THE ENTERPRISE`S IMPLEMENTED FINANCING  POLICIES AND ACHIEVED PROFITABILITY IN ROMANIA

Dorin Cosma, PhD, Prof.
University of Timişoara, Romania

Anca-Ramona Botezat, PhD Candidate
S.D.N. Arad, Romania

Introduction

Financial policies of the enterprise are an essential part of its general policy, especially, regarding its content and mission, highlighting the conditions under which the enterprise will place a greater or lesser importance on its autonomy, or will be oriented more or less towards market dominance (Conso 1981). The authors believe that the enterprise when developing financial policies should take into account the financing needs of a certain period of time, the choice of the financing policy depending on whether it is being achieved by its own, borrowed or raised resources, and also by the ratio between short-term and long-term financing needs.

Regarding the financing policies, they include a set of objectives to be financed; this refers to all activity or the major components of activity, the volume and structure of the available resources, the main actions undertaken, the primary responsibility and performers, financing resources, deadlines or intermediate, global and partial indicators. Further, we can say that the financing needs of enterprises will be carried out according to their permanent or temporary character, so that permanent or long time period needs are covered by long-term financing, which can be achieved in different ways and taking into account of the conditions within the enterprise and market. The authors believe that the main objective of the enterprise should be achieving a sustainable profitability.

In the classical theory, regarding the enterprise objectives there is one major objective, namely, maximizing profits, but it did not suit the case when the enterprise wanted to maximize profit in a short or long term period. The scientist who proposed the objective of maximizing was the French economist Cournot, but it was provided only for the monopoly situation. Later, Anglo-Saxon economists were those who adopted the criterion of maximization and the situation of a perfect and imperfect competition, not being operational in the latter case. This is because the enterprise’s shares are influenced by the actions of other enterprises (Brezeanu 1997).  For this case, the objective of maximizing the profit does not take into account uncertainty and risk.

Because of the drawbacks of the operationalily of profit maximization objective, other objectives were established such as the pursuit of profit rate to enable the enterprise to maintain control, maximizing turnover, maximizing the utility function of the enterprise, or any other variable that maximizes the variable in case of the existence of a certain constraint.

The main objective of an enterprise aimed to be studied by us and presented in this article is to maximize profitability. We believe that one of the major objectives of an enterprise is to provide the required capital at the lowest cost to obtain the highest level of profitability.

1. Financial policies of an enterprise

Regarding the financial policies of the enterprise, it is a component of its general policy, with a particular impact on the creation, distribution and use of funds, in order to achieve the current economic and development programs, of increasing operational efficiency and investment cycles and of all activities (Popescu 1996). Generaly speaking, financial policies refer not only to the enterprise strategy in choosing the development opportunities that require financing needs, but also the means of financing them (Cârstea 1999).

In other words, financial policies are the choice of financial conditions (or complex options) of the enterprise to adapt to the environment, being influenced by external constraints generated by the public authority, financial environment (inflation), political environment (economic crisis) (Manolescu 1995).

In addition to those above, financial policies are financial conditions of the enterprise to adapt to the realities under various aspects, especially in terms of rhythm and how to increase capital, financing methods, using of existing surplus in some periods, the organization of structure, namely, leadership from within (Toma 1994).

In other words, financial policies are a set of decisions, options based on the most efficient allocation of capital (Manolescu 2002). Regarding the financial policy decisions the investment decision is closely related to the financing decision, which in its turn depends on the dividend decision, and which on a perfect market are independent.

In our opinion, through the enterprise's financial policies the methods of fund  procurement are established including their rational allocation in destinations, and their efficient use in ensuring financial equilibrium, reducing the cost of capital. This should be  constantly adopted to the concrete conditions of each enterprise, financial conditions of the enterprise to adapt to the environment. We cannot overlook the fact that financial policies are influenced by shareholders, lenders, state, other factors in the external environment, which is achieved by such constraints as monetary policy, taxation, inflation, political and social conditions, technological development, and the control of those who provide credit.

Therefore, it is necessary, first, to determine the needs to be financed, then to make the choice of financing that must be done in parts, in other words, choosing the financing type that fits the enterprise and its conditions best at some point, keeping in mind the idea of obtaining the lowest cost. In this respect there should be a long-term financing plan aimed to maintain global financial stability. Thus, the research deals with considering the necessary funds and  predictable sources. It starts from the internal cash flow created by the the profit, depreciation (better - accelerated depreciation), and when they are insufficient, the external capital, medium and long term loans and ultimately, short-term loans should be requested. In other words, long-term financing may be chosen by the enterprise as a result of long-term financial decisions, and when being summed up determine the overall future development;. As being thoroughly grounded, they are often irreversible. In its turn, short-term financing is due to short-term financial decisions, which are subordinated to the first category, and correlated with each other, having a current character. They are not to be less important for the enterprise; on the contrary, if an error arises and the financing decision is a wrong one, it may have significant repercussions on the enterprise.

It is known that the financial policies of the enterprise are based on the financial structure adopted by it, on its targets for profitability and growth, taking into account the risks. From the policies intended to provide enterprise’s financing, a first draft, and most at hand would be self-financing. It is "the most common financing principle and requires that the enterprise provides its own forces for its development using financing sources as part of the proceeds obtained in the course expired and depreciation fund, covering both the needs for replacement of tangible assets and increase economic assets (Toma 1994).

Also, self-financing is a genuine offer of domestic currency, as an enterprise may have funds without resorting to debt agreements or to obtain new loans (Tudose 2006). Self-financing shall be based on proceeds from depreciation and undistributed profits. Capital recovery is done in order to maintain the level of assets and it is done with internal financing depreciation as a resource, and increasing invested capital in order to increase capital uses and undistributed profits as internal financing resources (Cristea et al. 2001). The decision to self-financing and its level are often influenced by external factors such as taxation, various constraints on access to various financial market or legal constraints (Toma and Alexandru 2002).

In terms of equity in financing the enterprise, its importance is relative. Its role is to provide financing of the enterprise. Capital increase has a triple effect: capital dilution, results dilution and control or power dilution. Add to this the high cost of increases operation, which makes it just a last-resort financing.

However, most available enterprise’s financing policy is the loan, but, definitely, the cost of indebtedness is essential which increases with an increasing volume of loans, opportunity and ability to fall into debt, which depend on the balance that must be maintained between equity and debt. It is clear that this last resort of financing, namely - financing through short-term loan, carries certain risks and depends on the enterprise objectives and manager attitude towards risks. When asking for a loan, enterprises should be able to repay the debt at their maturity, which is achieved only when self-financing is appropriate. Financing policies are, thus, the correlation of the two strategies: the solvency and profitability.

The objective of maximizing profitability focuses on satisfaction of all involved in the existence of an enterprise because shareholders have as objective the obtained profit, managers  - salaries, fame and power, employees -  wages and working conditions, third parties (customers, suppliers, authorities representing the State) - different interests, but most importantly is the state of solvency of the enterprise. As the interests of all those present should be satisfied, it is necessary to create enterprise value, which is then distributed as follows: shareholders (investors), for the risks that they assumed they receive dividends representing a certain proportion of profits; employees receive remuneration for work;  customers (consumers) have the goods and / or services provided by the enterprise, suppliers of inputs for the rental or delivery.

Setting specific performance targets is necessary in all areas and at all levels of management, from the highest hierarchical level, down to the bottom structure of the organization, these goals influencing the success and even survival of an enterprise (Constantinescu et al. 2000). The enterprise performance  is assessed not only by profitability, but also  its ability to create additional value, by increasing its asset value (Manolescu 2002).

Financial managers of the enterprise are interested in the results of the financial analysis in order to decide on the financing policy. The information contained in financial statements must be processed through the correlation of different types of financial effort and financial results.

An important point is that financial managers should establish indicators meant to measure the entrusted profitability obtained by the enterprise. It is also essential to know if/in what way the model is most appropriate for assessing the profitability, so that the implemented decisions are correctly assessed, the obtained profitability as a result of the taken decisions is  correctly measured, as in the future this will influence the choice of the best alternative from the ones at  disposal. The choice of indicator categories and their implementation should be monitored and adjusted when necessary, to implement the idea of increasing the enterprise's ability to make the necessary changes, to continuously adjust goals when business conditions require, because good planning helps to anticipate problems and adapt to changes faster.

As to the most important financial information, most probably, it will comprise the indicators of liquidity and solvency, leverage, degree of wear for tangible assets and funds of information, speed of rotation of current assets, the cost of working capital, dividend rate required by the owners and that provided by competitors, marginal cost and price (Bran 1997).

Generally speaking, when profitability is lowering quicker than the interest rate on long-term, the management of the enterprise should analyze the situation so as to focus the assets in another direction of using them or even to proceed to its liquidation or other reorganization procedure, when profitability can be improved.

Returning to the importance when determining the structure of financial resources, the authors consider that when the enterprise aims to maximize profitability, the following circumstances should be taken into account depending on the  financing resources used, namely:

• if financing is made by issuing shares, the increase of capital will be made by cash only if the profitability of contribution shall be at least equal if not superior with the return of capital that was previously invested;
• if financing is made by loans, partial financing by issuing bonds is indicated because the obtained benefit is higher than for the one of a share;
• if financing is made by retaining a part of profit, it is to achieve return on investment when the return of investments is at least at the past ones and if the financial market place does not allow a more beneficial placement of capital at their disposal.

However, we should not forget that one of the primary criteria of decision making for financing is the cost of the capital necessary to achieve it. However, the greatest challenge is finding the method or the mix of factors to achieve optimal growth for profitability, especially, from long term perspective. 

2. Case Study

Analysis of the relationship between financing policies of the enterprise and its profitability will be presented below.  The authors believe that the creation of a panel model is meant to highlight the influences of financing rate of tangible assets, the rate of financial autonomy, the financing rate of stocks, overall liquidity, financing stability rate, financial lever, financial leverage and overall rate of indebtedness on business profitability.

In order to achieve a conclusive analysis we found 21 Romanian enterprises, each 3 from 7 different areas and as we used a specific category of data, given the low degree of accessibility to financial-accounting documents that are necessary to perform this study, we used the publicly traded enterprises. In choosing them, we took into account the fact that for these enterprises the losses are not too large so that to lead to the existence of negative equity. We also took into account the period of the analysis done - between the years 2004 - 2009. In order to perform the analysis of the mentioned relationship, we chose a combined type of the a projection stochastic model which also includes the method of Pooled Least Squares. .

In the considered model the dependent variable is  the business profitability (Y), and independent variables are: the financing rate of tangible assets (), the financial rate of autonomy on term (), the financing rate of stocks (), overall liquidity (), financial stability rate (), financial lever (), financial leverage () and overall rate of indebtedness () for which there will be presented the used formulas for each one:

·                     business profitability(BP) =     (1)

·                     the financing rate of tangible assets (FRTA) =           (2)

·                     the financial rate of autonomy on term (FRA) =             (3)

·                     the financing rate of stocks  (FRST) =  (4)

·                     overall liquidity(L) =                        (5)      

·                     financial stability rate (FSR) =  (6)

·                     financial lever(PL) =  (7)

·                     financial leverage(FL) = (8)

·                     overall rate of indebtedness (ORI) =  (9)

After choosing the model variables we set the type of the model that will be built; this was possible by using the Hausman test the results of which are presented in Table 1.

Since the probability of accepting the null hypothesis for the Hausman test is high, the model to be built will be without effect and the used method is Pooled Least Squares.

The econometric model form without effects can be written:

+ε,                        Where,

α- coefficient of the independent variable, which explains the relative change in the dependent variable y as a consequence of the change in the explanatory variable X, if the other explanatory variables remain constant,

ε- The regression residual term this quantifies the influence of random action, characterized by zero mean and constant dispersion,

i- The number of sections after which the regression is made=21

t – Time period = 1, 2, 3, 4, 5, 6 years.

Sample data and the obtained empirical results 

The used data sample for the enterprises that have adequate data for the period 2004 - 2009, and the descriptive characteristics of the data for the variables used are are shown in Table 2: 

In terms of the recorded values for business profitability the highest are in 2006, both for the average and median and the lowest are those for the average in 2009 and for the median 2007 to 2008. Regarding the overall liquidity, the highest recorded value of the average is in 2007 and the lowest  - in 2008; and for the median the highest value is in 2009 and the lowest i - in 2004 and 2008. It can be seen that the values recorded as the average for the financing rate of stocks and the financial leverage has the best value in 2006, while the lowest financing rate of stocks is in year 2009. The financing rate of tangible assets has the best value for the average in 2004, the lowest being in 2008, while overall rate of indebtedness has the highest value for the average in 2006 and the lowest in 2007. Perhaps, the most uniform in terms of descriptive statistics for average and median are for the financial leverage.

As a next step we checked if the variables are stationary using the Phillips-Perron-Fisher test, which has the null hypothesis of no stationary variables, whose probability of acceptance or rejection is determined as a combination of probability of acceptance or rejection of unit root test Philips-Perron ( PP) applied in individual series.

From the above table it can be seen that the series are stationary, unit root null hypothesis is rejected for all the used variables: for BA, FRTA, FRA, FRST, FSR and ORI with a risk threshold of 5% and for L, PL and FL with a 10% risk threshold.

After checking if the series are stationary, we move to modelling the relationship between business profitability and financing rate of tangible assets, the financial rate of autonomy on term, the financing rate of stocks, overall liquidity, financial stability rate, financial lever, financial leverage and overall rate of indebtedness

The probability column in Table 4 includes the probabilities of accepting the null hypothesis,  and where. As shown, for coefficients and the point estimation has small probabilities, therefore,  these estimated coefficients are significant with a risk threshold of 5%. For coefficients,,,, and probabilities are zero, which means that these estimated coefficients are significant with a risk threshold of 1%.

For point estimates the value of which is close to zero, it was necessary to implement the Wald test to determine if these coefficients are significantly different from zero or not. Since the Wald test value is higher  than the corresponding critical risk threshold of 1%,  coefficients,,,, andare significantly different from zero. In terms of   coefficients  and Wald test values were obtained above the critical value of 3.8 at a threshold of 5% risk, which means that the respective coefficients are different from zero.

Given the estimates point for the coefficients, the model can be presented as:

            (11)

The results of the model can be interpreted in the following way: 

• Between business profitability and financing rate of tangible assets there exists a direct relationship, and for 1% increase of its value we expect an average increase of business profitability by  0.02% and vice versa. So, the more the financing is done with equity, the higher the business profitability is;
• Between business profitability and financial rate of autonomy on term there is an inverse relationship, so that to an increase of 1 % of its value we expect the business profitability to fall on average by 0.01% and vice versa;
• Between business profitability and the financing rate of stocks there exists a direct relationship, so that for an increase of 1% of its value we expect for business profitability to increase ion average by 0.01% and other way around. When stock financing is done in net working capital will increase business profitability.
• Between business profitability and overall liquidity there is a direct relationship, so for an increase of 1% of its value we expect that business profitability will increase on average by 0.02% and vice versa. This means that when assets are financed by current liabilities, business profitability will be influenced in a positive way on long-term.
• Between business profitability and financial stability rate there is an inverse relationship, an increase of 1% of its value we expect business profitability to fall in average by 0.01% and vice versa. So, the biggest share of resources that the enterprises have for a period exceeding one year in total economic resources to cover assets, the more negatively will be affected business profitability on long term.
• Between business profitability and financial lever there is a direct relationship, an increase of 1% of its value we expect business profitability to increase on average by 0.59% and vice versa, this independent variable having the largest positive influence on the dependent variable;
• Between business profitability and financial leverage there exists an inverse relationship, for an increase of 1% of its value we expect business profitability to fall on average by 0.61% and vice versa, this independent variable having the largest negative influence of all the considered variables. So, if the enterprise covers its total debt from equity, the activity will increase business profitability.
• Between business profitability and overall rate of indebtedness there is a direct relationship, for an increase of 1% of its value we expect business profitability to increase on  average by 0.004% and vice versa. Thus, when the enterprise’s activity is financed from other resources than their own, it will increase profitability.

Because the value of is 0.579, it shows that the variation of business profitability is explained in the ratio of 57.93% by the variation of the considered independent variables from this model, the rest being an influence of other factors.

The value of Durbin-Watson statistic test is 1.38, indicating a slight negative autocorrelation for the values of the model residues, a result which depends on the number of observations, the number of exogenous variables in the regression model and the characteristics of variables.

3. Conclusions and further research

We can conclude that the implementation of financing policy at the right time and related to internal factors and external environment is very important , as the desired results can be influenced more accurately in relation to profitability, just as the transfer of influences takes place and vice versa, so that profitability is further affecting  the financing policies that will be applied in the future.

Because of the increasing tough competition on dfferent markets and also the existence of clusters of products and services that do nothing else but force participants to find new ways to resist the market, achieving sustainable profitability is essential for a healthy sustainable development at the enterprise’s level. In this regard, enterprises have at their disposal a number of ways not only to retain their market position, but also to increase their profitability, each with its ups and downs. However, it should be noted that it has been a challenge to find out that most of that method or mix of factors is made to achieve optimal growth on long-term, and profitability, in particular. Thus, given the increasing number of participants from different markets, for many enterprises the main objective is a profitable growth of existing activities. Due to these concerns, enterprises are seeking ways to attain this purpose.

According to our survey results  the sample of the considered enterprises is representative to highlight the importance of establishing and implementing policies to achieve financing to enable the desired level of profitability. In terms of the quality model used, we believe that this is satisfactory, but is necessary to mention the limits of the proposed analysis: first, the conceptual one - in the literature there were given many interpretations regarding the most suitable financing policies, depending on the time evolution of the enterprises and the business environment in which they operate, the observed relationship between this concept and profitability of the enterprise, determined by various indicators to measure them. In this article we have included only some of them, and regarding the methodology limits, we must specify that the amount of the used data for the empirical evidence is insufficient, as well as the period of the analysis done.

As a result of the implementation of the above model we have achieved reliable results and highligted the link between business profitability and financing rate of tangible assets, financing rate of stocks, overall liquidity, financial lever and overall rate of indebtednessis a direct relationship, while between business profitability and the rate of financial autonomy, financing stability rate and financial leverage there is an inverse relationship.

Regarding the possible future direction of research it could be valuable  to find out more about the way how managers choose to implement financing policies for their enterprises, and  if they take it into account when choosing their target -reaching profitability, and vice versa. Even more than a simple preference, it would be interesting to know more about the reasons why the enterprises choose to realize at some point one or another financing policy being at their disposal.

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Lotārs Dubkēvičs, Ivars Namatēvs THE ROLE OF ORGANIZATIONAL CULTURE FOR SUSTAINABLE DEVELOPMENT OF ENTREPRENEURSHIP