FINANZAS

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.

20

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.

29

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