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SPIRU HARET UNIVERSITY FACULTY OF LAW AND ECONOMICS CONSTANTA

STUDY PROGRAM: ORGANIZATIONAL MANAGEMENT AND

ANTREPRENEURSHIP

FINANCIAL MANAGEMENT BUSINESS – Course support –

Course Instructor: Assoc. Prof. Neguriţa Octav, PhD

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INTRODUCTION

This discipline aims to improve the coursant knowledge regarding the notions of finance, the

mechanisms of formation of the value added in the economy, in a monetary expression, which, by distributing

to the principal authors participating in its establishment, initially in cash, will turn into finance at the level of

public and private entities, and not at least will turn into international finance. In this course, coursants, using

information provided by mixes of knowledge of finance, will become familiar with the necessary concepts,

techniques, tools, methods, analyses for developing a training policy of profit and non-profit organizations. So,

they will be able to attend creating a bigger value added, which represents the GDP of any economy.

The financial practice from insight the companies is focused on: financial analysis, financial planning,

financial management short-term financial strategy, patrimonial and financial evaluation of the company and

the last but not the least, the financial decisions, the investment decisions and the dividend policy.

The course goals The Financial Management of Business course has as main objective to „arm” the students in

economics, as future specialists in the finance field, with the basics of theory and practice related to the core,

role and functions of finance, in an unstable business environment, full of risk and uncertainty, so that they

complement the economic knowledge and skills by which they will adapt to the requirements of the labour

market competition.

Also, the course aims:

- a deepening of the knowledge necessary for determining the timeliness of product development with a high intake of value added for entrepreneurs and investors;

- highlighting concrete theoretical and practical aspects, insight a company, generated by the operating,

financial and extraordinary activity and conducting a financial analysis capable to perform a diagnosis of the

performance state, to measure the increase of the company value;

- to understand the stock sizing and to ensure the financing resources;

- to identify the cost of different forms of funding in order to choose the investment and choosing the most efficient financing decisions;

- to identify the ways to estimate the risks encountered in the forecasting and budgeting of a company.

Specific skills

initiation, understanding and assimilation of essential aspects of the mechanism of creating value added in monetary expression;

preparing future managers by completing the theoretical knowledge and practical skills acquired / formed in the years of study in complementary disciplines;

conceptual and applied adaptation of modern organizations future managers to the rapid and profound transformations terms of the political, economic and social, cultural environment;

developing a business plan which is based on the newly created value added and its distribution, in

monetary expression, in an economy oriented to the needs of the population, to the employee motivation and satisfaction;

the manager will think in financial terms to the redistribution of financial resources constituted in all

budgets types from beneficiary income.

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COURSE STRUCTURE

Chapter 1. Financial balance of the company 1.1. The balance sheet, as an analysis tool of the financial balance 4

1.2. Accounting description. Net situation 14

1.3. Indicators of the financial balance 14

Chapter 2. The analysis of administrative results 2.1. Profit and loss account 20

2.2. Interim administrative balances 21

2.3. Self-financing capacity 24

2.4. Self-financing 26

Chapter 3. Administrative cash-flow and the financing table 3.1. The operating cash-flow and the administrative cash-flow 28

3.2. The elements of the financing table 28

3.3. Articulation of financing table with balance sheet and profit and loss statement 31

3.4. Typology of the financing table 33

Chapter 4. Financial diagnosis of return and risk 4.1. Diagnosis of company return 35

4.1.1. Economic rates of return 35

4.1.2. Financial rates of return 36

4.1.3. Decomposition of return rates 36

4.2. Diagnosis of risk 38

4.2.1. Economic risk 38

4.2.2. Financial risk 38

4.2.3. Bankruptcy risk (insolvency) 39

Chapter 5. Funding needs of the company activity 5.1. The financial cycle and the operating cycle 41

5.1.1. Financial cycle 41

5.1.2. Operating cycle 41

5.2. The rotation speed of capital 42

5.3. Inventories management 43

5.3.1. The management of inventories in situations of uncertainty 43

5.4. Optimizing inventories size 44

5.5. Kinetic rate system 45

5.6. Normative method of forecasting of the financial balance 46

5.7. Methods for determining the necessary to fund the operating cycle 47

5.7.1. Analytical methods for determining the necessary to fund the operating cycle 47

5.7.1.1. Analytical methods using the operating costs 47

5.7.1.2. Analytical methods using the turnover 49

5.7.2. Synthetic methods for determining the necessary to fund the operating cycle 49

Chapter 6. The budgets of the companies 6.1. The budget – a financial planning tool 51

6.2. The budgetary system of the company 51

6.3. Budget of sales 52

6.4. Budget of production 53

6.5. The concept of treasury 54

6.6. The budget of treasury 55

6.7. The cost of treasury credits and the cost of discount credit 58

Chapter 7. Conceptual distinctions concerning the decision on long-term funding 7.1. Long-term funding decisions 63

7.2. Financial items of an investment in secure environment 64

7.3. The way of determining the investment decision 65

7.4. Leasing plan 69

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CHAPTER 1

FINANCIAL BALANCE OF THE COMPANY

1.1. The balance sheet, as an analysis tool of the financial balance

In a competitive economy, the company activity, regardless his activity, aims to achieve at least

two main goals: making of profit and satisfying the necessities of some buyer categories. Or, in order to

achieve these 2 main goals there is necessary the information which will reveal the company's financial

position and its profitability. The social practice has compelled the accounting, as an essential component

of economic information system, to build a complete and credible information. The accounting through its

specific means and methods offers a pertinent analysis of market oriented, offers guidance on future

economic strategy, clarification on the past and present of the company, solutions and reasons for the

adopted decisions. This science is a logical system, and rational system of specialized information which is

the subject to the rules and the conventions socially defined.

According to Accounting Law no. 82/1991, republished, the official document of management

„which should reflect a complete, clear, true and fair view, of the patrimony, of the financial situation and

of obtained results” is the balance sheet.

The achievement of a true and fair view of the accounting requires that the information provided

fulfils the following conditions:

accounting data must be registered in time in order to be processed and used;

accounting information must provide to users an adequate description, must be accurate and

complete;

accounting of the economical facts must be consistent with their legal and economic basis;

information provided by the accounting must result by applying the accounting procedures and

rules with good faith.

Balance sheet, conceptual speaking, represents the most important informational synthesis of the

accounting, which is obtained through the structure, the aggregation and the systematization, in terms of

value, of the assets of an entity, at a certain moment. In one certain time, this characterizes the constituent

elements of company assets and contains a system of indicators that are developed based on data provided

by accounting, directly taken or being processed in advance.

The balance sheet is a way of analysing and management. This is the mirror of the company

activity, being the main support of informing all interested parties, a primary source of information for the

manager of the unit, regarding the conduct of the business which it leads. This is the tool for calculating

the macroeconomic indicators and for developing forecasts, which are serving to establish the national

economic asset. „Evaluating the work undertaken by any company, and developing economic decisions are

based on the analysis of the most complex "product" of accounting respectively balance sheet”, according

to professor Horomnea E., in his work Managerial Competence end in the technological changes

background, vol. II, Management of Technological Changes”, which has been published in Greece in

2003.

The balance sheet, as a model specific to accounting method, provides a synthetic and static picture

in monetary terms on the total asset state and on the overall results (profit or loss) at a microeconomic

level, namely an economic and up to the highest level - the national level. Using the qualitative structures

of its positions, the balance sheet achieves the double representation of the assets.

There are two principles of accounting which act directly on the balance sheet:

the principle of non compensation – according to this principle it is forbidden the

compensation of the structured elements in terms of liquidity with those elements structured in terms of

chargeability or more precisely the compensation of the receivables with debts;

the principle of balance sheet intangibility in the opening which forbidens any change of the

the opening balance sheet of the following year, which implies equality of the final balance of the initial

financial year with the opening balance sheet of the following year.

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According to the accounting theory, balance sheet has the role to demonstrate the validity of the

principles of the accounting method, the double representation and double duplication, which is the base of

the double-entry bookkeeping. In practice, the balance sheet has an important role in the company

management, by providing the managerial art, being an appropriate system for analysis of enterprise

activity and taking appropriate measures.

The image of the assets situation at one time, expressed by the balance sheet is complemented by

the statement of revenues, expenses, economic and financial results of the company, which have been

recorded by profit and loss, and by the annexes to the balance sheet and the management report which

includes a financial analysis of how to achieve unity indicators. The company manager analyzes the factors

influencing the achievement of indicators, especially the factors that led to the failure of both the technical

indicators and the financial ones. Considering these facts, we will present aspects of the production plan, of

the loading method of production capacity, of how to make the supply and production of sales, of product

quality issues, etc.

Financially speaking, the balance sheet highlights the cost, the profitability, the liquidity

developments and the use of credits. From the analysis of these factors should result the measures to be

taken in order to ensure that the influence of these factors is minimized or eliminated.

There are considered as well the factors with positive influence in order to enhance their influence

in the future and to achieve a higher level of these indicators.

Concerns in the normalization and harmonization of accounting systems, at European level, have

materialized, considering the normalization, in conceiveing of rules by International Accounting Standards

Committee (I.A.S.C.), while on the line of the accounting statements harmonization and including the

financial statements achievement, these have led to the acheievement of directives, each member state

having the obligation to include them into their own legislation.

At the EU level, concerns on the harmonization of the accounting systems have resulted in the

adoption of three significant documents:

1. The 4th European Directive, achieved on July 25, 1978 and revised on November 8, 1990,

whose provisions are based on standards published by the European Union of Accountants Economic and

Financial Committee of the International Standards. This directive is divided into four parts:

The balance sheet scheme (including income statement), is comprising two schemes of balance

sheet, only one of which must be applied on choise and two schemes of the income statement.

In the first scheme is presented in the balance sheet in landscape (into account), the asset being

divided into six categories, labeled from A to F (Callable capital; expenses for constitution; long term

assets; current assets; accruals; loss for the year), and the liabilities into five categories, labeled from A to

E (equity; provisions for liabilities and charges; debts; accruals; the profit of exercise).

In the second scheme it is presented the balance sheet in vertical format (list), where fields are

marked from A to F (callable capital; expenses for constitution; long term assets; current assets; accruals;

liabilities with maturity of less than one year; current assets (including E), excluding debt with maturity

less than or equal to one year; the total amount of assets net of liabilities with maturity exceeding one year;

liabilities with maturity exceeding one year; provisions for liabilities and charges; accruals; equity).

The 4th European Directive also includes the valuation rules, the notes to the balance sheet and

management report.

Briefly, some of the main provisions of the European Directive on the accounting:

the annual accounts must give a true and fair view of the financial position of the company;

interpretation of economic activities is done according to legal and economic concept of asset, yet

prevailing the legal aspect;

mandatory valuation of balance sheet items based on historical cost (the pluses or minuses from the

same post of the balance sheet must be valued separately, forbiding their compensation);

the accounting issues regarding the annual accounts can not be applied uniformly to all businesses

due to legal differences and their different sizes (SMEs are the beneficiaries from simplifications

regarding the submission of annual accounts in order to ensure a confidential character facing the

competition).

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Compared to the balance sheet structure adopted by the Romanian accounting system, in the

analysis of the 4th European Directive provisions, we can make the following remarks:

- callable capital is represented, inside thebalance sheet in the form of bilateral or account, as the

first entry in the asset or ca as an element of the current assets (in the detailed structure), the second

solution being agreed by the Romanian balance sheet;

- formation expenses are listed separately before the Long-term assets or as items of intangible

assets. The Romanian balance sheet provides the cumulation of formation expenses with development and

research costs, which is creating some difficulties in performing financial analysis (formation expenses

being considered as elements of fictional asset);

- the profit and loss are highlighted as the last category in the liabilities and respectively, in the

assets, whilce in the natioal laws these elements are registered by distinctive signs in the equity structure.

2. The 7th European Directive, achieved on June 13, 1983 by EU, is the result of international

studies, of normalization and standardization efforts in the development and presentation of consolidated

accounts, being finalized in the Order no. 1775 of 11/29/2004, published in the Official gazette, Part I no.

27 of 01/10/2005 concerning some regulations on accounting.

3. The 8th European Directive on the usefull stipulations regarding a competent checking

legislative activity of the balance sheets realized by the companies.

If we extend internationally in some way the standardization and the harmonizatio activity of

accouting systems we reffer to the International Accounting Standards Committee (I.A.S.C.) which was

founded in 1973 having as main objectif the development of international accounting standards through a

rational process which envisages the valuation, presentation and disclosure of informations concerning the

financial data of the companies.

In this context, „The frame of preparation and presentation of financial statements”, adopted in

1989 by the International Accounting Standards Committee and consisting of 110 paragraphs, treats

different aspects as: the goal, the qualitative features and the elements which compose the financial

statements, the measurement systems and the concept of capital.

The goal of financial statements is the necessity of providing information on the financial situation,

performance and development of financial situation, information which prove to be as usefull as the

potential users will be able to take economic decisions. Later, in the 1995 year International Accounting

Standards Committee has launched the project of rules on „Presentation of financial statements” which

reffers to: a balance sheet, a profit and loss account, a table of financial flows and the explanatory notes or

the annex. The presentation of the balance sheet defined by the I.A.S.C. is similar to the Romanian or

french balance sheet, has not the basic formula „assets – debt = equity”. It has an account form and

requires separate presentation of fixed assets, of current assets, of equity and of debt.

The separation of fixed assets by current assets is based on their real function rather on their

maturity. This is the reason why such a balance sheet model doesnt differentiate short-term debt by long-

term debt (the liabilities being structured into equities, minority interests and debt). Also, it is not possible

the deduction of current debt (short-term debt) from the current assets, and the elements of current assets

can not be classified by their liquidity.

The format of this balance sheet has is composed by next elements:

- the assets are resources over which the company is exercising influence and which are originate

from past events, designed to generate future „economic benefits”;

- the liabilities represent present obligations of the company which are generated by past events and

which generated on the payment, an outflow of resources that imply an economic advantage. Obligations

may have a contractual, statutory or legal basis and so they may result from current commercial practices

or may be the result of the company voluntary policy. There is a great difficulty in distinction to be made

between a present obligation and a future commitment;

- equities results from deducting all liabilities of the business assets and their size is influenced by

the system of valuing assets and liabilities. Only exceptionally size corresponds to the equity value of the

shares or the overall value of the enterprise.

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The accounting rules in our country adopted a general structure of the annual accounts under the

name equivalent "balance sheet" or annual financial statements. This prepares the annual compulsory and

if the merger or closure of the autonomous administrations, companies, public institutions cooperative

units, associations and other legal entities or individuals who have a merchant.

Introducing the obligation to lead accounts by economic units starting on 01.01.1994 under the plan

of general account of the Implementing Regulations of the Accounting Law no.82 / 1991, as amended

subsequently by the methodological norms accounting accounts approved by Government Decision no.

704/1993, was created in Romania, the possibility of reflection in the records of economic and financial

operations, specific market economy in line with the regulations adopted in this period and to the

provisions of the 4th Directive of the European Economic Community and International Accounting

Standards.

To meet the accounting harmonization with the provisions of the European Economic Community,

the Ministry of Finance established by Order no. 3055 / 29.10.2009, complete the form and content of

financial statements prepared annual mandatory from 01.01.2010 by companies, national companies and

corporations, national research and development institutions, cooperative societies and other legal persons,

under special laws the organization operates on the principles of company law. These entities that exceed

two of the three size criteria: total assets: Euro 3,650,000; net turnover: EUR 7,300,000 and average

number of employees during the financial year: 50 will draw up annual accounts comprising the balance

sheet; profit and loss account; statement of changes in equity; cash flows; notes to the annual financial

statements.

The annual financial statements drawn up by the economic entities that exceed two of the size

criteria mentioned above constitute a whole. They will be accompanied by the Directors' Report and will

be audited by law.

Legal entities that balance sheet date do not exceed two of the criteria set out above, simplified

prepare annual financial statements consisting of: balance sheet, profit and loss account and notes to the

annual simplified financial statements. Optionally, these entities can provide the statement of changes in

equity and / or cash flow statement. Simplified annual financial statements are audited according to the

law.

Annual financial statements must be accompanied by a written statement of the legal person

management accountability for annual financial statements in accordance with accounting regulations

compliant with Directive IV of EEC. Consolidated financial statements are compiled according to the

Accounting Regulations compliant with European Directives.

The importance of the balance sheet was noticed a long time ago. Professor N. Feleaga statement is

accurate, on the importance of balance "useful to make decisions, the head of an enterprise must know

whether his business prosper if headway or if it is declining ... at every great crisis, economists they were

obvious that many failures are due simply a knowledge too late to decline their business ... but we do not

need only to determine the result, when a company begins to be in danger; it is essential to take note of

prosperity. An able chief must seize this period of flowering, whether it is caused by circumstances or

economic structure. We can not let pass without favorable winds to sail, for they (the winds) will not

always blow”.

The balance sheet role is particularly important both in theory and in practice accounting:

In the epistemology of accounting, balance sheet role is to demonstrate the validity of the principles

of accounting method - double registration and double representation - which is based on double-entry

bookkeeping. In the balance sheet are introduced the two fundamental sides under which accounting

studying heritage, namely material and financial means regarded as structure, composition and destination

on the one hand and by financing source, origin on the other part. Also, check the theory that any number

and any movements occurring in all assets at the level of organizational links maintain equality between

the two fundamental sides: assets and resources. Through the balance sheet, the accounting knowledge to

the top level of generalization and conclusions on correlations and interdependence of economic

phenomena and processes data and information revealed in the balance sheet and, based on this knowledge

for future development trends.

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In accounting practice units through balance is achieved and put in correlation accounts which

reflect the patrimony elements of the unit, being this way, the instrument accounting accounts lose part of

individuality and their feature being presented by a single element, namely of the balance. Likewise, early

reporting periods, based on data and information from the balance sheet the accounts are opened. The

balance sheet data are out of the system data unit accounts during the reporting period preceded and data

entry into the accounts during the reporting period following. Thus, balance sheet accounting cycle is the

element that closes and begins the cycle.

Balance sheet is not only important for the unit management to which circumscribes the data and

information from it, and organs outside the unit concerned to know the work and its results, such as banks,

investors, shareholders, employees, tax authorities, etc.

Through its content and its annexes, balance sheet provides related information and verified sides

which are expressing syntheticly all the means, activities and outputs of a unit and are particularly useful

for driving these units.

Given the importance of the balance sheet it is necessary to know the functions that it performs

balance, given the amount of information that it makes available in the information system unit. These are:

1. The function of generalizing the accounting information – is a manifestation of the process of

generalization in the accounting method of accounting knowledge and process final moment an expression

of flow data processing and accounting information from one unit.

In the organization of accounting, data and information on the economic issues that occur in the

unit undergoing an ascending path: from simple to complex, from the particular to the general, from

primary to centralizing. In this work all the processes and tools used by the accounting method, the balance

sheet reflecting the final moment of stream. In the balance sheet are taken all data on each account, which

are then grouped and systematized by nature, so as to obtain synthetic data with high density information,

centralizing and generalizing the whole mass of information economic and financial accounting system.

2. The function of information – provides an essential balance in the accounting information system

and this extremely important because the information contained on the means, resources, economic

performance and financial management unit, which is indispensable to its management. Due to their

synthetic generalizing chracter, information from the balance sheet allows an overview of the situation at a

given moment, of how to ensure economic management principles.

Balance sheet provides information on the type and size of all economic means, whether and to

what extent the means are financed from own sources or from foreign sources, if the exercise which was

drawn balance ended with profit or loss, etc. Based on this information, although post-operative, the

management may decide to remove deficiencies or enable effective action.

The function of information of the balance sheet extends beyond the limits of organizational

management unit, meaning that the balance is used as a data source for a number of bodies outside unit.

So, the bank uses the balance sheet to see what the destination was given loans, if and to what extent these

loans are guaranteed. Also, the balance is used by tax authorities to determine the size and hence the mass

of profit tax, and other taxes.

3. Function of analizing the balance sheet – which in fact represent a continuation and deepening

of the function information. This feature highlights factors influencing phenomena and processes the data

and information presented in the balance sheet and the size of these influences.

This function is performed by checking various correlations that should exist between data and

information in the balance itself, the correlation between the groups balance between chapters and posts

the balance or the balance sheet and annexes to the balance sheet of accounting information and the plan of

Annexes to the balance sheet, etc.

This function provides balance in the use of the information management unit and is expressed

especially in the management report, which examines all financial and economic indicators effective in

terms of deviations from the plan and the factors that caused them. The analysis allows the diagnosis of the

financial situation and profitability of the entity.

4. The forecasting function of the balance sheet – anticipation of economic phenomena and

processes of evolution. In the management process leading of the companies, the balance sheet is an

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important tool of business regulation, given the organic link between the analysis based on the balance

sheet, functions and powers of the management company. Based on data provided balance is controlled

manner and extent to which the economic entity established to fulfill programs, budgets management

provisions, to use the available funds, was framed in the economic and financial discipline.

The accounting knowledge through the balance sheet highlights the close intertwining of these

functions, their mutual conditioning. Thus, the use of accounting information to a higher level is not

possible without generalization by balance sheet data and information from the accounts function achieved

by generalizing.

On the other hand, generalize of these accounts data is precisely in order to obtain the necessary

information management process.

Once using the information it is necessary an analysis of this information to identify the factors that

determined the size and development trend of economic phenomena and processes.

To have a true, clear and complete image of the asset, financial position and results must be

respected, in good faith, rules on the assessment of assets and other rules and accounting principles, such

as the precautionary principle, the principle Consistency principle going concern principle-based

accounting principle of intangibility of the opening balance sheet, netting principle.

The financial study of the balance sheet highlights the ways to achieve financial balance or

patrimonial functioning of the enterprise at a time (usually at the end of the reporting period), allowing

therefore a static financial analysis.

From a juridical point of view, the balance sheet summarizes the state patrimonial rights and

commitments that all existing property at a time.

Economic rights include property rights and the debt holders and gives power over property

(property rights) or the possibility of obtaining benefits from other people (rights instruments).

Property rights - materializes in the possibility of using property for the purpose of consumption,

production or exploit it to obtain income.

In general, an enterprise has certain property rights that a range of material assets such as land,

buildings, stocks of goods, raw materials, finished goods and intangible represented by patents, licenses,

trademarks and other intangible items.

Rights of receivable - that the rights on third parties, consisting of commitments made by some

partners, such as customers whose payment terms agreed in advance, have a maturity of subsequent supply

of goods or services and the debtors company in their capacity as beneficiaries loans, repayment

commitments for future capital and cost of this form of interest. As a result, the fixed assets accounts,

customers and debtors appropriate property rights and debt will be reflected in the balance sheet.

Economic commitments - appropriate to the obligations that the company must honor at a certain

maturity, are recorded in the liabilities category.

Depending on their origin, commitments may be the result of voluntary decisions or obligations

imposed on the undertaking. Thus, borrowing commitments or payment obligations to suppliers are the

result of free enterprise subscribed, resulting in debt reflected as a liability, while levies constitute

mandatory tax obligations imposed on registered all the liability side.

Also, the property commitments can be differentiated, depending on their effects in the

corresponding commitments and corresponding debt equity.

The elements corresponding to debt generally involve for the enterprise the obligation to pay

interest and debt repayment, depending on method and maturity agrred in the agreement.

The commitments relevant to equity develop due to the remuneration owners funding available to

the company as a down payment on setting capital either for input again during growth capital or accepting

maintain undistributed profits which in fact represents reserves that will increase its capital by

incorporating them in its amount.

Equity expresses the value of rights that homeowners have over the enterprise, although the

remuneration and reimbursement commitments taken by it against its owners are often unsure.

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Thus, the owners do not benefit from any firm guarantee to ensure their recovery of funds invested

and no certainty regarding the date of a possible recovery. Regarding the remuneration on invested capital,

there is a risk of undistributed dividends, if the results of the company will be weak.

In the risks compensation arising from that undetermination, owners can benefit from three major

advantages, namely: higher dividends, if the company has a favorable financial development and generates

good results at the end of the accounting year (remuneration is not guaranteed otherwise), growth of equity

value, so of the wealth that owners hold in the company (even it can not be considered a time limit for its

recovery) and the right to participate in the major decisions of the company's life (particularly those

concerning the appointment of its leadership).

If legal review allows presentation property rights and liabilities, financial presentation highlights

the relationship between sources of funds (resources) and needs (uses) to which funds are allocated,

leading to the need to process accounting data and their settlement in active and passive.

Thus, the liability arises as a summary of commitments made (legal point of view) or an inventory

of sources of funding (financial point of view), while items recorded in the asset corresponding to

patrimonial rights (both legally) or allocations of funds to purchase these rights (financially).

Can be defined the balance sheet as a state at a time of the firm's position. But his uncertainty

hovers over the content: it describes the legal situation of the company or its economic and financial

situation?

Therefore, currently on the balance sheet, we can meet several approaches.

A first approach to the concept of asset. In terms of economics and law „asset consists of all assets

(tangible and intangible), the rights and obligations which characterize the economic entity at a time ".

In order to be accounted for, asset components must be expressed in monetary standard.

Also, the assets must be attached to a natural or legal person who carries out acts of commerce,

appointed titular of asset.

Identifying, structuring and knowledge asset is achieved by balance sheet.

Starting from the concept of heritage, the balance sheet can be interpreted in several ways:

Economically speaking, balance sheet shows the equity of asset holder. Equities are represented

both in terms of their origin, namely resources and their use. This way of interpreting generates the

economic equation of balance sheet:

Utilities = Resources

Approached in terms of economics, balance sheet determines the origin of funds to finance the

company and the company needs.

Economic balance sheet is the kind of balance that makes a strict separation between financial

items and elements relevant to the productive or commercial process conducted by an entity heritage.

Legally speaking, a balance sheet shows:

- property rights and obligations, categorized in a rational order;

- company debts to third parties and debts to aportorii risk based capital (associates), classified in a

rational order.

Thus, the net situation (NS) is determined by the relationship: NS = Total assets – Total debt

Net situation is, therefore, the value of company's debts to associates, in other words, the value of

the rights they have on the entity property owners.

„A second group of finality balance sheet approach focuses on meeting the needs of economic and

financial analysis.

Balance sheet model, launched by the new Romanian accounting system (1 January 1994), inspired

to some extent fromthe French model provides a structured according to their assets and liabilities by their

origin. Based on the balance sheet drawn up and submitted by industry, by regrouping after its functions, it

can reach a functional approach”

Functional balance sheet is the kind of balance that is based on sorting stations according to their

nature, focusing on operational cycles, investment and financing. Functional balance is "a summary

synthesis to explain the functioning of an undertaking, seen in terms of financial resources used in the

pursuit. Thus, special attention is given to classifying the means (uses) and resources according to

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economic and financial cycle (investment, finance or operating) to which they belong. As a result, the

balance sheet is based on the functional distinction between long-cycle and short cycle, generating inflows

and outflows of cash”.

Basically, the development of the functional balance sheet is made up from data contained in the

balance sheet, but orderly, in terms of liquidity / chargeability. This means structuring of assets after their

liquidity in current assets and current assets and liabilities items after chargeability structuring their

resources in stable or permanent equity and debt with maximum 1 year maturiy. It is based on the principle

that permanent financing capital assets and debts under one year or short-term debt used to finance current

assets, being in that way a principle which is not applied rigorously or stiffness in practical life of the

companies.

Functional concept is based on a theoretical foundation own the operating cycle of the company.

Functional concept of the balance sheet assumes that assets and liabilities reflect transient values, fleeting

structures in processuality heritage. Functional balance sheet structure is based on the acoounting balance

sheet structure, classifying assets and liabilities as belonging to a cycle or another, such as: investment

cycle; operating cycle; cycle treasury operations.

Functional analysis provides a more economical image of the company, aimed at how to achieve

financial balance to the needs identified and allocated resources to finance their activity cycles. In this

presentation, we start from the specialized alocation assumption of a resource in need, for the purposes of

asset financing stable stable and the current assets of cyclical resources. This symmetry is not respected in

reality, due to gaps in time between payments and receipts associated to current operations determined by

the nature of business, the operating cycle, and the level of activity, organization and business

management.

The role of functional balance sheet in analyzing the financial balance is to allow assessment of the

company's financial structure and to help assess financial needs, according to the categories of resources at

its disposal.

Writing functional balance assumed the following principles:

- to the fair value of assets we add the depreciation and provisions accounted for, which means that

assets are taken into account on a gross;

- in the functional analysis, the concept of fictitious asset is not applicable;

- taking into account of assets held in leasing, because it considers that they serve the exploitation

process. Leasing operation substitutes to the traditional loan, so it is a source of funding. The assets held in

this system must be reintegrated into the category of property, correcting it accordingly, with the same

volume of resources (amortization for the depreciated amount and, respectively, the financial debt for the

unamortized part);

- costs relating to the following exercises are considered fixed assets, being treated as investment;

- costs incurred in advance are considered, where appropriate, cyclic operating assets or non-

operating assets;

- the expected effects till maturity are included in assets to receivables category and in liabilities to

current treasury loans. Effects and ceded claims are removed from the balance sheet in current assets, but

we believe it is prudent them to be functionally integrated in the balance, as the company reimburses the

bank in case of default of the customer at the due date;

- premium on redemption of bonds are removed from assets, decreasing consequently the value of

financial debt in liabilities;

The transition from functional balance sheet to the financial balance sheet can be done through a

proper processing. To do this, assets and liabilities must be reclassified as duration criteria: lasting over

one year; lasting less than one year. Either through information from balance sheet (French model) or

annex (the French model, and the Romanian) details are given on the duration of posts (items) from the

balance sheet.

Financial balance sheet is the kind of balance sheet that positions are ranked by liquidity (for assets

elements) and chargeability (for liabilities elements).

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Financial balace sheet reflects the solvency, liquidity and default risk of bankruptcy of the

company. It measures "company's ability to honor its debts. It checks liquidity, ie the property of an asset

to be quickly converted into currency in order to cope outstanding liabilities”.

Financially, any balance breaks down into three large masses: the working capital; necessary

working capital and treasury. These three masses informe on the financial balance of the company through

the relationship:

Working capital (WC) – Necessary working capital (NWC) = Treasury (T)

This relationship of equilibrium points out that the financial equilibrium of the enterprise is the

result of decisions taken by the company in the short term, the stock management, trade credit policy to

customers, relations with suppliers settlement, etc., as well as medium and long term , investment and

covering them with permanent funding resources.

A third group balance sheet approach is suitable to Anglo-Saxon and North American conception,

which excludes the patrimonial (predominantly legal connotation), the balance sheet is the document

which shows the financial situation of the company.

If we take as example the balance sheet practiced by most American companies, we can notice that

three mass values can be defined:

- Assets (goods or assets);

- Liabilities (debts);

- Shareholders equity.

Unlike many European countries, where the assets are presented in increasing order of their

liquidity and liabilities in order of increasing chargeability, companies in the United States present their

assets and liabilities in decreasing order of liquidity, ie exigibility.

This classification denotes an element of accounting American culture, focusing on short-term

items: cash and close out, shown as raw elements of the balance sheet structure.

Concerning the vertical presentation, this has stressed the legal nature (but not heritage, unused

term in Anglo-Saxon cultures). It reveals the company's creditors: third parties who have legal priority to

the owners. Net situation (equity) is considered, therefore, a residual part.

In this format (vertical), the basic equation of balance sheet:

Assets – Debts = Net situation (equities)

Net situation can also be meeting with the name of accounting net asset.

In the North American economies, in many practical situations, probed businesses tend to hide

lowering benefits to the dropping courses priming actions.

The subsequent developments of the results have proved these trends. For a circumspect eye,

concealing trends were detected in the balance paid extra attention.

It is known that a damaged balance sheet, but properly drawn, is the announcement of financial

difficulties, while one that looks fairly recovered financially, reveals a precursor condition improving

benefits.

Granting him the role it deserves, scientists have concluded that the benefits are not simply the

result of assumptions filtered through balance.

Balance sheet allows to expressf value judgments on the risk incurred by an enterprise and the

valuation of future cash movements. Through this we may conduct an analysis of the balance sheet through

the liquidity / financial flexibility chargeability and facing that company has to face.

Liquidity refers to the time required for an asset to be developed or converted into availability and

chargeability at the time required for a debt to be paid.

For company, the more liquidity and flexibility are higher, the less it is likely for the company to

fail.

Financial flexibility is the ability of a company to take the necessary steps to amend amounts and

the timing of cash movements, in order to meet their needs and contingency.

A company with a foreign liability (debt) so large that its liquidity is considered insufficient to pay

obligations at maturity or to finance its economic growth is an enterprise that lacks flexibility.

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Instead, a company which is able to overcome difficult moments and which is easily detecting the

investment opportunities are offered represents a company with a high degree of financial flexibility.

Generally, the economists state that for an enterprise, the more financial flexibility is greater, the

less it is likely to fail.

The consolidated balance sheet is presented in a list format, where the patrimony elements are

presented in order of decreasing liquidity, respectively exigibility, unlike many continental European

countries, who prefer to order by the criterion of economic nature and sources of origin.

Separate disclosure of items in the balance sheet is based on three essential characteristics:

nature of assets and their liquidity;

fonction of assets in a company;

the amount (amount is important because there are to be separately disclosed items with

significant amounts; if case of debt whose amount is insignificant it is recommended aggregation of these

items value if they are kind and similar function), debt (requires separate disclosure of debt bearing interest

of the non-interest bearing, tax debts of commercial and salary) and delimitation while debt (chargeability

debt is the main criterion for the delimitation of debt in current liabilities and long term liabilities, leading

to the separate debt that fall due within one year from the balance sheet date or during normal operating

cycle of debt outstanding after this date).

Data necessary to the financial analysis are taken from financial balance sheet.

Construction of financial balance, based on the facts contained in the balance sheet, requires a

initial treatment, the criteria being already mentioned: liquidity-chargeability.

The liquidity-chargeability analysis, called in the Western countries practice as "analysis of

patrimony" is pointing out the risk of insolvency of the company. This consists of the company's inability

to honor its commitments toward customers.

Liquidity represents the ability of assets to be turned into money. The more liquid is an asset, the

more readily is convertible to cash (money). The most liquid asset balance sheet items are even available

money, and the less liquid non-current assets.

Chargeability is the elements of liabilities ability to be converted into cash or to be repaid to capital

supplier. In this sense, the most chargeable liabilities are the treasury loans, while the least are outstanding

equity, which in principle should not be repaid never (they could be considered repayable capital with the

entry of the company in bankruptcy)”.

Thus, structuring of elements is done by increasing liquidity since the top of the balance sheet. At

first, will be enrolled the less liquid elements, meaning assets (intangible, tangible and financial), which

are also called permanent needs and uses thanks to the slow rotation of capital invested. In the following

lines of balance sheet, are included current assets that are much more liquid than non-current assets, for

which they are known under the name of needs or temporary use.

Structuring elements by the degree to high chargeability presupposes the registration, initially, of

equity from associates and from reinvestment of previous accumulations (reserves, retained earnings),

continuing with capital from other sources (grants, provisions for risks and expenses, other funds). As

these resources have a certain maturity, they can be called permanent resources

The long-term debts included in the category of permanent resources are the medium and long term

loans with a maturity exceeding one year.

Short-term debts regroup all the debts with a maximum 1 year maturity in the category named

temporary resources. Analysis of debts according to their degree of chargeability has a great importance

for valuating the risk implied by the indebtedness of the company.

A preparation of balance sheet data in a suitable format for analysis leads to the next configuration

of the financial balance sheet:

- top of the balance (HAUT), contains needs or permanent capital and reflects the financial

structure through the stability of its parts to reflect the long-term financial equilibrium, with non-current

assets in the assets (NCA), which account for permanent capital (PMC) in liabilities;

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- bottom of the balance (BAS) for capturing short-term financial equilibrium, with current assets

(CRA) and monetary cash (MC) in assets category in correspondence with operating debt (OD) and

treasury loans (TL) in the liabilities.

Financial balance sheet, startimg from the point of balance between the duration of an operation to

finance and the life of appropriate means of financing, reveals the two main funding rules of financing:

- needs permanent allocation of funds will be covered by permanent capitals, particularly from

equity;

- temporary needs will be funded from temporary resources.

Failure of both funding rules will cause a situation of financial imbalance.

As a reflection of patrimony state, the established balance sheet at the end of the reporting period

(also called financial year), describes the separate assets and liabilities of the company.

The two-part of the balance sheet comprising asset elements in close correspondence with liabilities

elements reflect:

- long-term financial balance (top of the balance sheet)

- Short-term financial balance shown in the balance sheet bottom.

Horizontal analysis of balance sheet Evidences the way in which the main financial balances short-

term and long-term undertaking, such as net situation, working capital, the need for working capital and

treasury.

1.2. Description of accounting. Net situation

Starting from the legal approach to the balance sheet, there are different opinions according to

which the concept of net situation is more relevant in terms of coverage of net wealth of shareholders.

In the first sense, the net situation of the company (NS) represents the net assets unemployable in

debt and is determined by the relationship: NS = Total assets – Total debt. So the net situation of the

company is the difference between total assets and total liabilities contracted.

This express the accounting value of the rights the owners possess in the company, this part

representing the owner’s share which can only be sufficient to ensure financial independence of the

company and its operation mode.

Compared to the equity, net situation is more restrictive, being a more relevant indicator that

express the realizable value of the asset at a certain time, which interest the owners, thw shareholders and

the creditors of the firm, especially in the case of the company liquidation. Net situation is calculated by

confronting the assets and liabilities with the same maturity:

NS = Inventories + Work in progress + Operating customers + Treasury of assets

NS = Current assets – Operating debt

NS = Net realizable asset + Non-current net assets – Capitals of external investments

Net positive and increasing situation of the company reflects a good economic management, which

has the effect of maximizing enterprise value, the equity. The increase of the net situation has the effect of

increasing profitability and financial independence, based on their being able to determine the overall risk

or liquidation:

Global risk = NS – Assets without value / Assets

A net negative situation reflects a potential state of bakrupcy, being the consequence conclusion of

the previous financial losses, losses which have exhausted the full equity, the uncovered part remaining as

reserves to the creditors, this being the insolvency risk of the company.

Financial balance of the company is resulting from the confrontation of large masses of the balance

sheet: the working capital with working capital requirement which resulting in net cash. This balance is

determined in relation to conceptions of presenting the balance sheet: the financial and functional optics.

1.3. Indicators of financial balance

Financial equilibrium, using as base the financial balance sheet, that groups elements of balance

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sheet by the criterion of permanence, requires financing of the asset with more than one year duration

using the resources with maturities over one year and financing of assets under one year with resources

having maturities under one year. A first balance is resulting from the confrontation of permanent capitals with the permanent

necessary, the result being the net financial working capital (NFWC).

Basically, the working capital holds a strategic position in the financial accounts, being a

connection between the top and bottom of the balance.

The financial working capital is an indicator of liquidity, and this is because an insufficient level of

his is a sign of risk of payment, but it is an indicator of solvency appreciated by the creditors it represents

"a marje of security that society must face to asymmetry of debt risks and uses less than one year”.

Working capital indicator is considered "the most important indicator of the financial stability of

the company ..., the result of arbitration between long-term financing and short-term funding", as

Professor Stancu Ion writed in his work „Teoria pieţelor financiare. Finanţele întreprinderii. Analiza şi

gestiunea financiara”. („The theory of financial markets. Company finance. Analysis and financial

management”)

Working capital received a wide definition in the literature, reflecting the progress that it has made

the concept of the role of financial analysis.

Working capital can be calculated by using two methods.

The „peak” of balance sheet method is the first method for determining the working capital, as we

can see in the formulas:

NFWC = Permanent capitals – Permanent necessary, namely:

NFWC = Permanent capitals – Net non-current assets >1 year

This method puts in evidence the long-term financial equilibrium, the working capital representing

the part of the permanent capital remaining after funding non-current assets which the company

consecrates to financing the current assets. This is the part of the capital with a weak degree of

chargeability, serving the financing of assets with a sufficient increased degree of liquidity. This method

insists on the origin of the working capital, enabling to understand in the same time the causes that lead to

different variations.

Working capital can be determined as the difference between the permanent sources and the

permanent allocations.

Thus increasing financial working capital is caused by an increase in permanent capital (issue of

new bonds, new shares, and new loans long term) and reducing net assets (securities dealers, divestment

actions, etc). In this way, there is a increase of the safety margin of the company, a large part of current

assets being financed by permanent.

Recording a positive working capital apparently is only a sign of stability. It can be seen ca an

undertaking having a seemingly less stable equilibrium, it can face its maturity, daca rotational speed of its

current assets is higher than short-term debt, or otherwise can survive and imbalance.

In that case, the amount of the working capital financial is positive, then the company has secured

financial balance, ie the asset payable is higher short-term debt, which is equivalent to the fact that

resources in the medium and long term financed at least uses stable (over one year).

The decrease of working capital is caused by an ongoing capital decrease (reducing equity,

repayment of long term loans or bonds) and increased net assets (acquisition of fixed assets).

If the financial working capital is stationary, the company is in an period of stagnation, stagnation

which may be temporary or having a long time, with different causes.

The second method for determining the financial working capital is the "foot" of the balance sheet,

according to which the working capital is:

FWC = Net current asset < 1 year – Short-term debts < 1 year

This method is pointing the impairment and purpose of the working capital which is financed from

current assets. In this situation, the working capital shows the surplus of current assets shows net financial

debts unfunded temporary excess liquidity highlighting potential as a solvency margin enterprise security.

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Working capital positive is a margin of safety for operating activity of the enterprise, enabling it to

secure a minimum level of current assets strictly necessary officials (minimum stocks, minimum fund

house), current assets being higher than short term debt.

FWC > 0 due to Permanent capitals > Non-current net Assets

FWC > 0 due to Net current asset > Debts having a maturity under 1 year

But a negative financial working capital constitute an signal of alarm to the organization that will

be devoid of permanent sources sufficient to assure the financing of assets, or which has current assets less

than liabilities maturing in the short term, they will not be able pay such:

FWC <0 due to Net current asset < Debts having a maturity under 1 year

FWC < 0 due to Permanent capitals < Non-current net Assets,

It is a common situation in the retail sector, where the rate of inventory turnover is accelerated and

there Loans - large suppliers. The working capital of an undertaking judged by experts financiers should

represent the value of one to three months turnover, while the share leveraged within the permanent capital

not you had to be excessive in relation to the equity, this hovering below 50%, it is therefore necessary to

determine the own working capital (OWC) and working capital or foreign (FWC). The own working

capital (OWC) express surplus equity relative to net assets and is calculated relationship:

OWC = Equity – Net non-current assets

This indicator of financial balance put evidence influence on the financing structure of its

formation, ie the extent to which it ensures the financial balance through equity, which actually reflects the

degree of the financial autonomy. Inside the permanent capital, the share capital borrowed must not be too

high in relation to the equity, it should represent around 50%, it is therefore necessary to determine

indicator own working capital and foreign or borrowed working capital.

Own working capital pune în evidenţa influenţa structurii de finanţare asupra constituirii sale, adica

masura în care se asigura echilibrul financiar prin capitalurile proprii, ceea ce reflecta gradul de autonomie

financiara al întreprinderii.

This express surplus of equity, equity in relation to the net current assets. Negative results

expressed or foreign working capital loan, ie long-term indebtedness to finance short-term needs, an

important role in ensuring the autonomy or freedom to make decisions to invest in social development.

This is calculated relationship:

FWC = Long and medium term loans – Net non-current assets;

or: FWC= WC – OWC

Special value informative of working capital to achieve connection between the two parts of the

financial balance leads to the conclusion that working capital is the most important indicator of financial

balance liquidity - is outstanding, the result of arbitration between long-term financing and short-term

funding.

Net working capital, as a source of financing is the difference between current assets and

permanent capital assets.

Working capital analysis should be completed with the study of another important aggregate

balance sheet and working capital needs ie.

Necessary of working capital (NWC) designates the financial needs arising from the execution of

those operations that make up the current operating cycle of the company whose total must be covered at

least partially by stable resources. The need for working capital is money to be transferred into the

company to ensure its operation, financing assets by comparing expenses will be recovered to pay bills by

customers.

The necessary of working capital is the result of compensation still unfinished mining operations in

financial terms as receipts or payments. Thus, the use of mining (inventories and receivables) is assets that

will materialize in temporary receipts, but by then be covered from other sources. Operating resources

(liabilities to suppliers and other non-financial liabilities) will materialize in the flat, but until then they are

temporarily attracted some resources, covering some of the same temporary uses.

The necessary oworking capital is "the expression of achieving financial balance between the needs

and resources of capital assets (the operation)."

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The need of working capital is the difference between financing needs and liabilities of the

operating cycle of exploitation. The structure of necessary working capital requirements includes: stocks

(of raw materials, semi-finished products) whose value incorporates manufacturing costs; claims.

The sum of these components are subtracted from total (operating and non-operating)

corresponding gap between receipts and payments.

The formula for calculating the necessary working capital is:

NWC = temporary needs (excluding tresury assets) – temporary ressources (excluding tresury

liabilities)

So, relationship calculation of the need of working capital is:

NWC = Cyclic needs – Cyclic ressources, where:

Cyclic necessities = Temporary necessties – Cash

Cyclic needs = Temporary ressources – Treasury loans

So:

NWC = (Inventories + Receivables) – (Short term operating debts)

or:

NWC = (Inventories+Receivables–Customers)–(Suppliers+Fiscal obligations)

The indicator of financial balance, the necessary working capital may be positive or negative.

A positive necessary working capital required is an additional temporary resource necessary to

temporarily before they can be fixed, if it is a normal situation is the consequence of the increased need for

financing investment cycle operation.

A negative necessary working capital required to show a negative gap between inventories and

receivables liquidation, on the one part, and chargeability debt service, on the other hand, the purpose of

accelerating slowdown receipts and payments. So one necessarily reflect a negative working capital

surplus of operating capital resources face temporary, temporary necessities being smaller than the

temporary resources that can be fixed. This situation is favorable if the consequence of accelerating

rotation of current assets, to expedite the collections and payments slowdown.

So, this indicator looks the current balance of the enterprise, the more unstable and fluctuating working

capital than indicator. The need for working capital is dependent on: the volume of activity (turnover);

duration of stock rotation; term debt recovery; payment term to suppliers, etc.

The increase of necessary working capital may occur by increasing customer loans or reducing debt

to suppliers.

Reducing the necessary working capital may occur by increasing or reducing debt to suppliers

inventories of raw materials and finished products.

The necessary working capital can be structured, in turn, into two parts:

1. The operating necessary working capital (ONWC), arises from the fact that most of the posts

targeting balance operating activity of the company, and the size of stocks stations, operating receivables

and payables varies in proportion to turnover.

The operating necessary working capital is determined as the difference between operating assets

and operating liabilities.

Depending on the size of turnover, it can be said therefore that the operating necessary working

capital is seasonal.

For these reasons, the necessary working capital interpretation must be done with great caution

taking into account the seasonality of business activity to know if the necessary working capital

corresponds to a maximum, minimum or average.

2. The outside operating necessary working capital (OONWC) is calculated on the balance sheet

items not related to operating activities. Refers to various other receivables, real estate investment and tax

and other liabilities and are generally related to financial activity or extraordinary.

The outside operating necessary working capital is smaller than the operating necessary working

capital and corresponds to those needs outside the operating cycle, not financed by resources cycle and

covered by permanent.

The calculation formula is: OONWC = Various assets - Various ressources

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or:

OONWC = Various outside operating customers - Various outside operating debts The outside operating necessary working capital not therefore depends on the size of turnover or

seasonal nature of the activity, its size randomly varying by the frequency and importance of outside

exploitation operations.

Regarding the balance between working capital and necessary working capital we can adopt the

following policies:

Policy of prudence and strengthening of the financial autonomy that without a profitable

investment, the net treasury can be found in the accounts and in cash;

Offensive policy of outputing the growth;

Policy of balance that maintains the working capital at the necessary working capital level.

The necessary working capital is positive in the industrial companies, being an operating necessary

working capital which has to be financed and is negative in the companies with distribution activity where

we can find net financing resources, operating resources being superior to the necessary working capital.

The net treasury (NT) can be determined from balance sheet equality which is leading to

confrontation of the working capital with the necessary working capital.

WC–NWC = Cash – Banking customers of treasury = N.T.

Net treasury thus appears as a result of operations that affect all balance sheet items resulting from

horizontal analysis:

- of the upper part: NT = WC – NWC

- of the lower part: NT = Cash –Treasury liabilities;

or: NT = T of assets – T of liabilities

The current cash produced by the company activity, plus the reimbursements at any time (securities

to invest) are composing the treasury of assets, whicle the treasury of liabilities is represented by the

current bank loans, credit balances of banks and the bills of exchange discounted.

Net treasury is resulting from operations influencing the permanent capitals and the non-current

assets, but also from operations concerning the current assets and the shot-term loans.

An increase of the net treasury can be realized through the growth of the working capital and the

decrease of the necessary working capital, or by the decrease of the treasury banking loans and the growth

of the monetary cash.

The net treasury calculated by the 2 methods can be positive, pr negative, thus:

1. The positive net treasury is indicating a financial balance in the company, being a funding

surplus to be placed effectively and safely on the monetary and / or financial market. The treasury is

positive when: WC>NWC and Cash > Treasury loans.

If:

a. the working capital is positive and the necessary working capital is positive, we can speak about

a necessary working capital which is financed by the working capital, which release cash that can hide an

under-utilization of capital;

b. the working capital is positive and the necessary working capital is negative, so the resources

from the operating activity are added to an excedent permanent resources in order to realease an important

surplus of cash that can hide an under-utilization of capital;

c. a negative working capital and a negative necessary working capital highlights the fact that

resources of operating activity cover a surplus of cash and a part of the non-current asset, another part

being financed from short-term debts, which involve as necessary the growth of the permanent resources.

2. The negative net treasury highlights a financial balance, a cash deficit which was covered by

hiring new loans.

Treasury is negative when: WC < NWC and Cash < Treasury loans

There are 3 siatuations in this case.

a. the necessary working capital is partially financed from the working capital and in part from

current bank loans which are higher than cash;

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b. if the working capital is negatie and the necessary working capital is positive, we must review

the financial structure, because the current bank loans cover a part from the non-current assets;

c. if the working capital is negative and the necessary working capital is negative, this is the

situation when the permanent resources covers a part of the non-current asset, the rest being covered by

short-term debt, including current bank loans. It is also necessary to review the funding structure.

The growt of the treasury from a financial year to another represents the cash – flow of the period

(CF) and is calculated following the next relationship: CF = NTN- NTN-1

Cash-flow may be positive and negative.

A positive cash-flow represents an enrichment of the real asset, a growth of the owner patrimony,

leading to an increase of the investment cash flow, while a negative cash-flow signifies a diminution of the

investment cash flow, a real asset impoverishment and a reduction of the property value.

20

CHAPTER 2.

THE ANALYSIS OF ADMINISTRATIVE RESULTS

2.1. Profit and loss account

The state of economic and financial performance of a company is a very important issue, in

general, much more compelling for Romanian companies being in some shortage of capital and liquidity.

Maintaining a state of economic and financial performance as good as it gets and, respectively, its

improvement is an ongoing and essential concern of the company carrying on business in terms of

profitability and liquidity.

Economic and financial operations that occur within a company are reflected in the accounting

synthetic documents in the form of inventories and cash-flows. Although the proper balance sheet shows

the size of comprehensive income in his structure, though it does not explain the origin of this result,

neither the causes that have generated it.

From these necessities, it was drafted the profit and loss account or the results account which

explains the formation of the result and favors some essential conclusions concerning the company

indicators.

Defining of the result in economic terms, the difference between incomes from the sale of movable

and immovable property which has been transferred ownership, services rendered, works performed, the

costs incurred to achieve them in a financial year starts from the fact that any activity is simultaneously

consuming resources and producing results. Resource consumption is defined, in terms of value, by the

structure plan expenditure, while the product is limited by the structure of income. As the resource

consumption and the result obtained as effect produce significant changes that cause mass patrimony of the

company, the two structures, namely income and expenses must be considered in terms of patrimony

relations.

The result of operations of any enterprise, regardless of the subject or activity and its size, is

determined periodically, in accordance with the relevant legal regulations, as the difference between

revenues and expenditures made.

The great diversity of economic operations that leads to the transformation of the patrimony

elements into economic and financial results is materialized, in a narrow way, in:

- profit, if revenues are greater than expenses during a financial year;

- loss, if over a period of time, usually a financial year, revenues are lower than expenses.

Romanian accounting system operated starting 1st of January 1994, according to G.O. no.

704/1993, into the classification of revenues and expenditures: current, consisting of financial and

economic results related to operating, financial and extraordinary activity, and according to General

Framework for the Preparation and Presentation of Financial Statements, prepared by the International

Accounting Standards Committee and according to M.F.P.O. no. 3055/2009 economic and financial results

provides with the current (operating and financial) and extraordinary economic and financial results,

respectively, that income or expenses arising from events and transactions that are clearly different from

ordinary activities of an enterprise and therefore not allowed to repeat in a frequent or a regular way.

Economic and financial results are known in specialty practice, as the results for the year.

Result for the year is determined monthly by using the "Profit and loss" account that characterize

income and expenses and determine the results of the basic structure and operations activities.

In the financial statements of companies, financial results recorded by them are synthesized,

systematized and presented in the profit and loss account, which can be presented in a structured way so:

ECONOMIC AND FINANCIAL RESULTS

PROFIT AND LOSS ACCOUNT

21

Such synthetic structure of economic and financial results allows us to calculate the partial

financial results, namely:

1. Operating result (OR) OR= OE -OR

2. Financial result (FR) FR = FE - FR

3. Current result of the year (CR) CR = OR +/- FR

4. Extraordinary result (ER) ER = EE - ERev

5. Gross result for the year (GR) GR =OR +/- FR+/-ER

6. Net result of the year (NR) NR = GR -IT

So, expenses and revenues express the result of different economic and financial processes and

operations, and the result as such, is determined after comparing the two sides essential for any patrimonial

unit: employee effort (expense) and the effect achieved (revenue). For this purpose, the accounting has the

account of final results 121 "profit and loss", which has obviously a function comparative.

So, the profit and loss account is used in order to determine the result of the year.

By presenting on the revenues, expenses and the definition of the result of the year are resulting the

relations on the results calculation as a result of variation of the patrimony situation and therefore of the

the activity which is consuming resources producing results. So:

Result Final - Initial +/- Owners contribution

of the year = situation situation to capital

or

Result of the year = Achieved revenues – Expensens of achieved revenues

Profit and loss account synthesizes economic flows occurring in the unit, respectively, the expenses

and revenues of the reporting period, which are resulting from the operating financial and extraordinary

activity.

The result as the difference between revenues and expenses is generated either by operations

current activity and normal enterprise, which are classified into three categories of operations: operating,

financial and extraordinary that is not part of their normal activities or functions of the enterprise,

differentiated the result in relation to the production function, the function of selling, administrative office,

financial position and obviously extraordinary function.

2.2. Interim administrative balances

Grouping and restructuring positions from the profit and loss account leads to obtain the interim

administrative balances (IAB), which contributes to supplement the information contained by the profit

and loss account, even it does not substitute to the operation of calculating the result.

The interim administrative balances are consequential sizes which are obtained by economic

calculations, based on the mutual ties between them and allow appreciating the growth of wealth generated

by business activity, as well as understanding the formation of the net result. The construction of the

resulting values in steps, starting from the most comprehensive and up to the synthetic led to the name of

the waterfall interim management balances, each reflecting the outcome of these interim financial

management hips on stage that accumulation. Building up „Interim administrative balances table” is based

on the next relationship:

EXPENSES

1. OPERATING EXPENSES (OE)

2. FINANCIAL EXPENSES (FE)

3. EXTRAORDINARY EXPENSES (EE)

4. INCOME TAX (IT)

5. NET LOSS (-NL)

REVENUES

1. OPERATING REVENUES (OR)

2 FINANCIAL REVENUES (FR)

3. EXTRAORDINARY REVENUES (ERev)

4. NET PROFIT (+NP)

22

1. Commercial margin (CM)

Commercial margin targets exclusively commercial units or the mixed-activity and is calculated as:

CM = Sale of goods purchased for resale – Packaging costs

Packaging costs is the buying price without VAT, which add accesories buying costs, ie transport,

handling, transport losses, variation of goods purchased for resale.

2. Production year, is characteristic to industrial enterprises which manufacture finished products

reflect the entire business productive unit or completed and sold production, production achieved and

remaining stock and production realized and retained for own needs. The formula is:

Production sales of Inventories production Own work

year = finished goods + flow +/- capitalized

3. Value added (AV) express the company's contribution in terms of production of goods or

services, the excess of receipts over consumption value from third parties, the wealth created by making

technical resources, human and financial resources of the enterprise.

The calculation of value added is achieved by two methods:

1. Synthetic method (subtractive) that determines the value added as the difference between

production and purchases;

2. Analytical method (additive) targeting parts of the value added cost of inputs respectively to be

paid (labor and capital).

1. Method allows - according to its value added (AV) is equal to the difference between production

year (PY) plus Commercial margin (CM) on the one hand and intermediate consumptions (IC) of goods

and services from third parties on the other hand according to relationship: AV = PY +CM – IC

Commercial margin (CM) is calculated as the difference between Sale of goods purchased for

resale (SGPR) and the Packaging costs (PC) during the financial year being an indicator specific company

with commercial activity. In the case of comanies without an commercial activity, the value added is equal

only to the difference between production year and intermediate consumptions: AV = PY – IC

Intermediate consumptions (IC) corresponding goods and services purchased from outside (various

suppliers) or raw materials (RM) and consumables (C), utilities such as fuel, energy, water (U) and other

administrative expenses (OAE) suitable relationship: IC = RM +C +U + OAE

Through his content, the value added is one of the significant indicators of enterprise activity as the

total value added of all economic entities is national gross domestic product (GDP): ΣAV = GDP

Value added is a tool of analysis and a management tool too:

a. as a tool of analysis, value added permits assessment of economic and financial performance of the company namely:

- Its economic power real;

- The contribution of production factors to create its own rich;

- Company contribution to GDP creation.

Value added is therefore a means of assessing the company waist more significant than turnover.

Used in intra comparisons, value added reflects structural differences between similar businesses through

the relationship between inputs incorporated in economic activity.

b. as a management tool, value added characterize the operation of the company, being used in

management control and determination of the VAT as a tax indirect tax.

2. Analytical method for calculating the value added - is a method of distribution as it means

adding structural elements of the value newly created namely: salaries (S) (wages, CHI, social protection

expenses), taxes irrecoverable (TI) (customs duties, customs commission excluded VAT etc.), financial

expenses (FE), depreciation of fixed assets (DFA), net profit (NP): AV = S + TI + FE + DFA + NP

The analytical method allows determining the structure of distribution of value added on repartition

elements, namely the percentage of participation rates of remuneration express their inputs according to

their contribution to achieving the newly created value, namely:

23

1. (%) 100_ xAV

Sonremunerati workof

2. (%) 100_ xAV

TIonremunerati stateof

3. (%) 100exp_

exp__ xAV

ensesfinancialonremunerati ensesfinancialof

4. (%) 100___

_ xAV

assetsfixedofonDepreciationremunerati sinvestmentof

5. (%) 100_ xAV

NPonremunerati companyof

The remuneration of the production factors through distribution of value added highlights the fact

that each factor incorporates two distinct parts: one corresponding to an added cost for the enterprise and

other samplings which correspond to a result (net profit).

Added cost is the cost of company activity which it shall add goods, works and services procured

from outside (various suppliers).

Sampling result represents the net profit components included in the value-added factors of

production are distributed in various forms.

Specifically, the value added produced by the company is shared between all inputs participants in

company life:

a. the personnel, through the salaries attributable directly or indirectly in the form of wages, as

insurance and social security as well as through the worker participation in profit;

b. capital contributions through the interest paid to creditors of borrowed resources and the

dividends paid to shareholders for permanent equity;

c. state through the taxes collected and through the tax;

d. the company itself by offsetting depreciation of fixed assets through provisioning and self-

financing its own development.

The value added so structured, is a performance indicator that allows you to appreciate the

efficiency of the company for a given activity.

4. Gross operating surplus (GOS), that unlike other indicators presented are referred to as

indicators of the activity, this is the first hip interim management significance in terms of profitability

reflecting the contribution of exploitation in training outcomes, wearing, as appropriate, as excess profit or

deficit gross operating highlighting specifically enterprise capital contribution to wealth creation. Gross

surplus of exploitation is a crucial indicator for understanding the economic performance of the company,

is a balance of management decisions independent of the company's financial, fiscal policy adopted, the

size of extraordinary income. This can be calculated in these ways:

a. by deducting salaries and tax expenses (less tax income) from the amount of value added and

operating subsidies received by the company;

b. The difference between receivable operating revenues and payable operating expenses, in which

the gross result of exploitation is a resultant flow potential liquidity related operating cycle, and this is

because when registering income does not coincide with that of receipt, and when registering to

expenditure does not coincide with that of their payment:

OEORGOS

5. The operating result (OR), a different indicator from the gross operating surplus, characterizes

trade performance and related financial activity normal operations of the enterprise, independent of

financial policy and the fiscal highlighting result evolved from operations, after being considered all the

costs of production, marketing and operating risks. In tits calcultion operation, it is taken into account the

24

depreciation and the provisioning policy:

OE=GOS +Write back of provisions+Other operating–Depreciation and provisions,-Other operating

for operating revenues operating expenses expenses

Operating result may be determined as the difference between operating revenues and operating

expenses, thus:

Operating result = Operating revenues – Operating expenses

6. Financial result (RF), an indicator of the interim administrative balances that appears as an

expression of the funding policy promoted by the undertaking, express its performance as a result of

involvement in financial activity. The financial result is determined as the difference between total

financial revenues and total financial expenses:

Financial result=Financial revenues-Financial expenses

7. The current result before tax (CRBT) is an interim administrative balance determined both by

the normal operating and current result of the enterprise and by the financial activity result, being the basis

for calculating corporate tax.

Current result before tax =Operating result +/- Financial result

8. The extraordinary result summarizes the result in the form of profit or loss, produced by the

exceptional, unrepetitive activity which has no direct connection with the work carried out, this balance

must be isolated from the current result, because it does not intervene in results verification for future

periods and is calculated:

Extraordinary result = Extraordinary revenues – Extraordinary expenses

9. The gross result is a intermediate balance that reflects the efficiency of the entire activity of a

company for a certain period of time, expressing the company's profit or loss taken in its entirety. It can be

determined by:

a. direct method, by relationship:

Gross result = Total revenues - Total expenses b. Indirect, by aggregating to the current result before tax of the extraordinary result, so:

Gross result = Current result before tax + Extraordinary result 10. The net result for the year (NR) express absolute size of financial profitability that are paid to

equity shareholders subscribed, ie the part of distribution and intended result is obtained by deducting from

profits of the income tax:

Net result for the year = Result for the year - Income tax

The net result for the year, as an interim administrative balance, is often used in the accounting and

financial analysis based on the rate system.

We can conclude that there are 2 principles which are the bases of the interim administrative

balance system:

- revenue and expenditure analysis by type of operation that generated them (operating, financial

and extraordinary);

- distinction between current operations and extraordinary operations evidenced by the result before

taxation arising from the operation and financial activities.

2.3. Self-financing capacity

An important indidcator which is calculated using the elements offered by profit and loss account is

self-financing capacity (SFC), being an indicator which reflects the financial potential of economic growth

of the company.

Self-financing capacity reflect the financial potential released by the profitable activity of the

company at the end of the financial year, intended for the remuneration of both equity and investment

financing. Self-financing capacity represents the flow potential liquidity for the entire business of the

company, that surplus money released by the activity profitable it by increasing net cash, ie cash flow,

which proves that most of the self-financing capacity must be supported by a positive cash.

25

Although not being an indicator contained in the interim administrative balances table, self-

financing capacity can be considered an intermediate balance having a quite rich value in meaning

highlighting the extent to which the company can finance its growth, an indicator of great expressiveness

economic reflecting the financial strength of the company, guarantee the security and independence.

It is also an indicator of financial liquidity and solvency raise the level of creditworthiness of the

company and increases trust business partners, creating better conditions for negotiating economic

agreements.

Self-financing capacity is an indicator that expresses the financial independence of the company,

reflecting the cash flow real, whose size depends on the one hand the profitability of the company, and on

the other hand, investment policy applied by the company and methods of depreciation of assets assets.

Self-financing capacity value depends primarily on economic and financial performance of the

enterprise and a series of internal and external parameters such as: driving policy adopted in debt, tax

provisions related to the depreciation system (linear, digressive or accelerated).

Self-financing capacity may be derived from the revenues and expenses of the current management

likely to turn immediately and forward into cash flows.

Self-financing capacity is determined by two methods: deductive method and additive method.

Self-financing capacity using te deductive procedure is calculated starting from the gross operating

surplus (GOS):

SFC = GOS

+ other operating revenues (a)

- other operating expenses (b)

+ financial revenues (c)

- financial expenses (d)

+ extraordinary revenues

- extraordinary expenses

- income tax

a. excepting: revenues from sales of assets disposed and other capital operations; revenues from

investment subsidies, write back of provisions;

b. excepting: expenses on external services; other taxes, fees and similar expenses; expenses on

assets sold and other capital operations; provisions;

c. excepting: revenues from disposal of financial investments; financial revenues from adjustments

for impairment;

d. excepting: expenses on disposal of financial assets; financial expenses for impairment

adjustments on financial assets; financial expenses relating to adjustments for impairment of current assets.

This method puts the origin of the self-financing capacity, correcting the gross operating surplus

and expenses payable with the proceeds, which are the source of cash flows. In this way, self-financing

capacity highlights the monetary surplus created progressively throughout the global activity of the

company during the year.

Self-financing capacity, according to theadditive method, is derived from the net result for the year:

SFC = Net result

+ Depreciation and provisions; adjustments of the current year

- Write back of provisions and adjustments for depreciation from the previous years

+ the accounting value of the accounting assets

- revenues from sales of assets disposed

- investment subsidies transferred to income

Additive method for determining the self-financing capacity is extremely simple and fast, being

preferred by practitioners, although not explain the origin of the cash flow and overall cash flows that will

be born transactions but informs the destination of the cash flow, namely: corresponding flow of resources

designed to increase the company's net earnings (through investments) and remuneration of shareholders

(via dividends); the flow of resources resulted in depreciation expense for assets renovation.

A merit of the additive approach is to suggest a possible use of the self-financing capacity:

26

- the part of the resources flow corresponding to depreciation of charges could be used for

replacement of equipment;

- Part of the resources flow corresponding to net result could be used to develop the business.

As an indicator of performance and funding resources embedded in the dash, meant to ensure the

link between analysis results and analysis of financial flows, self-financing capacity is the key concept for

assessing the profitability and financial balance for dynamic analysis.

Self-financing capacity can be characterized in the folowing ways:

1. It is a residual balance of all flows generated by management operations and some

extraordinary operations. It has the character of a resource released during the year and could calculate the

difference between inputs and outputs of the funds, which do not deduct any accounting item calculated

(depreciation, provisions)

2. It is an actually or potentially flow comprising inaccuracies. It is heterogeneous, as it includes

several kinds of resources: resources that remain a short time in the company; resources available to

ensure sustainable structural funding; extraordinary operations (expenses and revenues);

3. must compete on maintaining enterprise value, is a growth factor to it by its own means, can dispose of

additional capital by calling on loan;

4. usefulness of the self-financing capacity targets: financing (total or partial) of new investment;

strengthening of working capital; to complete repayment of the loan term means of financing the

investment program; repayment of bank debt to finance investments; distribution of dividends.

Based on the self-financing capacity, we can determine a set of indicators for assessing the

company's financial independence so:

1. the potential repayment ability of the financial expenses;

2. annual investment financing rate;

3. coverage rate of gross operating surplus;

4. coverage rate of year result.

Self-financing capacity represents the excess money obtained as a result of all receipts and

payments by the enterprise in a while, taking into account the tax incidence.

2.4. Self-financing

If from the self-financing capacity registered by the company shall be deducted dividends

distributed to shareholders or associates get another indicator is particularly important in analyzing

accounting – a financial one, self-financing. So, self-financing represents the remain available part from

the self-financing capacity, after dividend distribution, highlighting the real ability of the company to

finance itself after deduction of remuneration to shareholders, in the next way: SELF-FINANCING =

SFC - Dividends distributed

Self-financing is an expression of the wealth created by the company, as a source of internal meant

to cover financing needs next year, whose size is on increasing their own activity sources obtained from

the company, which remain permanently at its disposal for financing future.

The importance of self-financing can be argued by the main advantages it offers to the enterprise:

It is a reliable means of financing, providing a stable and independent source;

gives the company a high degree of action freedom regarding to investment decisions;

it enables the braking of society and implicitly the financial expenses decrease;

an indicator based on which we can measure the return on equity, ie return on financial;

it is the premise of opening access to the capital market and even attracting foreign capital.

The ideal level of self-financing of the enterprise is difficult to assess, however, can be mentioned

three possible scenarios regarding self-financing, namely:

a. Minimum self-financing allows maintaining enterprise, not enough to renew the necessary assets,

preserving existing production capacities;

27

b. Maintaining self-financing include sources that will ensure coverage of expenses necessary to

maintain production potential and renewal of operating assets and insurance cover;

c. Self-financing development includes, with the self-financing sources and part of the result of the

year, so as it will enable the modernization and increased production capacities.

By size, self-financing can be assumed as a strong indicator of company performance, suggesting

potential investors its ability to efficiently use the capital entrusted and to ensure attractive remuneration.

Absolute size and relative self-financing certify creditors’ repayment capacity by undertaking repayment

of loans and the default risk. The self-financing capacity and the self-financing are used in financial

analysis to determine profitability indicators with a special significance in evaluating the company

performance.

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CHAPTER 3.

ADMINISTRATIVE CASH-FLOW AND THE FINANCING TABLE

3.1. The operating cash-flow and the administrative cash-flow

The activity deployed in the company contains 2 types of operations:

1. management operations, being the most important, they have a repetitive character in the

economic life of the company. In the category of management operations are included:

a. operating operations - are operations relating to conducting itself on making products and

services;

b. financial operations - are related to capital market operations and monetary operations;

c. extraordinary operations - are those operations that are not related to the current activity of the

company, but occur accidentally.

2. capital operations, are targeting changes in the structure and in the volume of the balance sheet

items and contain the next operations:

- Investment and divestment operations (sale of assets and recovery of non-operating capital);

- Rations financing leading to increase its capital;

- Lending operations that aim to attract new sources by loans;

- Operations to repay such loans;

- Operations for the refund of equity.

Operations management result is the of management cash flow.

Categories of cash flow:

a. operating cash-flow, express the result as mining operations, meaning having a potential

capacity for self-financing enterprise growth and to remunerate equity investors or lenders shareholders

with dividends and interest. The relationship for calculating the operating cash-flow is:

O.C.F. = Operating Profit– Income tax + Depreciation

Income tax = (Operating Profit – Interest) x Income tax rate

b. management cash-flow express the result of all management operations and is determined as

follows: M.C.F. = GOS + FR +/- extraordinary results – income tax

or

M.C.F. = Net Profit + Depreciation + Interest expenses

c. available cash-flow (A.C.F.) take into account the results of operations of capital. This is

determined by management operations after finance growth, ie after deduction of assets at the end of the

variations and changes in inventories and receivables.

A.C.F. = MCF – Δ non-current assets – Δ NWC

Δ NCA = NCA – NCA0 + DEP0

Δ NWC = NWC 1 – NWC 0

After his destinations, the available cash-flow consists of:

a. available cash flow of shareholders (ACF sh.)

A.C.F. sh. = Net profit - Δ equity

Δ equity = equity 1 - equity o

b. available cash flow for creditors (A.C.F. cred.)

ACF cred. = Interest (expenses) – Δ Interests

Δ Debts = Debt 1 - Debt 0

3.2. The elements of the financing table

The financing table is one of the tools used in dynamic financial analysis, it is a synthesis

complementary financial document, explaining the patrimony variation. It allows capturing the enterprise

29

financial flows that occurred during the period analyzed, which is highly effective in diagnosing a

company's financial.

The purpose of financing table is to express the working capital formation and the relationship of

the working capital with the cash balance through the monetary flows (receipts and payments).

The financing table is determined based on the balance sheet and profit and loss account ended in

two consecutive financial years. It is differenciated as a "bridge" between the opening balance sheet and

closing balance of an exercise.

The need to use the financing table is determined by the fact that it provides a range of useful

information on the evolution of global treasury, which allows users information to evaluate the company's

ability to generate liquidity, or, as appropriate, regarding availability necessities. It is therefore a useful

tool for both the leadership of society, based on information provided by this document, it must ensure that

it has the additional financial resources for investments provided, and if they are insufficient, can assess

the time other possibilities procurement and for external users is a form of meeting their information

requirements. The financing table had over time many forms, of which only two seem to have the attention

of setters and users:

- uses and resources table (financing table);

- cash flow statement.

Uses and resources table is facing a patrimonial analysis of the enterprise, drawing an overview of

its financial equilibrium. This helps to explain the patrimony variation among the opening balance sheet

and closing balance of an exercise, its development is founded on a distinction to be made between

economic flows, financial flows and monetary flows.

Uses and resources table aims at presenting financial flows, while cash flows, separately, are

subject to the cash flow statement.

Main features of the uses and resources table refers to:

it is an indispensable tool of management and forecasting;

it is an instrument to achieve enterprise diagnosis; a tool in the diagnosis made by banks on

enterprise clients, in terms of past and future financing needs;

it is an instrument of assessing the financial management of the company;

it is an instrument of evaluating and interpreting company's dividend distribution policy;

it is an instrument of reflecting the economic and financial flows of the company and highlight the

main issues on the evolution and future prospects;

it is an information document for shareholders, staff and other third parties, etc.

A model of uses and resources table is present in the next lines:

USES RESOURCES INDICATORS

Stable uses (medium and long term)

The increase of non-current assets

Reduction of non-current capitals

Stable resources (medium and long term)

The increase of permanent capitals

The reduction of non-current assets

Δ NWc

Uses for operating activity

Cyclical asset growth

Reduction of cyclic liabilities

Resources for operating activity

Growth of cyclic liabilities Cyclical asset reduction

Δ ONWC

Uses for non-operating activity Uncyclical current assets growth

The reduction of uncyclical debt in the short term

Resources for non-operating activity Uncyclical current assets reduction

The growth of uncyclical debt in the short term

Δ NONWC

Uses for treasury

Increase of treasury assets

The reduction of short-term treasury debt

Resources for treasury

Reduction of treasury assets

The growth of short-term treasury debt

Δ NT

Uses and resources table

It analyzes thus the way was done, in dynamic, the structural balance between stable elements of

the balance sheet (uses and stable resources) and how to use the working capital to ensure functional

balance between the elements cyclical balance (uses and resources cyclical) and monetary balance between

receipts and payments.

30

The fundamental equation is:

Δ NT = Δ WC – Δ NWC

Δ WC = Δ NWC + Δ NT

To achieve financing table there are two parts to follow. The first phase refers to determining the

variaton of working capital due to the changes of capital structure, and the second stage refers to

determining the variation of net treasury due to changes of the necessary working capital.

The financing table highlights:

a. financial resources flows from self-financing and sales of assets – internal flows and equity

contribution and loans – external flows.

b. financial resources uses flows for: investment, payment of dividends, returning of loans and

equity, where it is possibe.

Analysis of these flows based on two successive balance sheets leads to the following findings:

a. creating a resource flow, when:

- a liability item is increasing following to a new contribution of capital or new loans;

- an asset item is decreasing due to depreciation of fixed assets or the sale of some assets.

b. creating a flow of use (allocation) when:

- an asset item increases by buying fixed assets or buying inventories of materials, raw materials

etc.;

- a passive post is decreasing by repaying a debt and / or payment of dividends.

With all the advantages that it offers the uses and resources table, information users are

increasingly interested in issues of Treasury, which is why painting funding lost ground to the cash flow

statement, array situated in the center of the analysis of financial and accounting treasury, while in painting

and resources it uses only an intermediary role between working capital and necessary working capital.

Treasury changes not only as a result of management expenses and revenues, but also the effect of

capital operations, respectively due to changes in inventories of assets and liabilities balances at the end

before the beginning of the year.

Cash flows designates all inflows and outflows of liquidity (available funds and deposits) as well as

cash equivalents (multicash), those placements very short-term, highly liquid, easily converted into a

specified size and liquid whose value is likely to vary insignificantly.

Cash flow statement shows, therefore, inputs and outflows of funds of enterprise activity that are

classified functionally:

- cash flows of the operating activity;

- cash flows of the investing activity;

- cash flows of the financing activity.

1. Cash flows of the operating activity can be determined in the next ways:

a. direct method, based on the information on receipts and payments;

b. the indirect method, according to which the net result is corrected with:

- the influence of transactions which have a non-monetary character;

- any operation or carry regularization of receipts or payments past or future, implied by operating

activities;

- items of revenues or expenses that are associated to cash flows, which are targeting financing or

investment.

2. Cash flows of the investing activity reflects payments that are made with the purpose of

purchasing assets that are intended to generate future revenues and cash flows, flows that provides

information on the manner in which the undertaking to guarantee the survival and even growth.

3. Cash flows of the financing activity are generated by changes in the structure and size of own

and borrowed capital of the company, highlighting the future potential equity investors.

Cash flow statement is based on the logic of the financial balance of the company centered on

notions of liquidity and solvency, which is used to assess the performance of the company and its capacity

to generate liquidity for investments without having to ne necessary to use foreign resources funding.

31

Given these considerations, and the need for alignment with International Accounting Standards

and the requirements Economic Community was introduced by regulatory legal obligation to which the

document by operators of our country.

3.3. Articulation of financing table with balance sheet and profit and loss statement

Articulation of financing table is conceived as a way oriented to the reflection of the connection

points, of the relationships and connections between it and the summaries, balance sheet and profit and

loss account.

When referring to the relationship between the balance sheet and the financing table, this

comparison is performed on mandatory two successive balances, identifying practically the first step on the

construction of the "uses-resources" table.

In order to judge a company's financial situation we must analyse the successive balance sheets

which are allowing the appreciation of the situation and the developments of financial balance and its

indebtedness.

The whole financial policy regarding the balance sheet analysis will be reflected in:

1. working capital evolution (ΔWC):

a. the increase of the working capital is indicating an improvement of the company's

financial structure, the increase of stable resources regarding the permanent needs, in the mean time with

the company's capacity to relieve liquidity and improve cash position;

b. the decrease of the working capital is indicating:

- a financial imbalance, ie permanent needs are covered by short-term resources;

- a chronic imbalance of the treasury and an increase of the risk of the inevitable bankruptcy of the

enterprise in a future period.

2. the evolution of the net treasury is influenced by:

- the working capital evolution with a potential influence;

- the short time evolution of inventories and customers;

- the treasury loans evolution.

So:

1. The elements of the financial balance sheet at the begining of the period are presenting in the next way:

ASSETS LIABILITIES

Non-current assets 30%

Current assets 50%

Cash 20%

Equity 20%

Financial debts 20%

Operating debts 50%

Treasury loans 10%

Using these elements, we can calculate the values of working capital (WC), necessary working capital

(NWC) and net treasury (NT) indicators:

WC0 = Permanent capitals – Non-current assets = 40% - 30% = 10%

NT0 = Cash – Treasury loans = 20% - 10% = 10%,

or

NT0 = WC0 – NWC0 = 10%

2. The profit and loss account of the year highlights the gross operating surplus as a potential

source used of the calcul of the self-financiang capacity of the company.

The self-financiang capacity appears as a stable source which allows to:

- finance the stable needs;

- to pay the share-holders for the given funds (payment of the dividends);

- refund the financial debts under the contract.

32

Profit and loss account

Revenues Expenses

Gross operating surplus e (R-E)

- income tax

- interests

= Self-financing capacity

Financing table

Allocations Resources

Purchasing and increasing of non-current

assets

Reefunds of equity

Dividende platite

Refunds of financial debts

Increase of the working capital

Self-financiang capacit

New capital contribution

New short and medium term loans

Transfer price of given assets

1. Working capital evolution (ΔWC)

Increase of working capital Decrease of working capital

Increase of inventories

Increase of customers

Operating debts relief

Repayment of treasury loans

Increase of cash

Decrease of inventories

Decrease of customers

Increase of operating debts

New treasury loans

2. Net treasury evolution (ΔNT)

FRı =

=Permanent capital – Non-current assets = (25% +25%) -35% = 15%

ΔWC = WC1 - WC o = 15% - 10% = 5%

NR1= Cash - Treasury loans = 25% - 10% = 15%

ΔNT = NT1 - NTo = 15% -10% = 5%

In order to analyze the financial situation, the forecast and its evolution situation, it is necessary to

study:

- the revenues and expenses flows from the profit and loss account;

- investments and/or desinvestments flows in non-current and current assets and/or their

repayment flows from the financing table;

- gaps between the begining of the financial flows and their effective realisation inside the

treasury, being a fact which is revealed in the financing table.

ASSETS LIABILITIES

Non-current assets 35%

Current assets 40%

Cash 25%

Equity 25%

Financial debts 25%

Operating debts 50%, from which:

Treasury loans 10%

33

The financial situation of the balance sheet at year-end is a consequence of the financial situation at

the beginning of the year and the financial flows of the undertaking within the year and highlighted in the

profit and loss account and in the financing table.

3.4. Typology of the financing table

Depending on the evolution of financial theory and practice, the following types of financial tables

were developed:

1. Financial cash flow statement – is built starting from the self-financiaing capacity and is

taking into account the differenciation of activities into opearting, financial and extraordinary activities and

also is taking into account the company purpose to realise a positive financial and operating balance, which

will ensure an economic growth. Financial cash flow statement can be presented as follows:

Indicators period period period

turnover – third party services

= value added

- taxes and duties

- salaries and social expenses

= Gross operating surplus (GOS)

- variation of NWC

- internal investments (intangible and tangible)

= 1. Operating activity balance (OAB)

± variation of debts

- financial expenses

- income tax

- expenses with bonuses for empoyees from profit

- distributed dividends

= 2. Financial balance (FB)

3.Balance of management (OAB + FB)

+ revenues from disposal of non-current assets

+ capital increases

± other extraordinary results

- internal investments

=Net treasury variation

Financial cash flow table

2. Cash flow statement following the financial theory - this statement has the principle of

developing Modigliani and Miller's theory (1958), according to which the company value has the same

growth as the borrowing rate, due to leverage (if the economic rate of return is bigger than the interest

rate).

The two authors separate financial flows, in order to highlight the conditions of the enterprise value

growing, into:

- real flows (due to internal and operating investments);

- financial flows (due to capital suppliers).

Cash flow statement, following the fnancial theory, allows tracking between uses and resources

horizontally and vertically between the real and financial flows, the equality between the real and financial

flows being as in the equation: R + S = A + C, where:

R = net result of real cash flows

R = Gross operating surplus – Total investments – Global taxes

S = tax savings

E = interests x tax rate

A = available cash flow for shareholders

34

A = Financial expenses (dividends and payed interests – increases of capital);

C = avalaible net cash flow for creditors

C = Financial expenses – borrowing variation.

Net result of real cash flows and the tax savings ensure, in that way, available cash flow for

shareholders and for creditors.

3. Explanatory table of treasury variation

The global variation of treasury is explained through the treasury balance which has resulted after

the management of real assets (operating activity) and after the capital operations (investments and

financing).

When real and monetary flows do not coincide, the treasury is ensured through gaps in payments

associated with these flows.

Cash flow statement role is to explain the contribution of operations management and capital

operations to the change in the company treasury.

Reconstitution of cash flows after the nature of operations (management and capital) allows

obtaining quantitative assessments on possible difficulties with cash or the ability to trace the origin of

these difficulties.

Treasury table may represent in the next way:

INDICATORS Year Year

+Receipts from sales

- payments for suppliers and employees

+ financial receipts

- financial payments

- payments of taxes

= net cash flow released by the current activity

(1) Operating CF

+ receipts from transfer of assets

- payments for non-current and current assets investments

= Net cash flow from the investment activity

(2) ΔNCA+ΔNWC

+ credit balances increase of the current accounts

- payments inside the leasing operations

± receipts resulted from capital increases

- payments of dividends

= Net cash flow resulted from financing activities

(3) ΔE+ΔDEBT

The amount of NT variation

NT at the begining of the financial year

NT at the end of the financial year

(1) + (2) + (3)

Explanatory table of treasury variation

35

CHAPTER 4.

FINANCIAL DIAGNOSIS OF RETURN AND RISK

4.1. Diagnosis of company return

Financial diagnosis detects any state of financial unbalance in order to identify the origin and

causes that generated them and establish remediation. The objectives of financial diagnosis refers to the

measurement and assessment of return on equity company balance economic and financial conditions and

to assess the company's risk, ie the economic, financial and bankruptcy risk.

Achieving financial diagnosis is realised by appealing to:

- accounting data offered by decision annual accounts: the balance sheet and profit and loss account for

the reprocessing this data to achieve financial balance;

- data obtained through the preparation of the statement of equity variation and cash flow table.

The measure of the profitability of an enterprise is given by a system of explanatory rates of

efficiency, defined as the ratio between the economic and financial results obtained (gross accumulation,

profits, dividends, etc.) and efforts to obtain them (economic assets, capital invested, equity etc.)

4.1.1. Economic rates of return

These rates measure the effectiveness of material and financial means allocated to the entire

business of the enterprise. If profitability is the ratio between the results and the means implemented in

order to achieve this, there are several ways to measure this effect (the result). Thus we can distinguish

economic profitability and financial profitability.

The economic returns on capital appears as an intrinsic profitability, which disregards the modality

of obtaining capital (own or borrowed). So, it is independent rapprting to the funding policy promoted by

the enterprise.

Depending on the purposes of the analyse, there are calculated more economic rates of return that

have a high informational value by expressing them in relative numbers, which gives it great strength of

comparison and evaluation. The comparability condition is provided by following the same reporting

periods (nominal or real). We can calculate in that way the next indicators:

gross operating surplus ratio (GOSR) which provides a global assessment on the gross return on

invested capital, as the following relation: GOSR =GOS/ECONOMIC ASSET

Since by the gross operating surplus was not deducted depreciation, this rate has the advantage that

it is not affected by the depreciation policy.

economic rate of return (ERR) is expressing the capacity of the economic invested asset (NCA +

NWC) to release profit (Net profit = Operating result – Income tax) through which it will ensure the

self-financing of the net growth of the company and the compensation of equity investors (shareholders

and creditors). The economic rate of return is dependent on the company capitals structure (own and

borrowed) and is calculated relationship: ERR = (Economic result/Economic asset) x 100

The counter may be operating result before financial items (it is considered gross operating

surplus, which is not a true economic result, it does not take into account the depreciation. The

denominator may be permanent capitals or total asset.

In these circumstances, the relationship for calculating the economic rate of return can be:

ERR. = (OR /Total asset) = (OR /TO) x (TO /Total asset)

Net profit rate (NPR) express net profitability free from the interest and the tax of economic assets

invested and is calculated relationship: NPR=(net profit/economic asset)x100

This rate is dependent on the capital structure of the company or on its degree of indebtedness,

being a net interest rate. From this point of view, it is less comparable with the net profit rates achieved by

other similar companies, in terms of technological and economic point of view.

In order for a company to be able to maintain its economic substance, it is necessary that the

economic rate of return will be higher than the inflation rate. In real terms, economic rate of return must

36

remunerate invested capital to the minimum rate of return in the economy (average rate) and to economic

and financial risk level the equity investors have taken.

If the inflation rate (IR) does not exceed 10%, then the nominal rate (RR) is, according to the

formula of Fisher, the sum of the two rates, the nominal rate (NR) and the inflation rate. De aici, formula:

RR = NR – IR If, however, if the inflation rate exceeds 10%, the real rate is calculated according to the

relationship:

RR = (NR - IR) / (1 + IR) Economic rate of return should allow the company to renew and increase its assets in a period as

short as possible.

4.1.2. Financial rates of return

These rates measure the yield or return on equity, ie thefinancial placement made by the

shareholders by buying the company shares. Financial rate of return remunerates owners of the company

by distributing dividends and increasing reserves which are in fact an increase in shareholders wealth. The

calculation formula of the financial rate of return is: FRR = Net profit / Equity

Although it is used as a tool of financial analysis, it should be considered the methodological

drawbacks for the calculation operation of net profit. It refers to the calculation method of depreciation and

provisions, at the deductible expenses, etc.. The financial rate of return, being influenced by the manner of

procuring capital, is sensitive to the financial structure, namely the state of indebtedness of the company.

It is intended that the financial rate of return to be higher than the average market interest, in order

to make attractive the shares of the company and to increase their exchange rate. For those companies that

are quoted at the stock market, it is calculated a meaningful indicator, called the coefficient of market

capitalization (CMC), by the relationship:

CMC = Exchange rate of shares / Profit per share

This indicator measures how many times investors are willing to buy profit per share, being a

barometer in comparing the companies from the same economic sector. It is obviously that investors are

interested in shares which have a capitalization factor as small as possible. The variation of this coefficient

is a good assessment of the company's operating risk, arising from the economic risk of its economic field,

of indebtedness and of the variability of future profits. The market exchange rate is therefore an external

measure in order to analyse the company performance. Compared to this indicator, we can often determine

as a financial analysis indicator the profit per share, the direct expression of the profitability of the

company (EPS) and is calculated by the following relationship: EPS = Net profit/Number of shares

4.1.3. Decomposition of return rates

The rates of return, both economic and financial, are composed of two rates, which are serving on a

much more finer financial analysis of the company:

1. rates of value structure of turnover (margin rates), rates that characterize the conditions of

economic activity (consumed capitals);

2. the rotation rates of capital through the turnover, which are characterizing the effectiveness of

capital employed by the company in its economic and financial activity(allocated capitals).

In fact, the decomposition rates of return highlight the influence of two factors:

- a quantitative factor (margin of accumulation);

- a quality factor (the rotation of capitals, the financial structure).

The effective size of rates of return is a combination of the two factors which are increasing

profitability. Thus, the rate of economic return breaks down into two components:

RER. = EBIT/ INVESTED CAPITAL = (EBIT/ TO) x (TO/ INVESTED CAPITAL)

Net gross margin The rotation rate of capitals

37

By consequence, economic rate of return may increase:

- by increasing of accumulation of gross margin (the difference between turnover and payable

expenses);

- by increasing of capital rotation, by turnover;

- by both methods.

It is possible that during development periods, invested capital may grow faster than the company's

profitability and therefore, despite the increase in operating gross margin, to register a low economic rate

of return.

Similar to economic rates of return, and the financial rate of return can be decomposed into two or

more component rates, such as: NET PROFIT NET PROFIT TURNOVER

FRR = = x or:

EQUITY TURNOVER EQUITY

net margin rate rotation rate of the equity

net profit net profit turnover invested capital

FRR = = x x

equity turnover invested capital equity

net margin rate rate of capital rotation rate of capital structure

Or:

Net result Operating result Net result Total liabilities

= x x

Equities Total assets Operating result Equities

(economic rate of return) (borrowing costs) (borrowing coefficient)

Borrowing impact

The economic rate of return characterizes thus the profitability of economic activity, while the

financial rate of return characterizes the profitability of the capital borrowed. So, the economic rate of

return of an indebted company îndatorata is bigger than the rate of a similar company, but not indebted, ie

that is financed 100% of equity.

The above model of the financial rate of return decomposition highlights the leverage, ie the

multiplier efect of the borrowing on the economic rate of return. This is highlighted by the following

formula:

FRR = ERR + (ERR - Interest rate) x Debts / Equities Interest rate = (Interests / Debts) x 100

The condition necessary to achieve the leverage is that economic rate of return to be higher than the

borrowing cost.

So, if this condition is fulfilled, the financial rate of return is even higher for a certain economic rate

of return, as the indebtedness.

We can establish the equation of the economic rate of return as a weighted arithmetic average of

the company capitals, thus:

ERR= FRR x (Equity /Economic asset)+ Interest rate x (Debts / Economic asset)

38

4.2. Diagnosis of risk

The diagnosis of risk is intended to:

- measure the variation of the company performances to the changes of financial position, of the

equities and borrowed capitals structure;

- measure the variation of company solvency, of its ability to pay, at maturity, liabilities assumed

towards third. From the general point of view, the company performs three categories of risks: operational

or economic risk, financial or indebtedness risk and the risk of insolvency.

4.2.1. Economic risk

Operating risk or economic risk corresponds to the risk associated with achieving an income or

estimated results without taking account of the financing method used for obtaining it. A complete

financial management can be realised only by combining two analyse elements: rate of return-risk.

The objectif in financial management is the maximisation of the rate of return at a certain assumed

risk level. The risk can be expressed in many forms:

a. the variability of the profit according to the average of rate of return, and the size of the risk is

given by disersion and the standard deviation;

b. the variability of profit according to workload, ie the turnover which is measured through the

modulus of elasticity calculated as a ratio between the profit variation and the turnover variation;

c. the variability of the company rate of return.

In the financial analyse, risk is expressed through the profit elasticity and can be analysed by two

points of view:

1. of the company who wants the increase of the patrimony and the proper remuneration of its

production factors;

2. of external financial investors who are interested to achieve the best investment having a

financial market with many sectors of rate of return and different risk.

The economic risk can be expressed as a variability of the profit according to the turnover and as a

result of the company activity position according to neutral point.

The variation of profit caused by the turnover variation is expressed through the coefficient of

elasticity or leverage.

4.2.2. Financial risk

The financial risk is characterizing the variability of results indicators under the influence of the

financial structure of the company.

Involving borrowed capitals by their size and financial expenses (interest, commissions) leads to

variability of results and to a higher financial risk.

To minimize costs and improve profitability, we must ensure the optimal structure between equity

and borrowed capital.

Financial risk analysis can be done in two ways:

1. risk analysis based on the breakeven method (neutral point method NP):

NP = (fixed expenses + interest) / (1 - variable expenses)

2. financial risk analysis based on financial leverage:

Financial risk analysis lays in financial leverage, which shows the relationship between the

economic rate of return, the financial rate of return and the company indebedness. In this context

shareholder support both economic risk and financial risk of the company and the cost of indebtedness is

safe, while the economic rate of return is probable. So, the financial risk assessment is done by using the

coefficient of elasticity of the financial rate of return (E): E = [Variation of current profit (after deducting interest) /Current profit] / [Variation turnover / turnover]

FRR = ERR + (ERR - interest rate) x L

39

where:

L = Debts / Equity Between these three rates, there are next correlations:

1. if the economic rate of return is higher than the interest rate, then the financial rate of return is

higher than the economic rate of return;

2. if the economic rate of return is equal to the interest rate, then the financial rate of return is equal

to the economic rate of return;

3.if the economic rate of return is lower than the interest rate, then the financial rate of return is

lower than the economic rate of return.

4.2.3. Bankrupcy risk (insolvency)

Diagnosis bankruptcy risk consists in evaluating the company's capacity to cope commitments to

third parties, ie in evaluating the company's credit ratings valuation.

Bankruptcy risk analysis is done:

1. In static manner and is based on studying the balance sheet and on the working capital notion.

Depending on the two concepts of development of balance, static analysis can be:

a. patrimonial;

b. functional.

Patrimonial static analysis monitors the net patrimony of shareholders and the overall economic

asset as a guarantee for creditors.

The main operational tools used by patrimonial static analysis are: working capital, liquidity rates

(general, low and instant), supplemented by indebtedness rates.

The functional static analysis of the bankruptcy risk uses as operational tools: the necessary

working capital and the net treasury.

2. In the dynamic method, it allows diagnosing and explaining the financial imbalance evidenced

by static analysis. Operational tools for this analysis are

- operating treasury surplus (OTS = GOS - Δ NWC);

- self-financing capacity (SFC = GOS – financial expenses– tax income);

- self-financing (A = SFC - Dividends);

- cash-flow (CF) or the growth of the treasury

From these indicators, bankruptcy risk analysis is using the rates and the indicators of financial

autonomy and of debt repayment:

a. repayment capacity rate (RCR)

RCR = Debts /SFC

b. financial autonomy rate (FAR)

FAR = SFC/ Stable financial debt repayment

c. operating treasury surplus (OTS) who can express himself the debt repayment capacity.

OTS = GOS - Δ NWC

The debt repayment capacity is insured if the operating treasury surplus minus income tax is higher

or equal to financial expenses plus the annual repayment of debts

The company is therefore constantly at risk. Consideration of risk faced by companies justifies in

fact the complexity of financial diagnosis approaches. Moreover, financial diagnosis, risk and solvency of

the company contain components of economic, social, financial and human nature.

Conclusions

Diagnosis is the approach through which: we can appreciate the "health state" or functionality state

of the company, we can identify internal and external factors that determine its evolution trend and we can

estimate the impact of their modification, taking into account the dynamic environment in which the

company operates its own activity. Also it allows an awareness of the competitive advantages of the

40

company, in relation to competition (strengths) to be used to advantage of the opportunities offered by the

external environment company, surprising weaknesses of the business in order adopting corrective

measures and minimize risks to subject to the undertaking, taking intoaccount these disturbances.

Diagnosis of equity rate of return is achieved through three types of rates of efficiency, one being

general and the other two which are composing the first one: economic rate of return, financial rate of

return and the interest rate. The effective size of these rates and their decomposition on influence factors

offer truthful information to detect the company's profitability status.

The economic rates of return measure the effectiveness of material and financial means allocated to

the entire business of the enterprise. The economic rate of return of the invested capitals is independent of

the funding policy promoted by enterprise.

The analysis of the economic rate of return is realised by studying the time evolution of indicators

and their components (results, capital) on the same enterprise. In order that the company can maintain its

economic substance, the economic rate of return must be higher than the inflation rate.

The financial rate of return and the interest rate are measuring the equities performance, ie the

financial invesment performance that shareholders obtained by buying the company shares.

The financial rate of return of equities is paying the company owners by distributing of dividens to

them and by rising of reserves that, in fact, is represinting a raise of owners’ wealth.

The interest rates are, most often, the nominal rates established in the loan contracts signed with

the specialised institutions in according the loans or sau in the enterprise bonds prospectus. As an

enterprise can take loans from various sources (bank credit, commercial or bonds) and on different terms

(short or long), it is recommended for analysis and for evaluation, to use an average rate of interest that

the relationship between annual spending and interest and fees associated with opening balance of debt

that they have generated.

Diagnosis risk measurement monitors the variation of firm performances due to change of the

financial position, equity and borrowed capital structure and monitors the variation company solvency

measurement, its ability to pay at maturity liabilities assumed before third parties. Overall its business, the

company performs three categories of risks: operational or economic risk, financial risk or leverage and the

risk of insolvency.

41

CHAPTER 5.

FUNDING NEEDS OF THE COMPANY ACTIVITY

5.1. The financial cycle and the operating cycle

5.1.1. Financial cycle

The financial cycle represents all operations that occur in the time of turning money (own cash and

borrowed ones) in goods and services by the time you recover the money allocated.

The financial cycle comprises a sequence of changes in the real structure due to real flows up to

forms of company inventories processed in money and recovering so the advanced financial capital and

obtaining a monetary surplus.

According to the depolyed activities and their position in the operating, we can distinguish:

a. long financial cycles of non-current or fixed capitals which have different sizes according to

their nature and their depreciable and non-depreciable character. They have a slower rotation, overlap on

several cycles of financial capital which recover on the invested capital depreciation path.

b. short financial cycles of current capital are shorter comparing to non-current assets case hich

have shorter or bigger periods, according to operating cycle characteristics. So it begins with the

acquisition for inventories formation and it ends with collecting from clients of thesold products value.

5.1.2. Operating cycle

The operating cycle is representing the all the operations that are made by the company to achieve

the objective pursued, objective that consists in producing goods and services in order to exchange them.

Operating cycle comprises three phases:

- phase of goods and services supply;

- production phase, which consists in transforming goods and services in order to arrive at a finished

product;

- phase of trading, of selling the products made, which ensures an optimum usage used means – ie of

labor and invested capital.

The management of operating cycle is the most important section of financial management, its

importance being given by the high share of current assets in the balance sheet, the high level of

profitability, and immediate reflection on the financial situation of the company.

The goal represents the most efficient allocation of capital into inventories and receivables in the

decrease risk conditions.

Harmonization of return-risk relationship is achieved within the balance between the necessary of

current assets and the sources to finance them.

In order to answe tor the need of profitability and of risk mitigation, so to optimize the profitability

- risk relationship, there are pursued two fundamental elements:

1. The management of operating assets has the following goal: to achieve a minimum level of

current assets; to eliminate the rupture of inventories, the lack of liquidity; to reduce the operating costs;

to increase the profitability.

2. The management of operating liabilities has the following goal: achieving the lowest cost of

procuring the necessary capital; the permanence of financing sources; the financial autonomy of the

operating cycle.

The management of operating cycle has 2 domans of activity:

a. determination of current assets (inventories, receivables, liquidity)

b. determination of methods of financing of current assets (working capital), of current debts

(suppliers, creditors), bank competitions: treasury credits and loans cash discount.

42

The main feature of the current assets is their high liquidity, which allows:

operative coverage of debts from receipts;

conducting treasury investments;

Provide liquid reserves in the petty cash and in bank accounts.

For the management of the operating cycle, we distinguish in a company three management

policies:

1. an aggressive policy (offensive) which aims at achieving a turnover of minimum stocks. This

means that business managers to accept risks related to the lack of inventories, lack of liquidity and

solvency of the company, focusing on higher return than the accelerating rotation, to increase the liquidity

of current assets. Financing of current assets is primarily made from short-term liabilities (debt) (operating

liabilities, bank loans) which means lower costs, but also a permanent renewal of loans.

2. a defensive policy – the policy of cautious managers, which supposes the achievement of

turnover by high liquidity. It is a policy of aversion to the risk and cautious managers do not accept the risk

of inventories rupture even having the risk of a lower return, affected by additional costs of prudence in the

inventories insurance.

3. a balanced policy (intermediate), which supposes the achievement of turnover by balancing the

relationship return-risk and the perfect timing between the maturities of short-time assets and short-time

liabilities. The growth of turnover is achieved, according to this policy, with current inventories having a

size corresponding to new turnovers, while the inventories of safety re determined at the level that equalizes

the costs of lack of inventories and high costs of inventories excessively high, of those stocks that exceed

the strict needs of the operating activity.

The operating cycle is presented as a sequence of structures in different phases of the operating

activity, being of different sizes and of increased values per unit of product.

Expenses generated by the purchase, storage, processing and circulation of these inventories form

the necessary of financing the operating cycle (NFOC).

The necessary of financing the operating cycle increases in the meantime with increasing of volume

and of duration of the commercial loans granted to customers and will drop even until a excedentary

treasury in the meantime with increasing of volume and of duration of debt and credit from suppliers.

The fragility or stability of a company depends on three factors:

1inventories and their storage intervals;

2. clients and their intervals of collection;

3. suppliers and their intervals of payment.

5.2. The rotation speed of capital

Collecting company own sales leads to ensure the most efficient company's financial balance

because in these receipts can be found all the possibilities to cover construction costs, to renew the means

and equipment; to repay the loans and to cover other needs of development and stimulation.

Turnover includes all values needed to cover all destinations already mentioned which leads to a

new patrimony state of the company.

Through the turnover, it is achieved:

- renewal of each asset of the company in a period of time;

- payment of each debt in a period of time.

The rotation speed of capital through the turnover (monthly, semesterly or annually) consists in the

periods required to cover the assets and steps required for paying the debts.

If no sensitive changes occur in operating conditions of the enterprise, it can be estimated that an

increase of turnover translates into a patrimonial state with an increase, in the same proportion, of

company assets, inventories, receivables and payables.

This relationship of proportionality requires the permanent (steady) existence of the following

relationships:

Assets/Turnover = steady

43

Debts/Turnover = steady

5.3. Inventories management

Inventories represent, physically, the quantities of materials, products or goods necessary for each

phase of the operating cycle (purchasing, production, sales) in order to ensure a continuous and rhythmic

fluency of operating activities. Thus, the continuous character to form the inventories is given by the

production character, respectively by the sales character in relation to the intermittent character of the

supply.

From a financial perspective, inventories are allocations of capital that can not be recovered until

they do not go through the entire operating cycle and are valued by the sale and collection of goods, works

and services produced in the enterprise.

Improper management of inventories leads to make some additional expenses from:

- insufficient inventories, requiring a larger volume of supply costs (transport, handling, etc)

- excessive inventories (over inventories) by: unnecessary transformations of capital in inventories;

large storage costs; interest expenses over the current expenses and considerable expense arising from

deterioration and degradation of excessive inventories.

An optimal management of inventories requires:

- harmonization of relations between supply costs that vary depending on the number of supply and

storage costs, variable depending on the size of inventories;

- minimizing of total expenses on the inventories formation and on maximizing profitability of the

operating activity.

The cost for the preparation of orders includes:

- expenses on market research;

- expenses on travel of employees which ensure the supply;

- the cost of preparing the paperwork of supply, of goods control, of samples output, etc.

The supply cost per product unit varies depending on the size of inventories and includes:

transportation costs, handling, storage, degradation and deterioration of inventories and cost of capital

allocated for their procurement.

5.3.1. The management of inventories in situations of uncertainty

In the management of inventories we can meet 2 situations of uncertainty:

1. management of inventories with constant intervals between supplies;

2. management of inventories having supplies at variable intervals and in variable quantities.

In this case, it calls into question the relationship profitability - risk for choosing a specific policy

of the inventories management:

1. a prudential policy on the risk which:

will lead to the establishment of sufficient safety and covering inventories for common "stock

outs", in case of delays between supplies;

is recommended when the costs determined by „stock outs” are very high;

lead to higher storage and opportunity costs with excessive inventories overpassing the current

needs of exploitation.

2. an agresive policy, is a neutral policy toward the risk, which leads to the determination of

environmental safety inventories as the average security inventories corresponding to each situation of

supply delay (including the situation without delay).

3. a more balanced, realistic policy optimizes the costs determined by each of the previous

policies, costs which can be measurable. It takes up 2 stages:

a. determining the costs incurred by each level of safety inventories, whenever possible situations

of delays in sourcing

44

b. determining a "matrix of consequences" for each level of the safety inventories towards the

inventories management. It is necessary to use an additional element, namely the frequencies of delays in

supplies (statistically recorded)

In the case of supplies at varying intervals, but in varying amounts, current inventories and safety

inventories are determined using the weighted average, calculating in that case the following indicators:

1. The average interval between consecutive supplies (i), is determined as a weighted arithmetic

average of the variable supply intervals (ti), weighted by quantitative variables which will be procured (qi):

i =

qi

qixti where: ti = intervals of supply

2. current average inventory (CAI):

CAI= 360

Nx i; where: N = annual necessary to supply

3. the average deviation interval from contractual intervals (s):

s =

qi

qixdd; where: dd = days of delay in supply

4. safety inventory (SI ):

SI =

360

N x S

5.4. Optimizing inventories size

For optimizing inventories size, it is used Wilson-Whitin mathematic model. In this model, it starts

from the total cost to form inventories, costs that are expected to be minimal, while maximizing the

profitability of operating conditions and calculating the following indicators:

1. total minimum cost to form inventories (TC)

TC = S

N x 2/Sxpa x d, where:

S - optimum size of inventories;

N - annual necessary of material, product or merchandise to supply;

ca - fixed cost per unit for the preparation of a new supply;

pa - unitary supply price;

cd - storage cost per unit of inventory.

2. optimum size of inventories (S):

S = paxcd

Nxca2

3. number of supply orders (Nr):

Nr = S

N

4. range between supplies (I)

I =N

SxT,

where T = number of calendar days in the considered period.

Wilson-Whitin mathematical model for optimizing the size of inventories requires:

- equal intervals between supplies;

- instantaneous establishment of inventories;

- the gradually shift in consumer of inventories until their total exhaustion (ie until the time a new

resupply).

45

The model can be extended to optimize inventory of work in progress and of finished goods.

5.5. Kinetic rate system

The system of indicators expressed in number of days - kinetic rate system - has several advantages

towards other indicators expressed in absolute or relative sizes.

If financial indicators expressed in absolute size have a reduced informative power, due to

comparability restricted to levels achieved in previous periods or those made by other companies, and

financial indicators expressed in relative sizes have an informative power slightly higher due to the

increased comparability, in content still remaining some abstract sizes that can not be shown in concrete

terms of economic reality. The kinetic rates have an informative power superior both by the high degree of

comparability, and through their expression in the form of concrete amount: the amount of depreciation

during recovery claims, duration debt to suppliers and others.

These rates are obtained by multiplying the duration of rotation of each balance sheet item (1st rate)

with the corresponding weighting coefficient (2nd

rate).

The 1st kinetic rate represents the weight of each asset or debt in his component of value of its

turnover: tangible assets towards depreciation, raw materials (or debts towards suppliers) towards

consumers from third parties, the customers balance towards the sales value, etc. This rate weighted by 360

days results in determining the duration of rotation of BSI (balance sheet items) in relation to turnover.

2nd kinetic rate represents the component value share of each asset or liability of the balance sheet

turnover in the total turnover. This rate weighted with 360 days results in the rate structure.

Correlated assembly of all kinetic rates form financial dynamic indicators system which captures

very well the financial stability of the company. It is recommended to use these indicators for financial

forecasting calculations in terms of economic stability of the company.

There are a couple of samples of balance sheet items rotation indicators in relation to turnover:

a. rotation speed of raw materials (Drm)

Drm = %

360

turnoverxM

lsxrawmateria

M% = the weight of third party consumables (profit and loss account)

b. rotation speed of work in progress inventories (Drc)

Drc = 2/%%

___

FturnoverxM

sinventorieprogressinwork

F%/2 = weight of production expenses in the turnover

c. rotation speed of finished goods inventories (Drf)

Drf =%

360_

turnoverxC

goodsxfinised

C % = weight of finished goods costs in the turnover

d. collecting period from the customers (Dî)

Dî = %

360

turnoverxÎ

Customersx

Î% = weight of total collecting in the turnover

e. rotation speed on the payment of debts to the suppliers (Dfz)

Dfz =%sup____

360

pliersindebtsofeightturnoverxW

Suppliersx

f. rotation speed on VAT payment (DTVA)

DTVA = turnoverinVATofeightturnoverxW

VATx

____

360

g. depreciation period of non-current asset (Da)

46

Da = turnoverinondepreciatiofweightturonoverx

assetsxcurrentnonofvalueremaining

____

360_____

h. payment period of financial debts (Ddf)

Ddf =turnoverinratesannualofeightturnoverxw

balancexdebtsfinancial

_____

360__

For activities relating to liquidity, there are not calculated rotation speeds or periods, those being

the final result of the rotation of capital. There are not calculated any rotation speeds for equity, which are

payable only in extreme situations. Kinetic rate will result from the net situation of the company.

Based on kinetic rates, we can prepare the company's balance sheet in the form of kinetic rates and,

based on that, it can be sized the financial balance indicators, namely liquidity, chargeability expressed in

number of days for recovery of property items by turnover.

Financial indicators expressed as kinetic sizes are recommended in financial forecasting

calculations, but under conditions of economic stability of the company, ie when changes are not occuring

in any operating conditions of the undertaking or production cost structure.

Indicators of financial balance in absolute sizes are: Turnover x Kinetic rate / 360

5.6. Normative method of forecasting of the financial balance

The normative method of forecasting of the financial balance is using the system of kinetic rates in

order to establish:

normative structure of financial balance at a projected turnover for the next financial year;

changes in turnover, due to changes in storage duration, in the duration of collection of customers,

in the duration of payment of suppliers or due to the changed structure of sales costs;

the possible turnover on a certain capital or a capital provided to rise in the next financial year.

The method is using the balance sheet items at the end of the financial year, which expresses the

static situation of patrimony, in order to have the most correct base as possible:

we take into account average balances at the beginning and at the end of financial year;

we can use an average turnover structure that characterize the company on several financial years.

Normative forecasting method of the financial balance allows:

conducting various simulations of the correlation "turnover - financial balance," correlation that

allows the detachment of conclusions on the financial policy of the company;

comparison of the financial balance of companys of different sizes, eliminating the influence of

specific volume activity.

Net capital investment in current assets (inventories and receivables) is restricted to necessary

working capital.

NWC = NFOE - Operating debts

Substantiating the need for financing operating expenses is limited to substantiate the need for

working capital.

Predicting the necessary for working capital is based on the assumption of a constant ratio between

the necessary for working capital and turnover.

In this case, we can determine the kinetic rates, ie a necessary working capital in days based on the

data of the previous year, by relationship:

NWC days = NWCo x 360 / Turnovero

Based on estimates of the budget of turnover sales in the first quarter of next year, forecasting the

need for working capital is made by the next relationship:

NWC quart = (turnover quart x NWC days) / 90

It is believed that the necessary working capital rotation days is a duration valid for the next year,

meaning the ratio of proportionality between turnover and the necessary working capital remains constant

for next year.

47

This indicator is calculated for the following significant items: materials, work in progress, finished

goods, customers.

5.7. Methods for determining the necessary to fund the operating cycle

In the practice activity which substantiates the necessary to fund the operating expenses, we can

meet 2 categories of methods:

1. Analytical method, which has, as supporting indicators:

operating costs, according to which the necessary of capitals to purchase and holding of current

assets is determined by acquisition costs, handling costs and transportation costs of materials needed for

production and the same expenses necessary to deliver the products;

turnover, according to which is necessary the fast return of capital advanced for the purchase and

holding of current assets inventories.

The analytical method involves determining the necessary, on elements, of raw materials, work in

progress, finished goods. On every element of inventory, the analytical calculation is made on the types of

materials or products and on every kind of inventory (current inventory, safety inventory, conditioning

inventory and internal transport). Given the calculation quite laborious and expensive, the analytical

method for determining the necessary to fund the operating expenses is used to substantiate the necessary

to fund in the next situations:

in the moments when there are structural changes in the company: creation, merger, development

etc.;

to determine the average annual necessary to fund the inventories, following that, fo the quarterly

necessary to fund, to be used the synthetic method.

2. Synthetic method involves determination of the current assets necessary for their total (depending

on the operational workload and the rotational speed recorded in the previous year). The synthetic method

as well is based on the two supporting indicators:

operating costs;

turnover

This method is used with good results during the period of economic stability of the company.

5.7.1. Analytical methods for determining the necessary to fund the operating cycle

5.7.1.1. Analytical methods using the operating costs

These methods are based on two elements:

1. Operating expenses are forecasted on the considered management period (year, quarter) through

the operating budgets (of sales, of production, etc). These facts are considering:

the advancing pace of capitals in foregoing the expenses;

the pace of their recovery by moving the inventories into consumer.

2. The time between two successive reconstructions of inventories is determined as the arithmetic

average (simple or weighted) of durations recorded in the previous period between two successive

reconstructions of inventories.

These durations correlate with the actual duration stipulated in future contracts of purchase and

sale.

The relationship of this method is:

NFOC = 90/360

exp_ ensesOperating x t;

Where:

48

t = rotation period;

It is calculated the average annual necessary to fund for each significant item of materials and

goods, as follows:

1. the average annual necessary to fund for significant materials inventory:

NFOC m = 360

NyearsxPsx (

2

i + S +C + tr)

where:

Nyears = annual necessary of the significant raw material;

Ps = unitary price of supply

i = average gap between supplies

S = average gap of safety inventory

C = the gap for conditioning inventory

tr = the gap for internal transport

2.the average annual necessary to fund for work in progress inventory:

NFOC p = 360

QxCuzx K x D

Q = annual forecasted physical production

Cuz = factory pre-calculated cost unit

K = correction coefficient specific to the pace of progress of construction costs 0,5<K<1

D = rotation period

3. the average annual necessary to fund for each significant finished good:

NFOC f = 360

QxCcx Dst,

where:

Q = annual forecasted physical production

Cc = pre-calculated complete cost unit

Dst = stationary period of finished goods in the warehouse

4. the average annual necessary to fund for delivered goods (customers) is calculated globally,

on the entire sent, sold production, according to the relationship:

NFOC c = 360

QxCcx Ddec

where:

Ddec = average period of settling (collecting) the customers;

5. the average annual necessary to fund for insignificant items (various items)

NFOC d = Chs

Chd x NFOCs

Chd = annual expenses for insignificant items

Chs = total annual expenses for insignificant items

NFOCs = total average annual necessary to fund the insignificant items inventory

6. average period of rotation for each of the 4 inventory categories

DMr = ChdChs

NFOCdNFOCs

NFOCs = necessary to fund the significant inventories

Chs = annual expenses for the significant items

Chd = annual expenses for the insignificant items

7. quarterly necessary to fund

49

NFOC quart = 90

..quartExp x DMr

8. the necessary to fund the operating cycle

NFOC = NFOC m +NFOC p + NFOC f +NFOC c + NFOC d

5.7.1.2. Analytical methods using the turnover

Substantiation Items of this method are:

–the forecasted turnover through the sales budget;

– period of rotation of the 4 categories of inventories.

The necessary to fund, according to this method, is realised by using the data from the balance

sheet and the profit and loss account from the previous year.

This is the way we can calculate the quarterly necessary to fund (NFOCquart), according to the

next relationship:

NFOC quart = 90

turnover x Rc

Rc = kinetic rates, ie the periods of current assets rotation in relation to turnover.

Quarterly necessary to fund is determined according to their specific kinetic rates and previously

determined based on the financial execution of the previous year and assumes that these rates remain

steady next year.

We may proceed to calculate rates kinetic based on the relationships from this chapter, for

materials, work in progress, finished goods, for customers, and for each asset and for each item of debt,

taking into account the share of these elements in total turnover.

5.7.2. Synthetic methods for determining the necessary to fund the operating cycle

Synthetic methods for determining the necessary to fund the operating cycle are used to calculate

the quarterly necessary to fund per total current assets, Fundamentals elements are also based on proportionality between current assets and exploitation

costs (turnover).

Synthetic methods are based on:

1. Rotation speed depending on costs

2. Current assets per 1000 lei of production goods produced and purchased for resale

3. Specific kinetic rate for all current assets

1. Synthetic method founded on the rotation speed according to costs – is considering the

physical production scheduled for the first quarter took into account, the full cost of unit production pre-

calculated and duration of rotation from the previous period, determined as the ratio between the average

balance of current assets in the previous year and the cost of producing goods made in the previous year,

using the following formula calculation:

NFOC quart = xDroxCcQquart

90

.

where:

Dro = 360x

PMo

Saco

Qquart = forecasted physical production per quarter;

Cc = complete unit cost of the pre-calculated production;

50

Dro = rotation duration from the previous period

Sac = average balance of current assets from the previous year;

PMo = the cost of goods purchased for resale from the previous year.

2. Current assets per 1000 lei of production of goods purchased for resale– as the name

implies, we can calculate the necessary to fund quarterly operating expenses based on current assets per

1000 lei of production of goods purchased for resale, the indicator being calculated as ratio between the

current assets balance and the annual production of goods purchased for resale, weighted by 1000 lei.

NFOC quart = 1000

41000/. xxCcxAcQquart

Ac/1000 = 1000)(

xyearPmc

Sac

3. Specific kinetic rate for all the current assets – we can calculate the necessary to fund the

quarterly operating expenses between the quarterly turnover and the rotation duration.

NFCE quart = xRcquartturnover

90

._

Rc = 360)(

xCAo

anualrSac

CAo = turnover from the previous year

Conclusions

In economics, the real and financial flow can exist only after a prior accumulation of goods,

services, money, in storage at the level of economic agents, among which there is a continuous exchange.

Proper functioning of the society requires real and financial compensatory flows, mainly for production

activities and for operating cycle.

The financial cycle represents all operations that occur when turning money (own cash and

borrowed ones) in goods and services by the time you recover the allocated money. The financial cycle

comprises a sequence of changes in the real structure, due to actual flows, up to forms of inventories of

company products which are processed in money, recovering so the advanced financial capital and

obtaining a monetary surplus.

The operating cycle is realized as a succession of inventories at different stages of the operating

activity, in physical quantities and at different values increasing per unit product, according to the advance

in the operating cycle, at the initial value adding the costs of storage, of processing and of circulation up to

collect the customers receivables.

The system of indicators expressed in number of days - kinetic rate system - has several advantages

over other indicators expressed in absolute or relative sizes.

Procurement, preservation, processing and circulation of these inventories generate treasury

expenses, which are giving the content to the notion of the necessary to fund the operating cycle.

If financial indicators expressed in absolute have power informative reduced, therefore to the

comparability restricted to levels achieved in previous periods or with those made by other companies, and

financial indicators expressed have a power informative slightly higher due to the increased comparability

in content, still making some sizes abstract that cannot be shown in concrete terms of economic reality,

rates kinetic have a superior power informative both by the high degree of comparability, and through their

expression in the form of concrete amount: the period of depreciation, the period to recover the

receivables, duration of paying the debts to suppliers and others.

The financial indicators expressed in kinetic sizes are recommended in financial forecasting

calculations, but under the conditions of economic stability of the company, so when changes do no occur

in any operating conditions of the undertaking or in the production cost structure. Kinetic rates correlated

assembly forms a dynamic system of the financial indicators which captures very well the financial

balance of the company.

51

CHAPTER 6.

THE BUDGETS OF THE COMPANIES

6.1. The budget – a financial planning tool

One of the tasks of modern management company is the forecasting task.

The financial forecasting is perhaps one the most important planning activity, because financial

action precedes any technical, economic and organizational action and this is because funding must be

ensured, and then the real flow of goods and services is directed to the enterprise.

The financial forecasting aims, through its own instruments of value, to provide both financial

coverage, management and control of objectives of economic programs and a positive influence on the

performance of processes and economic and financial phenomena of the company, in order to achieve a

financial balance, profitability and a prevention of risks.

Financial forecasting field is extremely broad, covering the current management and development

of the company, and these actions are done through financial flows.

The instruments to achieve financial forecast are the company budgets.

The role of budgets financial forecasting is: to steer the company toward a specific purpose:

profitability, liquidity, reduced inventories, etc; coordinating the efforts of all functional departments that

participate in the budgeting process; effective and systematic control by comparing achievements with the

forecast budgets and making timely corrective measures.

Financial planning also requires to management some constraints to overcome, constraints that refer

to the following facts:

- budgets can become a brake on efforts to adapt to new conditions, reducing in that way the

company's flexibility;

- budgets must describe the outline of the financial evolutions, must provide a leeway within

the provisions and the possibility to be reviewed;

- financial planning can be a source of wastage through the compartments tend to

overestimate their own needs to fund.

Before the financial forecast is a number of tasks, of which the most important are:

- the correct determination and the generation of revenue, expenses, results, financial

resources and their optimal utilization ;

- discovering and mobilization of internal resources;

- the establishment of financial mobilizers indicators;

- accelerating of capital circuit;

- collecting the capitals according to needs, costs and other criteria;

- ensuring a financial balance and a proper financial structure;

- boosting the achievement of economic programs.

Financial forecast should not only be a passive reflection, in monetary form, of the tasks of

production and of investment, but also a tool to prevent the lack of efficiency. In our national economy, the

annual and general financial program is named the budget of revenues and expenses. It represents a tool of

synthesis and management, a tool to follow-up the efficiency, the achievement of self-financing, the

formation and allocation of capital and profits.

6.2. The budgetary system of the company

The forecasting management of the company involves:

- budgeting main areas of activity, which would affect the sources and the establishment of

responsibility for each decision center;

52

- the budgetary control, ie the respecting of budgetary provisions in order to establish the causes of

deviation, informing the management and adopting the corrective actions as necessary.

The coherence of a budgetary system is ensured by respecting the following principles of its design

and operation:

1. the principle of totality, which involves the inclusion of all businesses through a coordination

which will ensure the balance between the various functional and operational services;

2. the principle of superposition of the budgetary system on the authority system from the company;

3. the principle of maintaining solidarity between departments and the principle of correspondence

with the general policy of the company;

4. the principle of suppleness that allows adaptation of budgets to changing environment, to the

needs economic variation, etc.;

5. the principle of coupling with the personnel policy, to give motivation and bonding to the staff.

In terms of frequency, these budgets are drawn up annually rule, but there are budgets that are made

for a period greater than one year (investment budgets), or under one year (Treasury budget).

Development operations for annual budgets last 3-4 months. Budgeting cycle involves the

following phases:

1. identifying the company objectives for the year to plan, arising from general strategic plan for

3-5 years;

2. conducting preparatory studies on input markets, the retail market, the competition, the

investments, etc.;

3. preparation of draft budgets (pre budgets) based on testing of various scenarios and on

negotiations between different departments and the company management;

4. preparation and approval of the company budgets, which are detailed on market segments, on

subunits and on operative management periods (month, quarter).

In the financial planning system are included the following types of budget:

1. Budgets of general guidance are long-term (3-5 years) and establish future business image

through descriptions of product, of project development, of procurement, of manufacturing of new

products, of fusion.

2. Annual budgets are budgets of execution of the general policy of the company, being specific

to different activities of the company: purchasing, production, sales, investment.

3. Treasury budgets, the forecast balance sheet and the profit and loss account, through which

are estimated the patrimonial and monetary situation of the company.

The link between these budgets resides in their successive elaboration, starting from general policy

to achieve strategic objectives, continuing with annual budgets and then coverage of all of the predictable

state of treasury, of patrimony and of results.

Some budgets were mandatory, in the sense that they prohibit overcoming figures provided

(management budget, investment budget), while others are indicative (operating budget, treasury budget).

6.3. Budget of sales

Budget of sales is the main annual budget and according to it are calculated other parameters from

the other annual budgets. Budget of sales is the forecast of the company activity goal.

The development of the budget of sales is realised in 2 stages:

I. Forecast of sales and of the costs of disposal;

II. Stage of development and breakdown of annual provisions.

I. Forecast of sales and of the costs of disposal

A. Sales forecast, the most important of operations comprises a set of studies and

assessments of the potential market outlets and of markets that the company intends to conquer and to

maintain.

The research includes the existing products on the market and new products as well, as the elements

of the external environment (purchasing behavior, competitive position, economic status, etc.) and of the

53

internal environment (existing production capacity, the research team competitiveness, trade policy,

network distribution, etc.).

Sales forecast is subject to marketing studies on economic conditions, market absorption potential

state competitors. The outcome of these studies will result in forecasts: volumes of the possible sales; the

amount of receipts determined by the unit selling price.

The forecast of sales for existing products can be done:

1. using the quantitative techniques to extrapolate the trends observed in previous developments of

sales, using the next methods:

a. exponential adjustment (it consists to find the best approximation that was made in the

previous forecasts, after which it will be done the planned forecast);

b. adjustment by a mathematical function (which contains a lot of sales trends, the most

common being those of a line, an exponential curve or those of a parabola);

c. adjustment through mobile average (is used for sales which have a seasonal trend that

wants to be taken in the calculation of the forecast).

2. based on the qualitative techniques which analyse variables that determine the size and value of

their sales in the year of plan.

B. The forecast of retail expenses

The forecast of retail expenses is part of predefined costs to determine the cost completely.

The main problem is the separation costs in their nature: variable expenses - directly proportional to sales

volumes and fixed costs - which remain constant relative to sales volume.

The forecast of these expenses is based on previously recorded data on costs and sales.

II. Stage of development and breakdown of annual provisions

The annual and global provisions (of the company) are allocated: quarterly and monthly; on types

of products; on groups of beneficiaries.

The budget of sales must be correlated with budget of production and both with the budget of

investments.

6.4. Budget of production

Budget of production with the budget of sales is representing the main budget and, in fact, the main

prediction of the means to achieve the business objectives (forecast the goal of the company activity).

Preparation of the budget of production involves three stages:

1. Quantitative forecast of production to run

2. Forecast (predefined) of production costs

3. Breakdown of production budget provisions for periods of less than one year and on the

factories, workshops and production sections.

1. Quantitative forecast of production to run - primarily aims to harmonize the provisions of the

budget of sales with the company's production capacity, according to the meeting as complete the trade

provisions and the full capacity utilization of factors of production.

The main stage planning is sizing the production to made, conditioned by the optimization of

production factors and especially by technological equipment and labor force. This is achieved starting

from two elements:

- from the sheet of standardized technological consumption of materials, of labor and of

equipment, for each product manufacturing;

- from the restrictions on the restrictive nature of the factors of production, in terms of

volume and productivity.

The optimal solution is achieved using:

- optimization techniques: linear programming; inventory optimization; theory of waiting threads.

- informative techniques - computer software.

2. Forecast (predefined) of production costs - is a laborious activity that consists in

separating the expenses into two groups:

54

a. direct expenses divided by product (materials, labor, equipment)

b. indirect expenses representing the common expenses of the section (CCS), general expenses of

the organization (CGI), expenses for maintaining and operating machinery (CIFU), company

administrative expenses (CA), etc.

In order to determine the unit cost of production, there are envisaged the calculating on the two

groups of expenses:

a. direct expenses that are distributed directly to the product and comprising:

- direct materials (Md), calculated according to the specific normed material consumption (Cm) and

to the supply unit prices (pa). The relationship is: Md = Cm x pa

- wages and direct salary expenses (Sd) calculated according to the standardized consumption of

workmanship (Cs) and the rate per hour in force (th). The relationship is: Sd = Cs x th

b. indirect costs - are distributed on products using the successive keys of division and lead to the

formation of the unit cost of different stages, namely: of section, of enterprise and of full commercial cost.

1. The cost of section on product (C su)

Csu = Mdu +Sdu +CIFU +CCS CIFU = Sd * K1, and K1 = CIFU total / Sd total on sections

CCS = Sd * K2, and K2 = CCS total / Sd total on sections

2. Factory cost unit (Cuz)

Cuz = Csu +CGI,

CGI = CS x K3;

where K3 = CGI total / Cs total

3. Comercial complete cost (Ccu)

Ccu = Cuz +Cd

Cd = Cuz x K4

where K4 = Cd total / Cuz total

6.5. The concept of treasury

Presenting an image of the dynamics of the financial structure has some interest both for external

financial analyst of the company, as well as for its management.

The manager of a business is often put in the position of analyzing the financial developments,

which implies the localization of the benefice into the patrimonial structure: treasury, inventories, non-

current assets. The real problem facing the manager of businesses is the discrepancy between increased

production and turnover, on the one hand, and a decrease of treasury, on the other hand.

Having such a problem, the global theory, doctrine and practice responded by creating a technical

tool: financing table, i.e. the cash flow. Cash flow is placing the treasury at the center of financial analysis.

Treasury is the key information, as it provides the knowledge of how to finance his business. Using the

treasury, we can determine needed indicators to the management and financial analysis, both in the short

and long term.

Thus it ensures the objectivity in the analysis, because, unlike the working capital, the necessary

working capital and the capacity of self-financing, treasury is not dependent on accounting conventions and

policies of the management. At the same time, treasury information are suitable for a budgetary and

forecasting approach on the enterprise activity.

The concept of treasury is representing the assembly of liquidity and over liquidity. Thus, according

to the norms established by international standards and in accordance with the requirements of the 4th

Directive of the European Economic Community, cash flows expression designates all inputs and outputs

of liquidity or funds available, of forward funds and over liquidity - those short-term placements (usually

with maturities less than three months) highly liquid, easily convertible into a specified size and liquidity

whose value is not likely to vary significantly.

55

The statistics show that not always a company makes a profit and has positive treasury, and this

recording in the accounts due to the gap between revenues and expenses, and receiving, respectively their

actual payment.

Most of the bankruptcies are due to weaknesses in treasury management. Treasury management is

influenced by some phenomena of economic instability at macro and micro level, namely: rising inflation;

interest rate increase; decreasing of rates of return; lowering of the degree of self-financing.

Net treasury could be determined in two ways:

1. NT = WC – NWC this reflects, moreover, the fundamental relationship of the Treasury, that

express the correlation between working capital (WC), necessary working capital (NWC) and net treasury

(NT) and can be:

a. positive (F.W.C > N.W.C.);

b. negative (F.W.C.< N.W.C.);

c. balanced (F.W.C.= N.W.C.)

2. T = liquidity treasury financial treasury financial

assets liabilities

Treasury assets are:

a. Liquidity, represented by petty cash and by current accounts at banks;

b. Treasury financial assets contain: investment securities; commercial notes to receive; treasury

bills and certificates of deposit in portfolio.

c. Treasury financial liabilities – contain: credit balance of the current account; treasury loans;

discount loans.

Treasuries both positive and negative imply some costs in the management, namely: opportunity

costs by lack of fruition of the treasury surplus financing costs through loans to cover the treasury deficit.

Treasury function is the most important in the company and is satisfied by the CFO, chief of

financial department, chief of accounting department.

The objectives of the management treasury are:

1. avoiding losses, in the settlement days at the company receipts and payments through the bank;

2. increasing the efficiency of the receivables collection, without affecting the policy which is

applied next to the customers;

3. balanced and relaxed staggering of maturities, of payment obligations of the company;

4. obtain the best loan at the lowest real cost;

5. ensuring a "zero" balance of treasury which will not imply any costs of funding, nor any costs

of opportunity;

6. optimize the use of surplus treasury by the best placement of liquidity in order to ensure the

profitability, the safety and the optimal liquidity.

All these coordinates of the treasury result from the overall objective of the enterprise, i.e. the

increase of the equity value.

6.6. The budget of treasury

One of the tasks of management is forecasting. To govern means to foresee. Along with production

and sales budget, it is also particularly important the treasury budget.

Treasury budget aims to ensure permanent payment capacity of the enterprise, by synchronizing the

receipts with payments. Failure to achieve this objective in acceptable conditions, cause changes in all

current budgets, in the pace of investment, in the policy of creditors clients, etc.

Cash flow table must submit entries and exits of funds of the company activity, classified by

functional criteria in:

a. cash flows of operating activity, which may be calculated by the direct method (based on the

information on receipts and payments) or indirect method (according to which the net result is adjusted

under the influence of transactions that are non-monetary). Operating flows are generated by operations

including receipts from operating activities and payments for operating activities, as the receipts and

56

payments not directly related to operating activities.

b. cash flows of investment activity reflecting payments made to purchase assets intended to

generate future revenues and cash flows. These streams provide information on the manner in which the

company guarantees the survival and growth.

c. cash flows of the financing activity generated by the changes produced in the size and structure

of equity and borrowed capital of the enterprise.

Treasury budget has as basic function the forecast of cash receipts and payments; this forecast is

maed starting from planning the expenses, excluding the non-paid (calculated depreciation and provisions)

and from planning the incomes, excluding the unearned incomes (revenues from sales on credit).

Receipts will include: sales with immediate payment; collection of sales on trade credit (from the

previous period); sales of securities; sales of non-current assets; obtaining a loan or the sale of new issues

of securities; collecting rents, interest, dividends and other values.

Payments will include: predictable payment of following debts; payment of purchases on demand

and on trade credit (from the previous period); payment of salaries and awards; payment of operating

expenses, selling, management expenses, etc.; payment of taxes to the state budget; acquisition of non-

current assets; payment of outstanding interests and rates on loans; redemption of securities issued by the

company; shedding dividends to shareholders or withdrawals of funds by owners.

Depending on the arrangements for taking into account of receipts and payments, treasury budget

may be:

- gross treasury budget that includes all receipts and payments of the period;

- net treasury budget, achieved by adjusting the net profit with revenues and expenses without

involving receipts / payments, resulting in predictable developments of the financial situation.

Treasury budget preparation

There are two stages in conceiving the treasury budget:

1. forecast of receipts and payments;

2. calculating and coverage of cash balances, which includes:

a. determining cash balances before coverage;

b. cover the treasury deficit through loans or investmenting of excess cash;

c. elaborating the final budget.

Treasury budget is developed based on three documents of evidence and forecast, i.e. the balance

sheet for the year ended, which represents the opening balance of the projection period, the forecasted

profit and loss account and the forecasted balance sheet.

Treasury is determined by:

- financial flows of the forecast period, in turn determined by the incomes and expenses of the

period;

- changes of the balances of receivables and debts, at the beginning and end of period

(opening balance sheet and the forecast balance sheet), as the following relations:

Receipts per = Initial receivables + Forcasted revenues for the period – Final receivables

(Ip) (Ci) (Vp) (Cf)

Payments per= Initial debts + Forcasted expenses for the period – Final debts

(Pp) (Di) (Ch.p) (Df)

Treasury budget = Opening budget + Profit and loss account – Forecasted budget

Thus, data on receipts and payments are provided by treasury budget and those concerning the

initial receivables and debts by the opening balance sheet, while data on the planned revenues and

payments are provided by the forecasted profit and loss account.

Treasury forecast horizon is different, depending on the objectives pursued by the financial

management and the collection and payment due dates.

Thus, if the collection and payment due dates are quarterly, or longer than 90 days and the company

monitors the annual balance of treasury, budgets periodicity may be a year.

57

If the maturity of receipts and payments are monthly or longer than 30 days and the company

monitors the financial structure optimization of the treasury on short-term, the budget may be several

months (4-6 months).

Most frequently, the time horizon is of the order of days to a month, so we can build the daily chart

of receipts and payments with fortnightly, decadal, semidecadal maturities.

A pertinent forecasting of the treasury involves the establishment of an annually treasury budget

being breakdown monthly and being breakdown for the first 2-3 weeks of the year. This forecast will be

updated continuously throughout the year and detailed according to company needs.

The forecast of receipts and payments

The forecast of receipts is founded on sales figures. It must take into account the permanence of

their distribution on months and the changes that will occur in the structure of sales and capital adequacy of

enterprise customers, which will influence the gap between data deliveries and the receipts. Depending on

the economic field, between the moment of sales and the moment of corresponding revenues, there is a gap

of 30 to 90 days. These gaps result in timing the revenue monthly collection to be included in the treasury

budget.

A payment forecast is based on forecast of annual expenses and on the predictable timing of

payments starting from these expenses.

In principle, payments forecast is similar to that of receipts, taking into account the different nature

of the expenses that will cause a number of peculiarities both in terms of their annual forecast of the size

and of the maturities installment on payment.

Coverage of treasury balances

Treasury balance resulted from comparing payments with receipts may be deficient or excedentary.

The forecasted deficit of the treasury will be covered by new treasury loans or cash discount whose

selection and dosing keep the by the "art" of the treasurer to optimize the size of their real cost.

Before calling the new loans, there are required to be taken some measures including: advancing of

some receipts (reducing of volume and / or duration of credits- customers, request of receipt in advance of

sales); postponing payments (under the conditions provided by law); temporary reduction of payments by

waiving, for the moment, to carry out some expenses; proceeding of receipts from activities, such as the

sale of fixed assets or available assets.

Forecasted surplus of treasury may come, either from:

a. an excessive working capital caused by employment of long-term financial debts without

immediate use (basically, being prohibited the choice of long-term capital to be placed on the short term)

b. a necessary working capital smaller than the working capital, which is caused by the maturity of

payments generated by the operating activity much bigger than the maturity of the receipts.

In this case, it is followed the placement of treasury surplus as effectively as possible, as less risky

as possible and with the best liquidity.

Committed credits cost to cover the balance of treasury generate additional payments which

increases the necessary to finance and treasury investments are lucrative of revenues which increase

receipts. Thus, in determining the final balance of treasury, it will take into account these influences.

Optimizing investment takes into account the conditions offered by the financial and capital market.

You can make these investments of treasury: negotiable monetary investments: term deposits, cash

receipts, etc.; negotiable monetary investments: certificates of deposit, treasury bills, treasury bills, etc.;

financial investments: stocks, bonds, etc.

In principle, the placement is made on longer term, the more profitable, but less liquid and vice

versa. In conclusion, the treasurer work in setting funding projections can be summed up in three main

directions:

- evaluating the real cost of each loan, depending on the duration of use and the establishment

of a hierarchy of loans;

- quantification of the available effects by their nature;

- selection of funding sources that generate the lowest financing cost.

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6.7. The cost of treasury credits and the cost of discount credit

The cost of credit for the management of the operating cycle is an important criterion in the

selection of the type of short-term loans, so, optimizing the cost of purchase of current capitals and

negotiating various sources of acquiring these capitals are financial decisions of particular importance in

the company's strategy and tactics.

It is necessary to distinguish between the applicable cost to requested loans and to real cost, since

the real cost is higher than the applicable cost.

The applicable cost of required credit is determined by two key factors: interest rate; related fees,

i.e. commissions for risks and for administrative expenses, mostly variable in relation to the size of credit

or to the size of risk to be taken.

The interest rate is composed by:

a. the reference rate, which can be: the official discount rate, the rate applied by the National Bank

of Romania on loans granted to commercial banks in the country; interest rate applied by the first

commercial banks to their most important customers; interbank rate on loans between banks called BIBOR

(Bucharest Interbank Operating Rate).

b. the increase of reference rate in order to offset the risk involved in the type of loans: treasury

loans present a higher risk of default than discount loans; specific increase of treasury loans can reach up to

1.5 points, while the specific increase of discount loans up to 0.5 points.

c. the increase of the reference rate in order to offset risk enterprise, according to patrimony size

and its creditworthiness. Depending on the size of the patrimony, we can make a risk classification of the

companies with regard to turnover.

Elements of classification (rating) of bank customers

Commercial banks in Romania use to categorize clients, as rating criteria, the consecrated

internationally methodology of rating.

According to this methodology, analysis of a client's credit file contains two parts investigations:

managerial analysis and analysis of economic and financial performance recorded by the company which is

applying for loans.

Decision of lending concerning the volume, duration, repayment, interest, etc., will take into

account the score and the framing of the company, based on the score thus obtained, in one of the classes

of risk, using specific grids for the two components of credit analysis.

For bank customers who already have a loan portfolio incurred in the previous period, the request

analysis of a new credit combines with analysis of debt service, which uses as indicators: interests

coverage; the volume of overdue loans; outstanding payments, etc.

According to these elements, it is given one of three ratings: good quality; poor quality; bad quality.

By combining the five risk categories with the three qualities (good, poor, inadequate quality), it is

resulting an array of enterprises framing (the leverage) in one of the classes of risk. For each class, there is

an increased risk of specific interest, with a bonus according to the degree of risk incurred by the bank in

providing the loan requested by the company.

The interest rate (Rd) is calculated as an annual rate, while short-term loans are granted for

fractions of a year (often quarterly). So:

- the interest rate at a fraction level of an year is determined as a proportional rate, depending

on the size of fraction: the quarterly rate, similar to the rate of a quarter; monthly at a rate of 1/12 of the

annual rate, etc;

- the proportional rate, given the possibility that the interest capitalization from the bank is

higher than the equivalent rate of the same time fraction.

Regarding the number of efective days to lend, it is very important for the financial manager to bear

in mind the distinction between the days of settlement, as an actual day of receiving the loan and the

59

operating days on bank documents (credit agreement, bank statement), as an effective day to calculate the

interest.

Between the transfer operations, there are gaps of time into company's bank account and into

accounting records on these operations, with implications for company treasury and the calculated interest:

in the case of operations of payments, settlement day is earlier than the operating day in the

statement;

in the case of operations of receipts, settlement day is later than the operating day in the

statement.

For management of the company treasury, it should be considered also other necessary elements:

boundaries between day of petty cash (front office) of the bank, of working day and of the

calendar day used for calculation of interest; thus, on the example of bank checks, two working days, for

their settlement, can cause four calendar days of settlement, if they were submitted to bank at the end of the

week, on a Thursday or Friday, or there are only two days if they were submitted to bank at the beginning

of the week (Monday, Tuesday, Wednesday);

boundaries between settlements with third enterprises with the same bank branch account and

the settlements with enterprises that have an account at another bank branch, in the same locality or in

different localities. Boundaries between day settlement and operational day appear depending on the actual

duration of bank transfers.

Treasury loans, known as general loans, are short-term loans to be granted if the treasury has deficit

character, without special guarantees, in order to cover current payments. These, after their objects, are

divided into: loans for home facilities, seasonal loans, liaison loans, very short-term loans and loans to

mobilize financial effects.

The cost of treasury loans includes: interest and fees charged on daily debit balances which are

recorded in a quarter.

From the bank position, credit balances from current account of the company appear to debit

balances of the bank (loans granted to the company).

For the quarterly settlement of tis cost, two documents are prepared:

a. the interest scale, represents moreover, a table of daily payments and receipts, depending on

which are determined the daily debit and credit balances. In order to calculate the interest, the bank selects

the days that have the same balance and transcipts those in the interest scale.

The number of debit balances (Nrd) can be calculated through the following formula:

Nrd = 100

CxNr, where C = debit (credit) balance

Nr = number of days when that balance has been registred

By adding these balances, we determine the total number of debit balances of the quarter to which it

applies the annual interest rate (Rd). The interest due by company for treasury loans is calculated by the

next relationship:

D = ( Nrd) x 360

Rd

b. statement of interest and commissions

Fees are differentiated in two categories: risk commissions and fees for administrative expenses.

1. In the risk commissions’ category are found the following:

a. loan commissions (Cc)

b. commission of immobilization (Ci)

c. the fee for the highest debit balance for each month of the quarter of reference (C> D) is

calculated at a lower percentage rate of 0.05% on the largest balance from each month, regardless of the

number of days it was recorded. The fee is capped, meaning that it can not exceed, during a quarter, 50%

of the interest on debit balances.

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d. the fee for biggest exceed on every month of the ceiling of loans approved (C> p), is an effective

means to make the company to comply the approved cap and is calculated in a percentage rate (0.25%) on

that overcoming.

2. In the category of fees for administrative expenses are found the following

a. fees of settlement (of turnovers),

b. fees and expenses for preparing the banking documents and submitted to the company are

charged as a fixed amount for each document.

The two documents, the scale of interest and statement of interest and commissions are representing

for the company a tool to analyse the treasury management of each quarter, as they allow the following

operations of management control:

1. checking of settlement days and their comparison with the operating days from the bank

statements;

2. checking the operations of debit banking that are exempt from paying the fee settlement, as the

possible negotiations on transactions for their exoneration;

3. checking the interest rates applicable to the debit balances, the rate being calculated by the

relationship: Rd = D / Nrd X 360

4. checking the commission calculation mode for the largest debit balance (DSMB) and checking

the calculation mode of the interest rate increased by this commission (Rd1): Rd1 = (D + CMSD) /

Nrd X 360

This interest rate can be negotiated with the bank, which may affect the cost of loan.

5. checking the annual global rate according to all interest and fees charged for treasury

receivables (Rg):

Rg = (D + Comissions)/ Nrd x 360

The commercial discount is a banking operation which means that a commercial bank buys

commercial papers from their beneficiaries before they reach maturity. As a result of the discounting

operation, the company receives cash, which represents the nominal value of the commercial paper,

respectively, less interest on amounts advanced by the banker and certain fees that remunerates bank

intervention. The most important commercial papers are: bills of exchange and promissory notes or treat.

The cost of the discount credit is determined by the interest rate, by the fees associated and by the

discounting period of commercial papers from banks (or their endorsement to third party until maturity).

Also it is the credit discount case where there are distortions between credit discount applicable cost and

their real cost.

1. The interest rate is based on the same elements: the interest rate used as reference; the increase

specific to discount loans; the increase specific to the company.

2. Fees charged by the bank are determined by: endorsement of commercial papers; credit under

repayment; handling of commercial papers, in fixed amount, depending on their category, amounts may be

different for each classic paper (bills of exchange, promissory notes) and for magnetic paper.

Bill of exchange or treat is a document by which a of creditor, the shooter, give an order to one of

its debtors, pulling, to pay at a certain maturity, an amount determined by a person designated recipient,

who may be the shooter himself. The bill of exchange is: negociable, having the option to be sold before

the maturity and obtaining cash; transmissible, meaning that their beneficiary may transmit the ownership

to a new beneficiary.

Bill of exchange payment is realised by direct presentation to consignee or with a bank help.

The promissory note is a document by which a person, the underwriter (the issuer) must pay to the

named beneficiary or to other person upon his order, a sum of money at a maturity date. The essential

difference between the bill of exchange and the promissory note is that promissory note represents

Diferenţa esenţiala ce exista între cambie şi biletul la ordin rezida în faptul ca biletul la ordin este an

engagement subscribed directly by the debtor. The promissory note presents characteristics which are very

similar to the bill of exchange characteristics.

3. The discount period includes the number of working days from the submission to the bank until

the real maturity of the commercial paper. In fact, the company has the available funds borrowed after two

61

days of submission to the bank of the commercial papers (one day for recording and one day of bank

according to banking practice).

The real cost of credit discount depends on:

a. total cost applicable is the settled cost, meaning the company will receive a credit equal to the

difference between the nominal value of commercial paper and the cost of input, which increases the real

cost of discount;

b. total number of days in a year that cause an increase of the real cost;

c. commercial papers with low levels are charged with a fixed amount per paper. This is the reason

why the real cost will be even higher, as the expected amount is less.

For optimizing the cost of treasury loans and the cost of discount loans, there are taken into account

the following elements:

1. the nominal interest rate, which is smaller in the discount loans case than in the treasury loans

case;

2. the real discount rate may be higher or equal than the treasury rate, according to: discount period

(actual number of days credit); settled costs for discounting and aftersettled costs for bank lending; the risk

of over-financing to discount loans, in case of collecting some unforeseen sums and their entry in the

current account; minimum number of working days (10 days).

3.fees for the largest debit balance and for the biggest exceeded of ceiling are causing high costs of

the treasury loans.

Selection between the discount loan and the treasury loan requires a good knowledge of the entire

mechanism of calculating the nominal and real cost of credit and is based on their real cost.

Conclusions

Financial forecasting field is extremely broad, covering the current management and the company

development, and these actions are done through financial cash-flows..

The tools used for te financial forecast are the company budgets.

The financial forecasting role of budgets is: to steer the company toward a specific purpose:

profitability, liquidity, reduced inventories, etc; coordinating the efforts of all functional departments that

participate in the budgeting process; coordonated and effective control by comparing achievements with

the forecast through budgets and making the corrective measures in the right time.

Forecasted management of the company involves: budgeting the main areas of activity, which

would affect the sources and establish responsibility for each decision center; budgetary control, i.e.

respectng the provisions of the budget, in order to establish the causes of deviation, information

management and corrective action as necessary.

Financial planning system includes the following types of budget:

1. General budgets oriented are long-term (3-5 years) and establish future business image through

product descriptions, project development, procurement, manufacturing of new products, fusion.

2. Annual budgets are budgets for implementing the general policy of the company, being specific

to the different activities of the company: purchasing, production, sales, and investment.

3. Treasury budgets, forecast balance sheet and profit and loss account, through which it is

estimated the patrimonial and monetary situation of the company.

The link between these budgets resides in their successive elaboration, starting from general policy

to achieve strategic objectives, annual budgets and then continuing with coverage of all of the predictable

state treasury, heritage and results.

The sales budget is the main annual budget, which helps to determine other parameters from their

annual budgets of the other. Sales forecast budget is the aim of the company. Sales budget preparation is

done in two stages. A first step refers to forecast sales and the costs of disposal and the second stage is the

stage of development and breakdown of annual provisions.

The budget of production and sales budget are the main budgets, being, in fact, the main prediction

of forcasting the means of achieving business objectives (forecast of the company purpose). The preparation

62

of the budget of production involves three steps: quantitative forecasting of production to be executed;

forecast (Predefined) of production costs and breakdown of production budget provisions for periods of less

than one year and on factories, workshops and production sections.

Along with the production and sales budget, particularly important is the budget statement, which is

based on forecasting the receipts and payments; this forecast is based on planning the expenses, excluding

the non-paid (calculated amortization and provisions) and on planning the incomes, excluding the unearned

incomes (income from the stored production, revenues from sales on credit).

63

CHAPTER 7.

CONCEPTUAL DISTINCTIONS CONCERNING THE DECISION ON LONG-

TERM FUNDING

7.1. Long-term funding decisions

From a financial point of view, the investment represents the changing of a sum of money present

and certain in the hope of obtaining higher future income, but probable, such as: purchase of machinery for

raising labour productivity or assimilation of a patent for the manufacture of new products.

From an accounting point of view, the investment represents an allocation of available Treasury to

purchase a fixed asset which will determine the flow of income and expenses. From the point of view of

the general policy of the company we distinguish two categories of investment, each of which being the

result of a certain development strategy:

a. internal investments, which consist of capital allocation for acquisitions of tangible or intangible

assets (equipment, inventory, licenses, construction), for the development and improvement of the

productive apparatus and distribution of goods and services.

These investments are the result of training policy and consolidation and even extending the market

position of the goods and services for the enterprise, having thus an industrial and/or commercial use.

b. foreign investments, also called financial investments consist of investments in capital to increase

financial contribution to capital formation of other companies, leading to diversification and expresses the

concept of the portfolio of investment projects that characterize the investment activity of the enterprise.

The major goal of the investment is to achieve increased value of the company.

Foreign investments highlights the best the concept of the portfolio of investment projects that

characterize the investment activity of the enterprise in its ensemble.

In a dynamic investment policy is pursued the selection of those projects that maximize wealth and

divesting those assets affecting the decrease in wealth.

Typology of investments in an enterprise is very diverse, it may be present after several criteria:

1. the nature of investments:

a. technical investment, concerns the acquisition, construction, machinery, etc.

b. human investment, concerns the training of personnel through qualification, specialization;

c. social investment, improving the social concerns of the staff side (canteens, nurseries)

d. financial investment (purchase of shares);

e. investment for advertising, commercial etc.

2. Depending on the risk involved in the perspective of enterprises:

a. investment to replace equipment worn out completely, with a very low risk, whereas changes are

not involved in the manufacturing technology, and credits can be easier got to carry them out (return is

definite and risk is low);

b. investment for the modernization of existing equipment in operation which involves a low risk

due to spurious patches of manufacturing technology. In this situation also you can get easier bank loans,

profitability being definite;

c. investment development (extension) of some wards, factories-involves a higher risk and an

unlikely for a return. It entails the need for the enlargement of supplying markets, of capital, outlets.

Development investment is financed, in general, from their own sources of capital (capital increase self-

financing,) and from external sources, borrowed.

d. strategic investment looks over creation to abroad subsidiary, merging with other companies,

robotics manufacturing process, which entails a considerable risk, due to the expansion of activity in new

geographical areas and/or technological, commercial environments, completely restructured. And this

category of investments presents an unlikely return, because of the high risk, which is why the funding is

going to be made from his own or borrowed sources.

3. According to monetary flow of inputs and outputs of the Treasury (cash-flow):

64

a. investment characterized by a single initial expense (at the entrance) and a single collection

(outbound) at the completion of the investment;

b. investment characterized by a single initial expenditure and receipts with staggered over the life

of the investment, are the most common cases (for purchase of equipment investment;

c. investments with initial expenditure staggered and with only one collection at the end of the

investment (Construction Department and handing them to the "key");

d. investment with inputs and outputs staggered cash throughout the investment of Treasury.

7.2. Financial aspects of an investment in secure environment

The elements of a financial investment in the cert are:

1. initial investment expenses (I0), in an investment project, representing the size of the net capital

required for the entry into service of the investment. The components of the initial investment expenses

are:

a. the acquisition cost of fixed assets in Exchange for financial or billing, whichever size is

calculated depreciation (machinery, installations, etc.)

b. mounting and installation costs of equipment and new facilities and training of staff in new

technologies;

c. increase amount of working capital, respectively increasing stocks and receivables-customers

increase operating debt minus, brought about by new production capacity;

d. resale price, eventually replaced by fixed assets of the new investment, so the price of the market

capitalization of fixed assets dezinvestite (after they dropped their decommissioning costs).

2. The life of the investments is a concept with different meanings, resulting from various angles of

interest for this element, as follows:

a. duration of tax accounting, i.e. the normal duration of service assets (asset) as described in the

catalogue of the depreciation rules;

b. duration of running technique resulting from technical running characters specific to each fixed

asset. This period may be greater or less than the length of cataloguing depending on the conditions for

their use;

c. duration, determined by the lifetime of products made with the investment;

d. legal duration, i.e. the duration of the legal protection on the rights of the concession of

exploitation, a patent, a trademark, manufacturing licenses, etc.

Evaluating the effectiveness of the investment will take account of what life is more personalized to

the financial management of the enterprise. Over this period of life, the subject of investment will generate

spending and higher depreciation than revenue.

3. Net cash-flows (available cash-flows) means the system of assumptions taken into account to

estimate future flows and consists of:

a. economic environment, without variations in rentabilităţiilor previously recorded;

b. sufficient equity, allowing separation of the investment decision of funding and so ignoring the

calculation of cash flo-available interest on borrowed capital and tax savings involved;

c. profit tax is assumed to be paid at the end of the financial year;

d. inflation rate remains constant throughout the life of the investment and equal to that of the first

year of implementation of the investment.

In these circumstances, future cash flows are, in fact, the excess cash available to pay dividends,

being determined as the incremental cash flows.

4. The residual value (VR) expresses the amount of possible recovered after the end of the life of

the investment. The residual value, after completion of the technical, duration reaches almost to zero or to

insignificant quantities for the financial management of the enterprise.

For a lifetime less than that, the residual value may be greater than the value of UN-depreciated,

which will result in a capital gain, that is, a surplus of receipts over the salvage value of the asset in

question.

65

For a long economic lifespan salvage value resulting from disinvestment new investment may be

considered insignificant to calculate net present value, however, predicting the residual value may become

more important for smaller periods of life. Residual value comprises the following items: value amounted

to an estimated resale price with taxes; the value of fixed assets necorpolare financial transactions and the

market price; cumulative sum of previous growth of amount of working capital.

The impact of residual value over the net present value is greater the higher the size of the

estimated residual value is higher and the time dezinvestirii is closer to the time of the appointment.

5. The discount rate (k) - it's about an estimate of the discount rate as an opportunity cost of capital

to be invested. This opportunity cost is the cost of financing of the investment from equity and will be

appreciated as a rate of return required by investors on this project.

In the economic environment, the investment is without risk, and the rate of return is equal to the

risk-free interest rate, nominal interest rate respectively which includes a constant inflation rate.

The discount rate (k) that is used is calculated starting from the real rate of interest (Rr) and the

inflation rate constant (Ri).

▪ (1+k) = (1+Rr) (1+Ri) - for one year, where: K = Rr+Ri+Rr*Ri

Formulas: -----------------------

▪ (1+k)n = (1+Rr)

n (1+Ri)

n- for "n" years, where

K= n nn RiRr 1)1()1(

Structure of interest rates in annual report from the time of appointment may be:

- payment structure when:

• annual short-term rates are equal to the rates in the medium term and long term;

• economic environment is certain with a constant inflation rate

-structure curve upward, when interest rates are expected to be upward in relation to the term of

maturity, i.e. the rates in the medium term or the long term to be higher than short-term annual; a looming

rise in the rate of inflation.

-structure of rates reversed when interest rates, short-term rates, are higher than in the medium

term and long term; a looming drop in interest rates in the short term.

The company engages in tangible fixed assets and intangible fixed assets subject to depreciation,

entered in the accounts, will proceed to the recovery of physical and moral wear and tear to their rebuilding

capital employed.

Are subject to depreciation: tangible assets: land, fixed assets (land only with economic value);

intangible assets.

The depreciation calculation is done by applying the depreciation rate on the value of the fixed

asset input and they include operating expenses.

There are three methods for calculating depreciation: straight-line depreciation; declining-balance

depreciation; accelerated depreciation.

7.3. The way of determining the investment decision

The main macroeconomic indicators of the effectiveness of the investment decision-making

process for use in informing the decision of investment are: net present value (VAN); internal rate of return

(IRR); the recovering term (TR) and the profitability index (IP).

1. Net present value (VAN) - also known in the literature as either "value capital", "goodwill" or

"benefit actuarial". It represents the difference between the updated values of the flows of spending and

revenue.

The net present value of capital surplus expresses the result after the end of the life of the

investment (including salvage value) and is given by the relationship:

VAN =

i

t

tkCFt

1

)1(

66

CFT = net cash inputs of the period t;

t = life span of investments;

k = discount rate (interest rate).

The criterion of choice of an investment is the net present value. To justify the investment, net

present value must be a positive value and superior interest from capital market, if the investment would be

made in another investment.

The present value of the net is higher with both project investment is more profitable;

If the net present value is negative net cash inflows do not permit replenishment of funds allocated

to the project and therefore should be rejected. In the case of investment, net present value credited shall be

the interest paid to the bank.

2. Internal rate of return (IRR) - is the discount rate for which the present value of costs (cash

outflows) is equal to the present value of revenues (cash inflows), and updated future profits are zero

(VAN = 0).

i

t

t IkCFt1

0 0)1( ;

01

)1(

i

t

t IkCFt → revenues = costs

Internal rate of return should be greater than or equal to the average rate of interest from the market

or with the weighted average cost of capital for investment:

• only such investment yield rate allows to compensate the cost of financing;

• the higher the internal rate of return is higher than the investment is more cost effective.

3. The period of recovery (TR) - expresses the amount of time (in years) required for the recovery

of the capital invested by the average annual net inputs of the Treasury.

TR = I0 / CF share/year

CF share/year = n

kCFti

t

t

1

)1(

, where:

I0 = the initial cost of investment;

CF act/year = cash flow average annual updated invested capital.

It follows that the period for recovery may be less than the life of the investment. With how the

term is shorter than the lower risk and creditworthiness of the investment project will be ensured.

4. The profitability index (IP) net - present value expresses the expected expenditure for the

initiated investments equal to 1 and is determined as the ratio between the net present value of cash inflows

and investment spending:

VAN + Io VAN

IP = = + 1 for „n” years

Io Io

In securing financial balance should be carried out two fundamental rules:

1. permanent needs for formation of fixed assets to be financed from permanent sources, deployed

on a long-term basis;

2. temporary needs should be covered by the temporary sources and the working capital must be

greater than the necessary working capital.

In achieving financial equilibrium very important is the quality of the two decisions:

- investment decision - making the choice between domestic investment in physical assets

(equipment, materials) and financial investment in securities;

- financing decision - it will choose its own funding sources funding sources or borrowed, based on

the cost of purchasing capital, aiming to reduce the cost of capital to weighted average.

67

Within its own sources, financial management will have to choose between self-financing (capital)

and new capital assets (own sources). Self-financing in its turn is determined by the dividend policy

adopted by the company.

Self-financing capacity is determined by:

-the size of the calculated depreciation and provisions consumed, and yet what constitutes a reliable

own source;

-size still retained profits (after deducting income tax);

-uninvestments income (sale of fixed assets).

Self-financing ensures sources of coverage of ongoing capital needs at cost below the average, and

that it is an efficient source.

If, however, it is insufficient self-financing resort to external sources of capital that can be:

-own sources through new capital contributions (in cash and/or in kind) or through subsidies from

the State budget;

-borrowed sources, through the issuance and sale of bonds and/or contracts of long-term bank loans

or the environment;

-rented sources, having the possibility of purchase of fixed assets at a predetermined price (leasing

operations).

The selection and combination of these sources form the content of the decision on long-term

funding, and the criterion for optimization is the net present value, the resulting value of each financing

option.

The subscription of the capital increase is motivated by:

- dividend policy that ensures profitability on each action;

- market policy, which provides the increase or decrease in the value of the market.

The capital increase will result in a "dilution effect" of return actions, by the fact that the net profit

is divided by a larger number of shares. As a compensation, capital growth assures the creation of

creditworthiness and the security undertaking to obtain new loans.

Capital increase can be done by:

1. the issue of new shares, which includes:

- the issue of shares in the nominal value of the old shares (rare cases);

- issuance of new shares to the value of increased depending on the value of stock shares (common

cases).

2. subscription for new consideration to capital leads to actual growth of social capital;

3. incorporation of reserves, issue premiums and profit in the share capital of the company;

4. incorporation of debts, which consists in the issuance and distribution of the new shares

"suppliers" of borrowed capital.

The value of a new issue shares is established in a size close to the market value of the old shares.

Issue value varies between two limits:

- nominal value;

- market value.

Nominal value </= Value of issue </= Market value

The difference between the issue value and the market value represents the first issue, which is used

to cover expenses with issuance and sale of the new shares. The first issue he enrolled as a reserve in the

balance sheet, along with the capital or be incorporated into it, with a new capital increase.

The issue of new shares at a value of broadcast less than the market value will result in an effect to

reduce the value of the old shares.

Market value (PV) of all shares, after raising capital, is determined based on the market value of the

shares and the value of the issue of new shares, as follows:

N x V + n x E N = number of old shares

VP= ; where V= market value of old

shares

N + n n = number of new shares

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E = value of issue

of new shares

Purchase of new action involves the granting of rights to subscribe to the shareholders as

compensation of the "dilution effect" in the value of capital:

The right to subscribe is a negotiable security that can be sold to new shareholders wishing to

subscribe to the capital. The right to subscribe (ds) is given by the relationship: ds = V-VP, where VP =

market value of the shares after the capital increase.

The right to subscribe means loss of value of the old shares with their holder to be rewarded so as

not to be affected by supplementation of growth capital.

For buying new shares, the purchaser must have or acquire a number of subscription rights (nds)

equal to the ratio between the total number of old shares and the total number of new shares: nds = N/n

Old shareholder who does not want to or cannot subscribe to the capital increase can sell exchange-

traded rights to subscription attached (in the form of coupon negotiable) of each action on a hold , for an

amount equal to the loss in value of its shares as a result of the dilution effect.

Loss of market value of the old shares, by increasing the number of shares issued will be matched

by attaching to each action, the right of attribution (Yes). It can be sold by the old, when shareholder he

refuses to use it to receive new shares in proportion to the free those held previously. The relationship of

the right to the award is similar to that of the subscription rights, the issue of shares value us being zero

because they are distributed free of charge:

N x V + n x E n

da = V = V

N +n N + n

Raising capital through incorporation of reserves, premiums and retained profits broadcasts

enables free new shares is issued, or to increase the nominal value of the shares, without bringing a new

capital.

Raising capital through incorporation of debts, consists in the issuance and distribution of the new

shares "suppliers" of borrowed capital. It is a way to put into practice the companies well placed from a

technical standpoint, but which shows financial difficulties as a result of too rapid growth. In these

situations, the old shareholders waive their subscription rights.

Debenture loans represent a special form of long-term credit why have a cost lower than purchase

subscriptions to the share capital, whithout influencing the shareholders ' ownership. The main

characteristics of debenture loans are:

- the size of the loan obligatar;

- size of interest;

- duration and the procedures for reimbursement;

- the value of the issue.

The decision to issue the bonds belong to the general meeting of shareholders if the company is

legally authorized to issue bonds.

The issuance and sale of bonds is carried out by credit institutions, which acts as an intermediary,

in his own name or as a guarantor of the show.

The size of the debenture loans is determined on the basis of:

-investment financing needs of the undertaking;

-the degree of liquidity of the financial market (offer of monetary capital).

The value of bonds issue (amount paid by all persons who subscribe to the bonds at the time of

issue thereof) can be equal to the nominal value (at par), lower (subpari), which makes them more

attractive (and rare situations) or higher than nominal value (suprapari).

The difference between the value of the scholarship and the nominal value is the issue bonus. In

order to make them more attractive, the obligations may be issued at a price greater than face value with a

refund bonus.

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7.4. Leasing plan

Leasing plan is a special form of lease of movable or immovable property whereby the tenant get

perks related to possession of the property leased, while financing its purchase is made by the leasing

company.

Leasing plan is therefore a method of funding put in place by the landlord (lessor, financier,

capitalist) rights of use over the property of another party called the user (lessee, beneficiary) at the latter's

request.

The user at the end of the lease term, the option whether or not to purchase the asset, or for the

extension of the leasing contract.

In the economic practice there are three types of leasing:

a. financial leasing;

b. operational leasing;

c. sale and leaseback.

The distinction between financial and operational leasing is based on the extent to which risks and

advantages related to the rights of ownership of the asset constituting the object of the lease, the lessee or

the lessor shall belong.

Financial leasing takes place where the lessee, the lessor gives way to a large extent, related risks

and rights of ownership of the asset in question. In the end, the title to the property may be transferred or

not. Financial lease represents, therefore, a form of financing asset came into use the tenant throughout the

life of the lease object and provisos: the risks and benefits of the related property rights, from the moment

of conclusion of the contract, the user; the contract parties have provided for in the contract, expressly that,

at the expiry of the leasing contract the right of ownership of the asset, shall be transferred to the user; the

user can opt to purchase the asset, and the purchase price will be a maximum of 50% of the market value

of the asset at the date on which the option is expressed; the period of use of the object of leasing system is

at least 75% of the normal use of the asset, even if ownership is not transferred in the end.

Typically, the contract of financial leasing: not ensure maintenance equipment insurance; There is

no option of premature cancellation of the location; the asset is fully depreciated at the conclusion of the

contract.

Operational leasing is a matter of professional judgement, which is rooted in the principle of the

primacy of economic over the judiciary and does not meet any of the conditions of financial leasing. The

values with which it operates in leasing operations are: input value, that value to which the property was

purchased by financier (acquisition cost); the total amount of leasing rates plus residual value; the residual

value, the value at which you want to transfer ownership of the property by users, on the expiry of the

leasing contract and the estimated net value expressed to be obtained by an enterprise, for an asset at the

end of its useful life after deducting the cost of prior assignment predicted.

Useful life refers to the estimated period that remains, at the beginning of the term of the lease,

without limitation, during which he expects the economic benefits embodied in the good to be consumed

by the enterprise.

The leasing rate, which in the case of financial leasing, representing the proportion of the value of

the asset and the lease interest, and in the case of operational leasing, the leasing rate is the share of

depreciation calculated according to the legal regulations in force and not the profit determined by the

contracting parties.

The rent which enterprise pays to a leasing company is recorded as an operating expense and

depreciation the asset leased includes; interest of the funds advanced by the company leases for the

purchase of the property; the profit margin of the company leases.

Sale and leaseback represents a way for an enterprise sells a lease or other investor-owned goods to

their market value and end at the same time, a lease of the goods in question under the conditions of

financial leasing, which denotes that the sale and leaseback are similar and even hypothetical financial

leasing.

The seller receives immediately the market price of the goods is transferred to the respective

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property, which will pay royalties (amount of money) leasing company to benefit from the use of the goods

until full depreciation.

The company leases (lessor), at the time of conclusion of the contract of lease-back, has the right of

disposition over the residual value of the leased goods.

Leasing, as a form of long-term financing, a number of tax breaks under the authorities:

-expenditure on royalties (operating expenses) are accompanied by tax savings whose size is

directly proportional to the size of the fees and the tax on share profits;

-rental of property by sale and leaseback is also a measure of depreciation of their value if one

takes into account the fact that the land does not calculate depreciation. This means that in addition to the

recovery of the amount of land, through the sale of tax savings are obtained by including depreciation land

leaseback royalty;

-whereas the movable property imported in order to be used in leases, are treated as import goods

temporarily admitted shall be exempt from customs duties, the buyer will pay, at the conclusion of the

contract, customs duty calculated from the value in the time of the sale, on the basis of the customs

declaration for home use.

Leasing represents, therefore, a particular way of financing which can analyze as a loan. The cost of

such funding sources may be evaluated as an actuarial rates. Apply the same principle of equal current

values of the equivalent amount of financing (acquisition cost and Assembly of equipment leased = E), and

outputs the Treasury for future payments, relating to the annual rent (CH) and the residual price (PR).

Currently, equality, the two streams of Treasury (equivalent input and output actual) calculate the actuarial

cost of leasing as an internal rate of return (kl).

The cost of leasing integrates, naturally, and tax effects of such financing. Rent is an expense

deductible from income tax on profit. Part representing depreciation of equipment leased, no longer

constitutes a tax for leasing, but also for the "supplier" leasing. Consequently, the user, not leasing the

asset leased owner, recorded an opportunity cost, determined by the economy's loss of tax related

depreciation of "A" equipment rental.

n

l

n

tt

l

tt

k

PR

k

AripCHripE

)1()1(

)1(

1

where:

rip = corporation tax rate

f = 1; 2;...;n years of validity of the contract of leasing.

In these circumstances, the cost of leasing (kl) is the solution to the above equation, which is

calculated after the internal rate of return methodology. Moreover, the cost of leasing for the user (lessee)

is the rate of return for the "supplier" (locator). The best resource available is self-financing, used for

investment or modernisation of fixed assets and the increasing need for revolving fund.

It is considered that the lease has the following advantages:

1. The tax plan: all costs resulting from the lease are tax-deductible, while financing through loans,

only interest is deductible and to funding from own sources is only deductible depreciation (the enterprise

is concerned to deduct from income the greatest expenses for ensuring good conditions for business paying

tax on it, for that portion of the income that remains after the deduction of expenses);

Rent is an expense deductible from income tax on profit. Part representing depreciation of

equipment leased, no longer constitutes a tax for leasing, but also for the "supplier" leasing. Consequently,

the user, not leasing the asset leased owner, recorded an opportunity cost, determined by the economy's

loss of tax in respect of the depreciation of the equipment rented.

2. financial plan: allow leasing financing investments without recourse to borrowed capital or own;

has the advantage that it does not alter the proportion between equity and the borrower nor alters the

relations between the ownership of the registered capital of the enterprise (as is the case of recourse to

capital through attracting new investors);

3. In the economic plan: leasing is a solution that links the cost of usability methods; the enterprise

uses a piece of equipment only as long as it needs to achieve a goal, after surrendering to him and no

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longer has any expenses; In addition, the undertaking may have access to the necessary means under

conditions less severe than if the bank credits (even though it does not have sufficient collateral);

The main disadvantage of leasing system is relatively higher costs; They cover and the value of the

service rendered by financier and leasing firm.

For development and strategic investments will appeal to the US capital from old or new

shareholders, from banks and other credit institutions.

Conclusions Investing represents a permanent allocation of capital in the acquisition of fixed assets and/or

financial enabling cost-effective activities the main risk assumed is the allocation of a lump sum today,

saved in hope of gaining some future revenue streams of cash flows (cash flow) on the life of the

investment. In certain of these revenue streams are known from the point of view of financial and

accounting officer.

The major goal of the investment is to achieve increased value of the company. Internal

investments consist of capital allocation for acquisitions of intangible or tangible assets (equipment,

inventory, licenses, construction), for the development and improvement of the productive apparatus and

distribution of goods and services.

These investments are the result of training policy and consolidation and even extending the market

position of the goods and services for the enterprise, having thus an industrial and/or commercial use.

Foreign investments, also called financial investments consist of investments in capital to increase

financial contribution to capital formation of other companies, leading to diversification and expresses the

concept of the portfolio of investment projects that characterize the investment activity of the enterprise.

Foreign investments provide the best concept of the portfolio of investment projects that characterize the

investment activity of the enterprise in its ensemble.

In a dynamic investment policy pursues the selection of those projects that maximize wealth and

divesting those assets affecting the decrease in wealth.

All these considerations resulted in a diversification of the types of investments.

Key indicators of the effectiveness of the investment decision-making process for use in informing

the decision of investment are: net present value (VAN); internal rate of return (IRR); the term (TR) and

the profitability index (IP).

Leasing is therefore a method of funding put in place by the landlord (lessor, financier, capitalist)

rights of use over the property of another party called the user (lessee, beneficiary) at the latter's request.

The user at the end of the lease term, the option whether or not to purchase the asset, or for the

extension of the leasing contract.

In the economic practice there are three types of leasing: financial leasing; operating lease; sale

and leaseback.