses and, it finishes with the sale and the collection of the portfolio. Logically, everyday cycles begin and end. The normal situation in business is that the current assets must be superior to the current liabilities. If the financial structure of a business is rare, but in some special cases, the current assets must be minor to the current liabilities. Maintaining the inventories within the limits when defining the proportion of assets, it is expected that the portfolio produces resources sufficient to take care of the obligations of the short term. Nevertheless, in most cases, the portfolio rather than the bank constitutes a true problem. Often cases of companies occur that in spite of presenting good indicators of liquidity, they face serious difficulties of circulating and permanently they must resort to the market of money in search of huge expensive solutions.
To make the decision to sell on credit, an evaluation must be made in economic terms, comparing additional profit sales awaited for with the rate of cut of the company and an overhaul of the direct and indirect costs; of course, the financial standing consulted to decide if the company has the working capital necessary to maintain the operation that generates the sales on credit.
In general terms, the sale on credit is easier than the sales on cash, so desirable in finance. But the conditions of the market, the economic characteristics of the competition, and conditions in some cases force most of the companies to sell on credit. The caution, accounting basic rule, recommends not to recognize the sale until it is not a reality. In administrative language, in the case of sales that don't accept it as such until the proper collection. In this order of ideas, we do not have to be satisfied placing numbers with sales, nor with making profits in books; these are due to be noticed in the cash flow, which depends in good proportion, on the collections of the portfolio.
1. HOW TO SELECT A CLIENT
Let's begin to observe a credit request because this constitutes the fundamental tool to know the person or organization with whom we are going to establish a relationship. Let's remember that while greater the selection effort, which has to do with the entailment although at first, it implies too much investment, in the long run, it widely will be compensated with the smaller effort of collection from delays in payments and with the losers by non-collectible portfolio. On the contrary, a selection to the light one leads to greater losses from delays and nonpayment.
The collection expectation basically depends on a good selection of credit; generally, the wide range of organizations and people ask for it. The decision is difficult by itself, among other things, by the pressure of the salesmen of the company and because it implies finding a balance between risk and the yield, because in the measurement that grants the credit or the terms that are extended are frozen cash in accounts to receive and it endangers the capacity to cover liabilities.
The greater difficulty appears in the evaluation of the portfolio management because an interval exists of generally enough time between the decision of granting the credit and the moment that is accepted the impossibility to receive the account.
Briefly, an organization realizes that its Head of Credit did his work badly when the problem is already created, and hardly detects deficiencies in the management with the opportunity that is required.
In most cases, the decision of the credit is very subjective and delicate. To avoid this difficulty the companies must design a model that allows them, whenever is possible, "to objectivity" the decision. A good system could be to establish a Manual of Credits, according to a point previously established. The manual establishes: if it has so many points, its line of credit will be of so many dollars complemented with software that allows in addition to the qualitative quantitative and analysis of the corresponding one.
2. ANALYSIS ELEMENTS
a. IDENTIFICATION OF THE CLIENT: certificate of existence and legal representation, providing evidence on the existence of the company, fulfillment of legal commitments, managing mental capacity to assume commitments, etc.
b. THE FINANCIAL STATEMENT OF THE APPLICANT: for the case one is due to mainly makes emphasis on the aspects of liquidity and indebtedness and, in the value generation.
The analysis must be made very carefully, maintain the limitations of the financial statements, and think about a commercial sense. It does not matter that a company becomes broke, thus we have guaranteed the debt. It is ideal to work with projected financial statements, properly sustained; centering the analysis in the state of cash flow, since while the cash projection is positive it eases the fulfillment of the obligations.
c. REFERENCES: commonly one asks for concerning references. Usually, this one presents its friends, who in the great majority of the cases, recommend him very well. Who is going to present as an informant to a person or organization with which there was some problem? This type of information is to be gathered; it must be cross-examined with a credit information center.
It is essential that all the organizations that grant credits be linked end to another "Great Organization", which would be the possessor of all the commercial information and the behavior of the users of the credit. That organization is the possessor of one of all the information and therefore is on the capacity to objectively inform any person or organization who asks for credit. In addition, it would have to exist, quite a difficult thing, a gentleman's pact, in order to accept religiously the received information and to block the bad creditors. This mechanism is oriented to protect the company that especially grants credits because the law by its slowness protects widely from the bad creditors to the corrupt ones.
Given the social decomposition and the transposition in the hierarchy of values in recent years, some companies have added to the previous collection of information the consultation of the so-called "Clinton List", which lists the people and companies that the State Department of States United is reviewed for its participation in criminal activities generally related to drug trafficking, money laundering or laundering, and frontman.
d. GUARANTEES: every operation of credit involves a risk factor. A good form to reduce it consists of asking for guarantees to the beneficiary who must be soon to grant them to the commitment proportionally. It is said commonly, "To a good creditor the debts won't hurt him".The guarantee must have a value of accomplishment sufficient to totally cover the legal debt, interests, and other expenses that the collection by channel implies.
The best one of all is the fiduciary because it makes agile transactions and the real estate constitutes a "lasting currency" in inflationary economies, safe in conditions of financial crises or of another order. In addition can be mortgaging, banking, negotiable titles values whose fulfillment is due to agree in the place where the company that grants the credit operates anticipating, a problem of judicial collection, which they serve as well to acquire money in financial organizations by means of the mechanism of discount.
e. OTHERS: although it seems obvious and elementary that is good to stress the following aspects:
Once identified the client helps to focus the efforts with the purpose of concentrating the efforts on the most representative buyers. The differentiation serves to decide the suitable strategy of collection. The conservation of the clients through telephone calls, personal visits, or by more advanced channels as electronic mail.
3. FINANCIAL ASPECTS
In financial terms, selling on credit is equivalent to reducing prices. This varies based on the cost of capital and the term; the calculation has been eased considerably by technological advances.
One has to calculate the present value of a future income (price) discounted at an interest rate in an equal period. A company that sells in the terminus of four months, sells monetary units at 88,8% if we assumed an interest rate of 3%.
VP =? (Unknown)
This analysis is important when it is going to make the decision to fix sale prices, to calculate or the yield of products, or the margin of contribution. If the payment is by equivalent fees, the same calculation can be done. In this case, it is to calculate given P an R.
Once the decision is made of the term to grant, the efforts are due to direct to treat of which the portfolio recovers before the decided moment or if it is possible. How?
A. DISCOUNTS BY PROMPT PAYMENT: in the monetary market a permanent dispute by the money appears. For the governors, the easier measures to fight inflation are the monetary ones and therefore they go for them, permanently restricting the circulating (cash) to a greater or smaller degree, depending on the general situation.
The company must enter to compete with aggressiveness in that market, offering attractive discounts, so the best investment for the client is to cancel before the victory. Among other things, intermediaries are not needed; it does not imply retention at the source, nor specialist's studies. In general, the decision to" invest" is due to present the easier possible for the clients; it must be eliminated per day to avoid concentration of payments in the deadline and must be applied in a strict form as the circumstances allow it.
B. INTERESTS FROM DELAYED PAYMENTS: the interests from a delayed payment must have a punitive character and therefore be higher than the interest rate that appears in the market. Of this form it is avoided that the clients finance with the supplier, the system used nowadays, due to its inexpensiveness, in addition, it does not require study of credit nor guarantees, nor approvals of meetings and other papers for the loans in financial organizations.
For this effect, the consultation of legal aspects is recommended in order to avoid difficulties that can arise by violations that can end in damage to the company that grants the credit.
C. RECONSTRUCTION OR REFINANCING OF THE CREDIT: in some cases, the reconstruction of the debt is recommendable, for which it asks for an indebted document update, with the purpose of signing documentation as if it were a new credit; conditioned to pay the first interests from delayed payment sooner, soon the current interests and later the remaining of the debt.
4. WITH FINANCIAL INTERMEDIARIES
A. FACTORING: a financial-administrative alternative that allows the yielding portfolio to be overcome and to obtain in return financial advance payments without increasing the indebtedness, easing adapted handling of the cash flow. Given the importance of this subject, we will talk about it in another charter.
B. OTHERS: agreements as securitization, outsourcing can be carried out to allow to contract with the third activity of portfolio administration and contribute to improving the cash flow.
Finally, is important to remember that while the more efficiency is obtained in the study of credits, the greater will be the probability of collecting without delays, the reason why is recommended to take good care of this kind of decision framing them in policies defined clearly by the top management, which must be of strict compliance by the group of city employees with whom they have to do, in the sales and collecting departments.