São Paulo – Possessing good financial control that are conducive to managerial reports makes it easier, and even cheaper, for enterprises to raise funds on the market. The tip was given lsat Tuesday (20th) by the PhD at the Getúlio Vargas Foundation School of Economics (FGV) in São Paulo, Claudio Jorge Monteiro, during a lecture to business executives at the offices of the Arab Brazilian Chamber of Commerce, in São Paulo.
“Whatever the market does not know is made up for in pricing, the price of credit goes up, it becomes more expensive and difficult to obtain,” said the specialist on the importance of having information on one’s business organized and available. Monteiro discussed two types of fundraising by businesses, one being banks, and the other, the equity market, either via becoming listed, selling stakes, taking in new partners, letting go of existing ones, etc.
For the two fundraising varieties, Monteiro said having managerial reports is crucial, since they are, in practical terms, the language the market speaks. “It is critical so the market may communicate with the enterprise and ascertain whether it is doing well or not,” he said. The professor listed important aspects of financial control, such as cash flow, treasury, accounts payable and accounts receivable, all of which combined provide a measure of the business’s performance, and may be used on obtaining lower interest rates.
These managerial reports, however, must not contain errors or inconsistencies. “This may cause the bank to overestimate the risk,” said Monteiro. In the case of the equity market, the company sell for a lower-than-actual price. Potential report errors cited by the professor include mixing natural and legal persons’ data. Including partners’ personal expenditures into the company’s statements may cause results to take a turn for the worse. Technical errors may also take place, such as not including certain revenues, among others.
In order to achieve a good financial control, according to Monteiro, a business must have clearly defined job assignments. The person who does the planning cannot be the same one in charge of implementation or control. But according to the FGV professor, 95% of Brazilian businesses have no accounting department, let alone an audited one.
In Brazil, businessmen are often people who are good sellers or manufacturers who lack management skills, unlike modern businessmen who have studied Economics, attended specialization courses abroad, outlined a business plan, and then set up their business, following opportunity studies, among other measures. “The vast majority of these businesses are one-man businesses,” says Monteiro, concerning professionals who plan, implement and control their enterprises.
The lecturer explained to attendees the process a request for credit undergoes in a bank. He discussed the 4Cs (character, capability of management, conditions and capital) which are taken into consideration on assessing a client’s risk profile. Character is assessed by looking into aspects such as timeliness and payment history, management capability entails the strategic decisions made, conditions involve how the industry the company is a part of is behaving, and capital means a company’s figures.
As regards figures, at this time the market’s “totem pole” is the ratio of net debt-to-Ebitda (earnings before interest, taxes, depreciation and amortization). In other words, by what proportion the debt exceeds a business’ cash flow generation capacity. The best-case scenario, according to Monteiro, is for the debt to be payable with three years’ worth of cash flow generation. “Whenever the debt requires over three years to be paid, the bank is going to require further guarantees,” says the professor.
Apart from the client’s risk, banks assess other hazards, also called Cs, such as Collateral, i.e. securities offered, Covenant, i.e. the company’s commitment to a successful operation, Conglomerate, I.e. whether the company is part of a group whose business and finances are in good shape, Cross Selling, i.e. whether the loan can be used as leverage in negotiation so that, for instance, the bank can take charge of the company’s payroll, among other aspects.
According to Monteiro, fundraising via the equity market is usually more expensive. “The process takes longer, is more sophisticated, more detail-rich, and requires specialized consulting,” he said. There are several methods on the market for assessing a company’s value when it comes to raising funds this way, but he told the audience which is best: according to Monteiro, third-party capital (banks) is always cheaper than proprietary capital (equity).
The Arab Chamber president Marcelo Sallum opened the lecture, which was organized and mediated by former director Mário Rizkallah. The meeting was part of a lecture cycle hosted by the Chamber, covering topics ranging from economics and business to law, history, and culture. Registration was free of charge.
*Translated by Gabriel Pomerancblum
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