Business alternatives to financial indebtedness as a tool in the face of the economic crisis.

in #finance6 months ago
Written by:Diomer Antonio Galán Rincón.
Bachelor's Degree.Public Accounting / MSc.Science of Higher Education.

All companies, regardless of the activity to which they are dedicated, suffer the accelerated changes in the prices of their products constantly, therefore, the investments for the renewal of their inventory are increasingly greater, hence the need to resort to external sources of financing that allow them to continue operating.

Author: @dgalan,through Power Point 2010 tool, and using public domain image Pixabay

There are companies, for example, in the sale of food (basic food basket products) that are in constant growth, due to the constant increase in demand, due to the increase in population and world economic growth. However, in countries such as Venezuela, where there is a serious economic crisis, most of the companies have a tendency to decrease.

The aforementioned circumstances make managers make decisions in an environment of very high uncertainty, therefore, the chances of success are lower, which is reflected in all areas of business, from production or services, to financial, in this regard Koontz and Weihrich (2004), notes that decision making "is the choice of a course of action against several alternatives", the important thing is to take the best one, which benefits the individual or the organization, with the least possible amount of consequences.

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We can also highlight that a bad decision that entails a setback in the markets or poor financial management are some of the reasons why large companies have declared bankruptcy in recent years, therefore, managers must follow mechanisms to minimize the risks of uncertainty and thus ensure decisions that are positive for organizations.

In this sense, it should be noted that financial decisions should be made with the greatest possible caution, because they are decisive in obtaining financing, but may also imply a financial burden that the organization cannot cover. Now, it is also necessary to make reference to the fact that in the Venezuelan case, companies are forced to resort to sources of financing due to the economic context, such as the high inflationary level, which results in a constant increase in the prices of inputs and raw materials, thus affecting the cost structure of the companies.

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It is important to clarify that getting into debt can be detrimental, but not doing so can also be harmful, since liabilities are an important tool for the growth and development of any entity. But, liabilities are synonymous with debt and risk, so management must make the correct reading of debt ratios to make the best possible decisions.

¿What are debt ratios?

They are financial ratios serve to determine the performance of the organization, determined by calculating and interpreting results of various financial ratios. This information is obtained after performing the entire accounting process and is extracted from the company's income statement and balance sheet.

¿What are the indebtedness ratio indexes?

The indebtedness ratios are various, these depend on the information sought to be obtained, in this regard, these types of indebtedness measure the company's capabilities to meet the commitments obtained with banking institutions or other financing entities. These types of ratios are described below.

*Indebtedness = (Total Liabilities ) x 100 / (Total Assets ):

Measures the amount of total assets granted by a company's guarantors. It indicates the participation of third parties in the company and shows the company's degree of risk. To interpret the results, it should be taken into account that if the ratio is high, it indicates that the creditors own a significant part of the company. Otherwise, it represents that the company does not have a high level of indebtedness.

*Total interest coverage = Earnings before interest and tax/erogation in the interest period.

This index can calculate the company's capacity to pay bank interest payments. When the result is higher, the company will have a good chance of meeting its interest expenses.

*Total Liability Coverage=Earnings Before Interest and Tax/(interest + principal credit)

Determines the company's ability to cover its interest and financial amortization obligations, as well as interest payments and principal repayments.

*Leverage = (Total Liabilities)/(Stockholders' Equity )

It is nothing more than the balance between the commitments (debts) and the organization's equity, between internal and external contributions. When in results it is greater than 1, this means that the company's capital is seriously compromised.

*Long Term Debt = (Long Term Liabilities )/(Total Liabilities )

This indicator shows the degree of participation of long-term liabilities with respect to the total financing of the entity. If the result is high, it means that long-term financing prevails over short-term liabilities.

Organizations need constant investments to guarantee an efficient productive and administrative process, in addition, when establishing growth and expansion projects, the decisions on the investments to be made are decisive. This situation is intensified in hyperinflationary economies, all this due to the constant increase of costs without any regularization, therefore, it is necessary to finance the acquisition of new inventories, for which the company must have the necessary payment capacity and these indexes help it to plan its indebtedness.

I hope you like my article and I would appreciate all your comments.

Bibliographic reference:

1.- Flores, L. (2010) Reflections on financial decision making. Universidad Católica Popular del Risaralda.

2.- Koontz, H. and Weihrich, H. (2004), Administración, una perspectiva global. 7th. edition. McGraw Hill, Edición. Mexico.

3.- Peña, G. (2017) Leverage as a tool for the optimization of Financial decision making. Universidad Nacional Experimental "Rafael María Baralt" .