FINANCIAL RATIOS
1
FINANCIAL RATIOS Why Use Financial Ratio Analysis
?
The use of financial ratios is a time-tested method of analyzing a business. Wall Street investment firms, bank loan officers and knowledgeable business owners all use financial ratio analysis to learn more about a company’s current financial health as well as its potential.
Types of Ratios One of the most useful ways for the owner of a small business to look at the company’s financial statements is by using “common size” ratios.
Common size ratios
can
be
developed from both balance sheet and income statement items. It is just calculated each line item on the statement as a percentage of the total.
Each of the items on the income statement would be calculated as a percentage of total sales. (Divide each line item by total sales, and then multiply each one by 100 to turn it into a percentage.) Similarly, items on the balance sheet would be calculated as percentages of total assets (or total liabilities plus owners’ equity).
Example of Common size ratios from the Balance Sheet
FINANCIAL RATIOS
2
Example:
Solution:
Emily Ltd information:
has
the
following
Trade debtors $100,000
Average Collection Period = (100,000 / 300,000) * 365 = 121.7 days Average Payment Period = (80,000 / 120,000) * 365 = 243.3 days
Trade creditors $80,000
Current Asset Turnover = 70,000 / (100,000 + 20,000 + 66,000) = 0.38
Credit sales $300,000 Credit purchases $120,00
Average stock = (60,000 + 20,000) / 2 = $40,000 Cost of sales $70,000 Opening stock $60,000
Stock Turnover Period = (40,000 / 70,000) * 365 = 208.6 days
Closing stock $20,000
Cash Cycle = 208.6 + 121.7 - 243.3 = 87 days
Bank $66,000 Calculate Ratios.
the
relevant
Efficiency
Debt to equity ratio is a financial, liquidity ratio that compares a company's total debt to total equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders).
Example Assume a company has $100,000 of bank lines of credit and a $500,000 mortgage on its property. The shareholders of the company have invested $1.2 million. Here is how you calculate the debt to equity ratio.
FINANCIAL RATIOS
3
ďƒ˜
Profitability ratios
indicate management's ability to convert sales dollars into profits and
cash flow. The common ratios are gross margin, operating margin and net income margin. The gross margin is the ratio of gross profits to sales. The gross profit is equal to sales minus cost of goods sold. The operating margin is the ratio of operating profits to sales and net income margin is the ratio of net income to sales. The operating profit is equal to the gross profit minus operating expenses, while the net income is equal to the operating profit minus interest and taxes. The return-on-asset ratio, which is the ratio of net income to total assets, measures a company's effectiveness in deploying its assets to generate profits. The return-on-investment ratio, which is the ratio of net income to shareholders' equity, indicates a company's ability to generate a return for its owners.
ďƒ˜
Efficiency Ratios. Two common efficiency ratios are inventory turnover and receivables turnover. Inventory turnover is the ratio of cost of goods sold to inventory. A high inventory turnover ratio means that the company is successful in converting its inventory into sales. The receivables turnover ratio is the ratio of credit sales to accounts receivable, which tracks outstanding credit sales. A high accounts receivable turnover means that the company is successful in collecting its outstanding credit balances.
Formulas: 1) Average Collection Period = (Average Trade Debtors / Credit Sales) * No. of Days 2) Average Payment Period = (Average Trade Creditors / Credit Purchases) * No. of Days 3) Inventory Turnover Ratio = Cost of goods sold / Average inventory held 4) Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors 5) Total Assets Turnover = Net Sales / Total Assets 6) Degree of Operating Leverage = % change in EBIT / % change in Sales
7) Creditors Turnover Ratio = Net Credit Purchases / Average Payable 8) Days Sales Outstanding Ratio = Accounts Receivable / Average sales per day 9) Working capital turnover Ratio = Cost of sales / Average net working capital 10) Current Asset Turnover Ratio = Cost of goods sold / Current assets 11) Stock Turnover Period = (Average stock / Cost of goods sold) * No. of Days 12) Cash Cycle = Stock Turnover Period + Average Collection Period - Average Payment Period
FINANCIAL RATIOS
4
Operating ratios There are many types of ratios you can use to measure the efficiency of your company’s operations. In this section we will look at seven that are commonly used and compared. There may be others which are common to a specific industry or that you will create for a specific purpose within your company. These “efficiency ratios” utilize data from both the Balance Sheet and the Profit & Loss Statement. The eight ratios we will cover are:
• Inventory Turnover Ratio • Inventory Days on Hand
Example of one tipe of Operating Ratios: Inventory Turnover Ratio To calculate the ratio we use the formula: Inventory Turnover Ratio = Cost of Goods Sold / Total Inventory From the Roots Up Company has an Inventory Turnover Ratio of: $4,895,000 / $896,000 = 5.463 (From the Roots Up Company has “Other Inventory” on the Balance Sheet. This figure is excluded from the calculation, as it is not considered operating inventory.)
• Accounts Receivable Turnover Ratio • Accounts Receivable Days on Hand • Accounts Payable Turnover • Accounts Payable Days • Cash Cycle • Return on Assets
Solvency ratios measure the stability of a company and its ability to repay debt. These ratios are of particular interest to bank loan officers. They should be of interest to you, too, since solvency ratios give a strong indication of the financial health and viability of your business. We will look at the following solvency ratios: • Debt-to-Worth Ratio • Working Capital • Net Sales to Working Capital • Z-Score Example of one type of Solvency Ratio: Working Capital Working
Lenders use it to evaluate a company’s ability to weather hard times. Loan agreements often specify that the borrower must maintain a specified level of working capital. Working capital is computed as follows: Working Capital = Total Current Assets - Total Current Liabilities Using the balance sheet data for the From the Roots Up Company, we can compute the working capital amount for the company. From the Roots Up Company working capital: $2,463,000 - $773,000 = $1,690,000 From the Roots Up Company has $1,690,000 in working capital.
FINANCIAL RATIOS
5
Example of Common size ratios from the Income Statement
Liquidity ratios
measure
your
company’s ability to cover its expenses. The two most common liquidity ratios are the current ratio and the quick ratio. Both are based on balance sheet items
Current Ratio The current ratio is a reflection of financial strength. It is the number of times a company’s current assets exceed its current liabilities, which is an indication of the solvency of the business. The formula to compute the current ratio is: Current Ratio = Total current assets / Total current liabilities
Using the earlier balance sheet data for the fictional From the Roots Up Company, we can compute the company’s current ratio. From the Roots Up Company Current Ratio: $2,463,000 / $773,000 = 3.19 This tells the owners of the From the Roots Up Company that current liabilities are covered by current assets 3.19 times. The current ratio answers the question, “Does the business have enough current assets to meet the payment schedule of current liabilities with a margin of safety?”
Quick Ratio The quick ratio is also called the “acid test” ratio. That’s because the quick ratio looks only at a company’s most liquid assets and compares them to current liabilities. The quick ratio tests whether a business can meet its obligations even if adverse conditions occur. Here is the formula for the quick ratio: Quick Ratio = (Total Current Assets - Total Inventory) / Total Current Liabilities Assets considered to be “quick” assets include cash, stocks and bonds, and accounts receivable. In other words, all of the current assets on the balance sheet except inventory.
AR CREDIT MANAGEMENT
Dun and Bradstreet information supports decision-making arose answering to the need of the merchants of the East of the USA of
that are taken every day on day in the world of the businesses.
evaluate their potential clients, who were going spreading towards the West of the country. Already in this moment, in the USA, there was detected the need to possess quality information to take quality decisions. This is how D&B turned into a key
In
the
business-to-business
marketplace, Dun & Bradstreet is the indispensable
source
of
information-management
content; expertise
and business insight that customers need to make more informed decisions
actor into the economic development
and build profitable relationships.
of the USA.
The database of Dun & Bradstreet
Dun & Bradstreet (D&B) grows the most
valuable
relationships
in
covers
more
than
220
million
businesses in over 200 countries.
business. By uncovering truth and meaning from data, they connect customers
with
the
prospects,
suppliers, clients and partners that matter most, and have since 1841. Nearly ninety percent of the Fortune 500, and companies of every size around the world, rely on their data, insights and analytics.
The long path of more than 150 years in the world, has allowed D&B to crystallize strong bonds with the different
sources
companies,
banks,
of
information:
public
offices,
public records, associations, etc‌ This experience has been capitalized for
D&B
and
overturned
in
It is the world leader in providing
developments
commercial information to the areas of
methodologies of compilation, update,
credit,
processing
marketing,
purchasing,
and
of
efficient
transmission
of
collection management and support
information towards the client, always
services areas. Dun & Bradstreet
orientated to covering with the aims of the clients.
6
D&B EMMA SCORE different
EMMA SCORE (Emerging Market
to
more
developed
economies. The EMMA Score (Entry Market
Mediation Alert Score) is a model of evaluation
of
risk
developed
for
countries on emergent markets. It is a
Mediation Alert) is based on a scale of 1 to 10 where 1 represents the lowest risk and 10 the highest risk of default
punctuation developed with statistical profile approach of information, which
A one digit number from 0 to 5
predicts the possibility that a business
assigned to the business based on
should
of
information in D&Bss file. The higher
instability or distrust, that is to say that
the EMMA class score, the greater the
has problems of paying the debts
likelihood that the organization will
during 12 months and that finally stops
have
paying.
failure.
be
in
risky
condition
Emerging markets do not have the pairings of trade behavior data and actual bankruptcy filings to pass D&B’s criteria for a standard delinquency or failure
score.
The
EMMA
score
acknowledges that there are pockets of an emerging market’s database that are deserving of a risk score sooner, because such businesses are more popular
as
global
suppliers
and
customers. In addition, the Emerging Market Mediation
Alert
(EMMA)
score
provides a standard risk indicator across emerging markets where the conditions indicating risk may be
AR CREDIT MANAGEMENT
late payments or business
EMMA Score Application Low EMMA Score - May proceed to process the applicant quickly with minimal or no manual review depending on the extent of score validation analysis. Medium EMMA Score (Medium Risk Scores). Recommend a manual review of the applicant based on the applicant's capacity, the internal policy and risk tolerance. High EMMA Score (High Risk Scores). Requires thorough manual review of potential decline, or approval
depending
on
the
applicant's capacity, the internal policy and risk tolerance.
7
PAYDEX SCORE The D&B PAYDEX is a unique, dollar
weighted
business's
indicator
payment
of
a
performance
based on the total number of payment experiences in D&B's file. The D&B PAYDEX ranges from 1 to 100, with higher
scores
indicating
better
payment performance. It reflects the payment
habits
of
a
company,
showing how punctual a company is in
80-100: Low Risk of late payment (averages prompt to 30 days within terms) 50-79: Medium Risk of late payment (averages 30 or less beyond terms) 0-49: High risk of late payment (averages 30 to 120 days beyond terms)
its payments. If a company breaches
Paydex gives an objective basis to
payment deadlines, the Paydex index
make decisions on setting credit lines
falls continuously by the number of
and terms. Paydex is one of the factors
days in default.
that come into play in calculating D&B
Payment experiences are gathered by
Scores, which enable predictions on
D&B from suppliers and vendors this firm
does
business
with.
bad-debt risk.
Each
Suppliers, banks, lessors, landlords,
experience reflects a different supplier
and customers all use the PAYDEX
and reflects how bills are met within
for:
relation to the terms granted. Up to 875 payment experiences are used to generate the PAYDEX Score and up to 80
representative
payment
experiences are reported in the credit report.
AR CREDIT MANAGEMENT
Determinate
interest
rates
and
insurance premiums To decide if an account should be forwarded for 3rd party collection Determinate whether to accept a sale, set terms, or reject an account
8
D&B RATING T
he
DB Rating
can help
you quickly assess a firm's size and composite credit appraisal,
based
on
information in a company's interim or fiscal balance sheet and an overall evaluation
of
the
firm's
creditworthiness
This helps you to drive growth and
The DB Rating is made up of two parts and presented in the following format:
increase profitability by: Allowing automated decisions for increased efficiency Enabling
more
decisions
across
consistent the
2A
• Financial strength • Based on Tangible Net Worth from the latest financial accounts
entire
organization Applying scores across an entire portfolio to quickly identify risk and opportunity Allowing faster processing of large
4
• Risk Indicator • Derived from the DB Failure Score but also considerate expert rules and overrides
volumes of transactions
AR CREDIT MANAGEMENT
9
The 1R and 2R ratings categories reflect company size based on the total number of employees for the business. They are assigned to business files that do not contain a current financial statement. For 5A to HH Ratings, the Composite Credit Appraisal is a number between 1 and 4 that makes up the second half of the company's Rating and reflects an overall assessment of creditworthiness. Our creditworthiness assessment is based on both payments and financial stability. In 1R AR CREDIT MANAGEMENT 10
and 2R Ratings, the 2, 3, or 4 creditworthiness indicator is based on analysis by Dun & Bradstreet of public filings, trade payments, business age and other important factors. 2 is the highest Composite Credit Appraisal a company not supplying Dun & Bradstreet with current financial information can receive.
Alternative Ratings
The US 5A to HH ratings reflect company size based on net worth or equity as computed by Dun & Bradstreet. These ratings are assigned to businesses that have supplied Dun & Bradstreet with current financial information.
Rating Classification (Based on Worth from Interim or Fiscal Balance Sheet) 5A $50,000,000 and over 4A 10,000,000 to 49,999,999 3A 1,000,000 to 9,999,999 2A 750,000 to 999,999 1A 500,000 to 749,999 BA 300,000 to 499,999 BB 200,000 to 299,999 CB 125,000 to 199,999 CC 75,000 to 124,999 DC 50,000 to 74,999 DD 35,000 to 49,999 EE 20,000 to 34,999 FF 10,000 to 19,999 GG 5,000 to 9,999 HH up to 4,999 Rating Classification Based on Number of Employees) 1R 10 and over 2R 1 to 9
Composite Credit Appraisal High Good Fair Limited 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 Composite Credit Appraisal Good Fair Limited 2 3 4 2 3 4
INV. Indicates that Dun & Bradstreet is currently conducting an investigation to gather information for a new report. DS. Indicates that the information available does not permit Dun & Bradstreet to classify the company within our rating key. -- (blank). The blank symbol means that the information available to Dun & Bradstreet does not permit us to classify the company within our rating key and that further enquiry should be made before reaching a decision. Some reasons for using a "-" symbol include: deficit net worth, bankruptcy proceedings, lack of insufficient payment information, or incomplete history information. ER. Certain lines of business do not lend themselves to classification under the D&B Rating system. Instead, we assign these types of businesses an Employee range symbol based on the number of people employed. NQ Not Quoted. This is generally assigned when a business has been confirmed as no longer active at the location, or when D&B is unable to confirm active operations.
CREDIT HOLD When a customer is consistently late in making payments, has exceeded their credit limit, or is identified as a bad risk, you can prevent additional credit purchases by placing their account on credit hold. When a customer account is placed on credit hold, you cannot create new sales orders for that customer. However, you can still create transactions
Managing your costumers’ credit hold situation
for that customer in Receivables.
11
Cash flow can either
on credit hold. The
their orders placed on
make or break an
most common situation
credit hold evaluation.
operation.
though, is the need for
You may decide to
it's obvious that the
the
categorize your best
most important way
determine if an order
and
to
Although
software
to
most
important
manage
an
should be placed on
customers to never be
organizations'
cash
automatic credit hold.
placed on an account
flow is its ability to
This would allow the
hold and having a flag
collect
open
credit manager time to
to control this is very
invoices,
managing
investigate whether to
important.
which
customer
“force” the release of
should be extended
the order or to contact
Next, designate a flag
what credit and which
the account and notify
to control the logic of
should be extended
them of the situation.
placing accounts on
on
no credit at all, are mutually important.
There
may
unfortunate that
you
be
the
situation decide
to
place an entire account
credit hold under one of To start, designate a
the following situations:
flag in your customer
Is the account over
master file that will
their credit limit?
control
whether
the
Is the account past
customer should even
due?
be subject to having
Both AR CREDIT MANAGEMENT
Managing your costumers’ credit hold situation
12
AR CREDIT MANAGEMENT This means that if the
It is critical that your
your credit manager
account is coded as
software
with immediate access
logic 1, their orders will
staff when orders are
to
be placed on credit
placed on credit hold
enables them to make
hold if they are over
and the reason why.
decisions
their credit limit. Logic 2
This way your staff can
immediate action.
will place their orders
properly communicate
Armed with
on hold if they are past
the situation with the
information, it is the
due, and logic 3 if either
customer
credit manager's ability
one is true.
immediate action as
to
necessary
while
customer the order or
protecting
allow it to go through.
notify
Next, identify the dollar
properly
amount each one of
your assets.
your
customers
your
and
take
and
either
that
take
all this
deny
the
How they chose to do
will
it, is
walking
the
Once
limit. As orders are
placed on credit hold, it
the
organizations
being
immediately
assets
or
in
order
is
have as their credit
processed
an
information
appears
your system, have your
on the credit manager
system
evaluation screen. This
instantaneously check
screen should provide
the
order
amount
against the available credit balance which is calculated by simply subtracting the amount currently due on the account receivable
(accounts open
amount) from the credit limit.
balance of protecting
building
customers for life.
CREDIT TERMS T
Credit terms are the payment requirements stated on an invoice. It is fairly common for sellers to offer early
payment terms to their customers in order to accelerate the flow of inbound cash. This is especially common for cash-strapped businesses, or those that have no backup line of credit to absorb any short-term cash shortfalls.
he credit terms offered to
normal payment in 30 days, then the
customers for early payment
terms are stated as "2/10 net 30".
need to be sufficiently lucrative
for them to want to pay early, but not so lucrative that the seller is effectively paying an inordinately high interest rate for the use of the money that it is receiving early.
The concept of credit terms can be broadened
terms is to first state the number of
the invoice date in which to take
associated with early payments. If so,
the credit terms: The amount of credit extended to the customer The time period within which payments must be made by the
terms.
customer if
a
customer
is
supposed to pay within 10 days
Early payment discount terms The penalty to be charged if
without any discount, the terms are "net 10 days," whereas if the customer must pay within 10 days to qualify for a 2% discount, the terms are "2/10". To expand upon the last example, if the customer must pay within 10 days to obtain a 2% discount, or can make a
13
entire
are made, rather than just the terms
advantage of the early payment credit
AR CREDIT MANAGEMENT
the
arrangement under which payments
days you are giving customers from
example,
include
the following topics are included within
The term structure used for credit
For
to
payments are late Credit Terms
Explanation
Effective Interest
Net 10
Pay in 10 days
None
Net 30 Net EOM 10 1/10 Net 30 2/10 Net 30 1/10 Net 60 2/10 Net 60
Pay in 30 days
None
Pay within 10 days of month-end
None
Take 1% discount if pay in 10 days, otherwise pay in 30 days Take 2% discount if pay in 10 days, otherwise pay in 30 days Take 1% discount if pay in 10 days, otherwise pay in 60 days Take 2% discount if pay in 10 days, otherwise pay in 60 days
18.2% 36.7% 7.3% 14.7%
Cost of Credit You should be aware of the formula for
result into the discount percentage.
determining the effective interest rate
For example, under 2/10 net 30 terms,
that
customers
you would divide 2% by 98% to arrive
through your early payment discount
at 0.0204. This is the interest rate
terms. The formula steps are:
being offered through the credit terms.
1.
3.
you
are
Calculate
offering
the
difference
Multiply the result of
both
between the payment date for those
calculations together to obtain the
taking the early payment discount, and
annualized interest rate. To conclude
the date when payment is normally
the example, you would multiply 18 by
due, and divide it into 360 days. For
0.0204 to arrive at an effective
example, under 2/10 net 30 terms, use
annualized interest rate of 36.72%.
this number to annualize the interest rate calculated in the next step. 2.
Subtract
the
discount
percentage from 100% and divide the
AR CREDIT MANAGEMENT
Thus, the full calculation for the cost of credit is: Discount % 360 x (1-Discount %) (Payment days-Discount days)
14
Bankruptcy? Which exit to choose?
B
ankruptcy; to start talking
Bankruptcy filings in the United States
about this financial state
can fall under one of several chapters
we first going to define the
of the Bankruptcy Code, such as
word. A legal proceeding involving a
Chapter 7, Chapter 11 and Chapter 13.
person or business that is unable to repay
outstanding
debts.
The
bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors (less common). All of the debtor's assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt.
Chapter 7 bankruptcy is a liquidation proceeding in which the debtor's nonexempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities established in the Code. The case is begun by filing the official petition, schedules and statement of financial affairs. These forms prompt
Bankruptcy offers an individual or
you to list all of your assets and all of
business a chance to start fresh by
your debts, along with some recent
forgiving debts that simply can't be
financial history.
paid while offering creditors a chance
important and most time consuming
to obtain some measure of repayment
part of a bankruptcy filing. It is
based on what assets are available.
important that every creditor is listed in the
This is the most
schedules
with
an
accurate mailing address. You must list all of your debts, even if the debt is non dischargeable or if you intend to reaffirm the debt. The schedules also list your property, any debts secured by that property, and the BANKRUPTCY 15
sale value of the property. "Property"
consuming, and complex. Chapter 11
here means "assets" or "possessions",
is
not just real estate.
however, for a small business seeking
Chapter
7
bankruptcy
protection
allows debtors to get rid of most of their debts and start over with a clean slate. But it also has its drawbacks, including the loss of property and a depressed consumer credit score.
to
the
only
bankruptcy
restructure
operation
if
it
and is
option,
continue owned
in
by
a
partnership, limited liability company, or corporation. Chapter 11 is also the only bankruptcy option for individual business
debtors
who
want
to
reorganize but owe too much money to Chapter 11 is a form of bankruptcy
meet
that involves a reorganization of a
requirements.
Chapter
13’s
eligibility
debtor's business affairs and assets. It is generally filed by corporations which require time to restructure their debts.
Under Chapter 11, a debtor can restructure its finances through a plan of reorganization approved by the
Chapter 11 is an option of bankruptcy
bankruptcy
for small business. Generally, small
obligations and modifying payment
businesses shy away from Chapter 11,
terms, a Chapter 11 plan can help a
because it is expensive, risky, time-
debtor
BANKRUPTCY
court.
balance
By
its
reducing
income
and 16
BANKRUPTCY
17
expenses, regain profitability, and
than $383,175 in unsecured debt or
continue in operation. Under Chapter
$1,149,525 in secured debt.
11, a debtor also can sell some or all of its assets so it can downsize its business if necessary or pay down claims that it owes.
A U.S. bankruptcy proceeding in which the debtor undertakes a reorganization of his or her finances under the supervision and approval of the courts. As
part
of
the
reorganization, the debtor must submit and follow through with a plan to repay outstanding creditors within three to five years. In most circumstances, repayment provide
the
plan a
must
substantial
payback to creditors - at least equal to what they would receive under other Another type of bankruptcy option is
forms of bankruptcy - and it must, if
Chapter 13. Chapter 13 can be a
needed, use 100% of the debtor's
restructuring
small
income for repayment. Chapter 13
businesses owned and operated by
bankruptcy differs from the outright
individuals
foreclosure
option
(that
for
is,
sole
of
an
individual's
or
proprietorships). Only individuals may
business's assets (seen in Chapter 7
file Chapter 13, so it is not an option for
bankruptcy) and the expensive and
businesses
complicated restructuring of debts
partnerships,
operated
through
limited
liability
seen
in
Chapter
11
bankruptcy.
companies, or corporations. Chapter
Essentially, Chapter 13 allows a debt-
13 eligibility is also subject to debt
laden person or sole proprietorship
limits. Currently, an individual cannot
that still has significant income to
file Chapter 13 if he or she owes more
submit an orderly plan to the courts to
pay back debts over a few years.
may at least 80% of the obligations
Doing so can provide advantages to
past due as of the date of the filing.
the debtor not found in other forms of
Under the LCM, eligibility is presumed
bankruptcy, such as preventing the
when the debtor does not have
foreclosure
residence.
sufficient assets to attach after a
The options for bankruptcy that we
default, there are no persons with
been analyzing are just valid for USA,
authority present, or where the court
in the case of MĂŠxico there is a law
determines
called Ley de Concursos Mercantiles
fraudulently conveying its assets to
which is the one in charge of the
avoid the payment of obligations.
of
a
bankruptcy in this country. A case under the LCM may be commenced by (i) the debtor, (ii) a creditor or (iii) the Attorney General (Ministerio PĂşblico). Under the LCM, a debtor is deemed to have "generally defaulted on its payment obligations" if: (1) a payment default has occurred with respect to the claims of at least two creditors; (2) payments are past due for more than 30 days and represent 35% or more of all the debtor's payment obligations as of the date of the filing; and/or (3) the debtor does not have liquid assets (e.g.,
cash
deposits,
that
the
debtor
is
In general, foreign companies may not be subject to bankruptcy proceedings in Mexico. The LCM, however, does allow
for
the
reorganization
of
branches and subsidiaries of foreign companies. The LCM also permits the recognition of foreign proceedings under "Titulo XII," which like Chapter 15 of the U.S. Bankruptcy Code is based on the UNCITRAL Model Law on CrossBorder Insolvency. Indeed, Mexico was one of the first countries to adopt the
Model
Law.
short-term
securities, and accounts receivable) to
BANKRUPTCY
18
In collaboration with the Ministry of Finance and Public Credit, we have prepared an informative article to learn more about this organization.
What is CONDUSEF? According to the Secretariat of Finance and Public Credit, the CONDUSEF is dedicated to two types of actions: Preventive (guide, inform, promote financial education) and Corrective (handle and resolve complaints and claims by users of financial services and products).
The CONDUSEF is committed to promoting Financial Literacy among the population, continue with the development of products and tools to support, advise and guide users
19
of financial services, Always seek a fair and equitable relationship between users and financial institutions.
How to claim financial and banking services? On more than one occasion we go to the bank and left with the same questions that we walked in or even more and some additional problem. At such times, it is normal to feel unhappy and we have to redo queue so that we again meet us and probably will again leave unanswered again. That is why there is the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF), which aims to ensure the defense of the rights of banking users as consumers.
MEXICAN FINANCIAL SYSTEM
Although the Condusef is an organ of defense, the entity also controls sofoles, sofomes, credit information companies, brokerage firms and exchange, investment and savings, credit unions, insurance, bonding and Afore, among other.
What can be claimed in CONDUSEF? The CONDUSEF answers questions related to all types of financial products and services commercialized in the country, but it is remarkable that only handled claims on product characteristics, the shape of the operation, on the treatment of employees and commitments the parts.
You can claim credit and debit cards, free of commission, commission checks with insufficient funds checks, as well as auto insurance, medical expenses and life.
What cannot be claimed at CONDUSEF? In no way conflicts are handled due to the costs involved in hiring a product or service, as well as those relating to the interest rate. Nor can claim matters relating to internal policies of banks, provided they are not too hardened.
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How to make a claim on the CONDUSEF? There are numerous ways to contact the CONDUSEF. It can be done through the Call Centre (CAT) to the number 01800999 8080, toll free from anywhere in the country for information, advice and even initiate a complaint or to 53,400,999, for the Federal District and metropolitan area with the same functions. It can also be made by email to the email asesoria@condusef.gob.mx or Headquarters You can also make claims in the 32 regional offices and three existing metropolitan throughout Mexico.
What should be a claim to the CONDUSEF? Complaints to the National Commission for the Protection and Defense of Financial Services Users should indicate the name and registered representative claimant or person, provided it is a legal person or minor. You must also enter a description of the service that is requested and a brief statement of the facts underlying the claim. It is also essential that the letter provided the name of the financial institution with which the claim is made. A copy of the documents certifying the reason for the claim must always be attached. Otherwise, CONDUSEF may reject your claim as unfounded. The claim is approved, it could arrive a 'Settlement Hearing "so we can solve your problem with the financial institution.
MEXICAN FINANCIAL SYSTEM
21
MEXICAN FINANCIAL SYSTEM
BANCO
DE
MEXICO
“Our central bank� INFORMATIVE ARTICLE
The Bank of Mexico is our central bank and helps the financial system of our country to develop healthily. The financial system is a set of institutions like banks, investment companies, insurance companies, sofoles, brokerages, and other more. These financial institutions facilitate the access of people and businesses payment systems, ie, checks, credit cards and debit cards, wire transfers and any other system through transfers which it was money.
Imagine the amount of money paid through the system payment within three business days equal everything produced in the country on a year. For a financial system works well it is necessary that the payment systems are safe and efficient. Located in the Mexico City, was founded on August 25, 1975 by then President of our country, Mr. Plutarco Elias Calles and its main objective is to achieve stability in the purchasing power of the national currency. The Bank of Mexico is the only institution that can issue national currency for all transactions in our economy are made. Mexico is one of the few countries that manufacture their own notes and coins. For that there is the Banknote Factory and the House of Currency. The Bank of Mexico makes sure you have the money needed to cover all needs without any inflation; ie that prices of goods and services no increase to the point where we can buy less with the same amount of money. Care price stability is one of the most important responsibilities Bank of Mexico. A series of measures that this institution applies antiinflation is called monetary policy. The Bank of Mexico is not a commercial bank, so that neither individuals, nor businesses can open an account at the central bank.
As only grants loans to commercial banks is said to be a bank of banks. The Bank of Mexico, like most central banks around the world, It is autonomous. This means that the government cannot intervene directly on how it is handled. This autonomy prevents, for example, any authority to order the bank to pay money or even issuing more money than desirable Bank of Mexico considers it important to improve public understanding of what is and what makes central banking in our country, in particular regarding their action aimed at maintaining price stability, ensure the healthy development of the financial system, ensure smooth operation of payment systems and provide a means of secure and reliable exchange so that people can realize their economic transactions.
MEXICAN FINANCIAL SYSTEM
How the Bank of Mexico seeks to control inflation? To a great extent, combating inflation has been possible thanks to the institutional foundations of the Central Bank. There are 3 fundamental elements. The first has to do with the primary objective of Bank of Mexico, established by the Constitution, is to ensure stability purchasing power of the currency. This command leaves no doubts about the basic orientation of the tasks of the Bank of Mexico. A second foundation is that, also by constitutional provision, The Bank of Mexico is autonomous in the exercise of their functions and their administration. A third institutional pillar is increasing transparency in the conduct of monetary policy. Like any public body, the Bank of Mexico is held accountable for the performance of their duties. Furthermore, the exercise of its powers and, in particular, the determination of monetary policy, requires a clear external communication. To this effect, the Bank of Mexico produces and disseminates statistics and research papers. It also issues to meet requirements its role as regulator. In terms of its objective priority, the law obliges him to submit to the Executive and the Legislative one statement on monetary policy at the beginning of each year, a report each semester on its implementation.
22
Moreover, since 1995 the Bank of Mexico publishes its statement Weekly, which among other things contains the level of the reserve international as well as the main accounts of its balance sheet, whose movements allow knowing their market operations to meet demand for money from the public. Since 2000 the Bank of Mexico reports a quarterly report that explains the evolution of inflation and the foundations of monetary policy It must be remembered that central banks do not determine prices, but these are the result of the interaction of businesses and consumers in the markets of different goods and services. However, when the general level of prices registered inflation continued growth exists. Ultimately, inflation is a monetary phenomenon, which corresponds to the Central Bank guide expectations and price formation in the economy through their actions to control. Since 2001 the Bank of Mexico formally applies a strategy based on inflation targeting, which means that monetary policy is "anchor" the commitment of the Central Bank to apply its tools to achieve the stated objectives. In the monetary program that year the Bank of Mexico established that the annual inflation target is three percent from December 2003. This rate is consistent with price stability, once considered the upward bias indices corresponding, which do not consider aspects such as increases in product quality and changes in consumption patterns.
23
The target of three percent represents an ongoing commitment. However, a variability interval of plus or minus one percentage point around this target is included, in order to incorporate temporary deviations from factors outside the scope of monetary policy, such as highly volatile price fluctuations. Since 2008 the Bank of Mexico expresses its monetary policy stance using a benchmark interest rate, which currently is the rate of interbank overnight interest. With the changes in this rate it seeks to influence on public expectations and, through this and other channels on the future inflation trends.
MEXICAN FINANCIAL SYSTEM
We know that the effects of monetary policy occur with long and variable lags, so that decisions in this area should be based primarily on forecasts of the future and therefore be preventive. The problem is that nobody knows the future and therefore the transmission channels of monetary policy may have an uncertain impact. Therefore, central banks take into account all available information. Seek to identify inflation pressures and nature are trying to distinguish whether temporary or permanent, whether they come from pressures of supply or aggregate demand, and at what stage of the cycle the economy is.
Mexican Stock Exchange
M
exico's only securities
The BMV is a private financial
market,
entity, operating by concession
Stock
the
Mexican
Exchange
(in
Spanish, la Bolsa Mexicana de Valores,
or
headquarters
BMV) in
has
Mexico
its City.
Established in 1886 as the Mexican Mercantile Exchange, it adopted its current name in 1975 and is the second-largest stock exchange in Latin America (after Brazil). Its trading system is fully electronic, and its main index is the IPC.
ofthe Secretariat of Finance and Public Credit (Mexico) (SHCP by its initials in Spanish), under Mexico's Securities' Market Law, passed in 1933 with the creation of the modern Mexican Stock Exchange. The main purpose of the BMV is to facilitate share transactions and to push
market
development,
expansion, and competitiveness. The
BMV
was
officially
founded in its modern form in
1933
along
with
the
passing of the Regulatory Decree of the General Law of Credit
Institutions
Auxiliary which
Organizations,
deals
relative
and
to
on the
matters trade
of
securities within the country. On August 26, 2014, BMV became
the
12th
stock
exchange to join the United Nations
Sustainable
Stock
Exchanges initiative.
24
MEXICAN FINANCIAL SYSTEM
25
MEXICAN FINANCIAL SYSTEM
SECURITY The types of securities exchanged through the BMV include stocks, debentures, government and corporate bonds, warrants and other derivatives. Shares of initial public offerings can be made available through the BMV. The Mexican Stock Exchange's roles include facilitating securities trading, making securities information available to the general public, promoting fair market practices, ensuring transparency and contributing to the growth of jobs and the economy in Mexico.
BMV equities market. It operates by concession of the Secretariat of Finance and Public Credit. Until its IPO BMV was owned by its members, which were a group of banks and brokerage firms. The exchange trades debt instruments including Federal Treasury certificates (CETES), Federal Government Development bonds (BONDES), and Investment Unit bonds (UDIBONOS), Bankers acceptances, and promissory notes with yield payable at maturity, commercial paper and development bank bonds. In addition, it also trades stocks, debentures, mutual fund shares, and warrants. Trading is conducted electronically through the BMV-SENTRA Equities System.
Most important companies
STRUCTURE
BMV is now a public company following its IPO in June 2008, and its shares are traded on the
AFORE I
t's
a
Mexican
(Retirement
workers. From August
financial company
Funds Administrators)
2005,
specialized
were created by the
services
Social
Mexicans.
in
managing
and
Security
Act
(LSS) in May 1996,
for
and
starting its operation
safely,
in 1997 with the aim
workers
of providing personal
retirement
millions
of
affiliated
to
the
accounts of workers
Mexican
Social
Security
Institute
generated throughout
(IMSS). Seeking the
his working life, could
best
grow with the returns
possible
performance
during
the investment cycle of resources. Previously
and
the
generated. Its
Ministry
of
The
by
is the
Finance
their
to
all
salary
he
receives is deducted an
amount
which,
together
with
other
amount
that
your
employer contributes and
operation
authorized the
savings
offer
provides
amount
than
other the
government,
a
savings fund (which is
and Public Credit and
their
workers affiliated to
supervised
by
the
accounts), which put it
the
CONSAR
(National
to work is formed (as
System
invest) from day one
pension
resources
IMSS,
were
administered by such
Commission
institution in one joint
Retirement Savings).
account
without
obtaining
yields.
Subsequently
the
Since July 1997, the AFORES manage the savings of the IMSS
individual
and will generate a return to the worker. Thus, gradually grows saving for the future.
HOW DOES IT WORK?
investing the savings
voluntary
26
AFORE
MEXICAN FINANCIAL SYSTEM
OTHER FUNCIONS 27
Providing information
BENEFITS
material on the (SAR) 1. You can improve the lives of retirees
system. Having a Specialized Unit
for
Public
2. Increase domestic savings 3. Increase productive investment
Attention to address complaints
and
grievances. Perform
resource
transfers SAR 92-97 to
your
individual
account. Provide at least 2 statements annually. Have an Investment Company Specialized
in
Retirement
Funds
(SIEFORE)
through
which workers may get better returns on their savings and with very
little
risk.
Through it the Afore can
receive
process
total
SIEFORE
and and
The Siefore is the instrument by which the Afore invests
partial withdrawals.
resources in the individual account of the worker to earn
Keep track of the
higher returns. Siefores are supervised by CONSAR.
resources
for
your
housing subaccount.
Your retirement savings will be deposited in the Siefore that apply to you according to your age.
MEXICAN FINANCIAL SYSTEM
28
MEXICAN FINANCIAL SYSTEM
MARKETABLE SECURITIES Marketable securities are very liquid as they tend to have maturities of less than one year. Furthermore, the rate at which these securities can be bought or sold has little effect on their prices. Examples of marketable securities include commercial paper, banker's acceptances, Treasury bills and other money market instruments.
In this comparative table are demonstrated the marketable securities of a specific type of bank:
Bancomer
Here, are represented the different interest in a short term debt till 1 year and the different types of marketable securities that the bank has. Also, are settled the minimum investments that the marketable securities has to contain.
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MEXICAN FINANCIAL SYSTEM
LIBOR vs. TIIE LIBOR
TIIE
1. LIBOR (London Interbank Offered Rate) is
1. The
TIIE
(Tasa
de
InterĂŠs
the average interbank interest rate at
Interbancaria de Equilibrio) is a
which a selection of banks on the London
representative
money market are prepared to lend to one
transactions between banks.
another 2. LIBOR
rate
credit
2. The TIIE is calculated daily (for comes
in
8
maturities
(from
periods 28, 91 and 182 days) by the
overnight to 12 months) and in 5 different
Banco
de
Mexico
currencies. The official LIBOR interest
submitted
rates are announced once per working day
mechanism
at around 11:45 a.m. In the past, the
conditions in the money market in
BBA/ICE published LIBOR rates for 5
local currency.
by
with
banks
quotes
through
designed
to
a
reflect
more currencies (Swedish krona, Danish
3. The TIIE is used as a reference for
krone, Canadian dollar, Australian dollar
various instruments and financial
and New Zealand dollar) and 8 more
services
maturities (2 weeks, 4, 5, 7, 8, 9, 10 and
products.
11 months). 3. LIBOR
is
such
as
credit
card
4. The interbank equilibrium interest watched
both
rate (TIIE) is determined by the
individuals
Bank of Mexico based on quotations
because the LIBOR interest rate is used
submitted by lending institutions,
as a base rate (benchmark) by banks and
with a start date of publication in the
other financial institutions
Official Journal of the Federation.
professionals
and
closely private
by
4. Rises and falls in the LIBOR interest rates
5. TIIE
is
the
parameter
most
can therefore have consequences for the
commonly used for daily operations
interest rates on all sorts of banking
and
products
placements,
such
as
mortgages and loans
savings
accounts,
loans
operations.
as
well among
as
equity other