Annals of the University of Petroşani, Economics, 21(1), 2021, 91-100 91

STUDY ON THE MICROECONOMIC FINANCING

DECISION

ILIE RĂSCOLEAN, ILEANA-SORINA RAKOS *

ABSTRACT: The purpose of the action taken by the authors is to demonstrate that, in
order to substantiate the financing decision within an economic entity, the starting point is the
principle according to which current assets are financed from short-term sources and fixed assets
- from long-term sources. The financing decision must be taken on the basis of the correlation
between the costs of capital and the profitability of the financing projects. The objective of this
paper is to demonstrate that the objective of an economic entity is to achieve the lowest cost of
capital acquisition, under a reasonable and controllable degree of indebtedness, as demonstrated
by an empirical study on the example of an economic entity in Hunedoara County. The article
concludes with the authors' conclusions on the need to improve the timing of the debt collection
gap and the average debt repayment period, with positive influences on net cash; increasing the
profitability of the economic entity's activity through measures to optimize expenditures; ensuring
financial autonomy for the entity.

KEY WORDS: financial analysis, financial autonomy, cost of capital, financial

decision, economic entity, cost optimization, profitability.

JEL CLASSIFICATION: G29, M41.

1. INTRODUCTION

The diagnostic activity at the end of the financial year, of the state of financial
performance within an economic entity, is performed through the financial analysis. The
purpose of the financial analysis is to highlight the ways in which the financial balance
is achieved, both long-term and short-term, as well as the steps of money accumulation
and profitability of an economic entity.

*
Assoc. Prof., Ph.D., University of Petroșani, Romania, ilierascolean@[Link]
Lecturer, Ph.D., University of Petroșani, Romania, nihilsinedeo_68@[Link]
92 Răscolean, I.; Rakos, I.S.

The object of the financial analysis is defined by the research topics imposed on
an economic entity through various constraints. Mainly, the financial analysis focuses
on how the economic entity can overcome the constraints on performance, solvency,
autonomy and financial flexibility. For financial analysis, data sources consist of
summary accounting documents, such as: balance sheet, income statement and balance
sheet annexes.
The common information found in both documents, respectively, both in the
balance sheet and in the income statement is the net result (profit or loss), as a reflection
of the profitability of the economic entity and the new balance sheet in which it is
found. It is known that the objective of any economic activity is to maximize the profit
obtained, while maintaining a cost of production as low as possible.
Therefore, financial analysis is the basic component of financial management,
and financial management is the art of managing the finances of an economic entity, ie
the relationships associated with the formation and use of its capital and income.
Long-term money management is the process of making decisions in the field
of fund investments, which means that when the manager of an economic entity has to
make certain decisions, such as expanding the business by acquiring new fixed assets,
an important part of this decision will be the consideration of the ability to generate
economic benefits, as well as a positive cash flow. If assets and liabilities are balanced
over time, a balance of cash inflows and outflows and a financial balance of the economic
entity are also ensured.
Therefore, financial analysis data characterize the absolute efficiency in the
management of an economic entity, and the results of the financial analysis allow us to
identify the vulnerable points that need special attention, as their identification allows
the best measures to be taken to eliminate them.

2. RESEARCH METHODOLOGY

The authors in the research approach followed some principles and rules specific
to the research methodology, including the review of the literature, the collection and
processing of conclusive data and information, the synthesis of theoretical and practical
aspects.
The methods used were: deductive research, statistical grouping, observation,
comparison, case study, economic analysis and interpretation of the results
obtained. Theoretical research analyzes and describes the current state of knowledge as
a result of theoretical documentation, both nationally and internationally, and empirical
research complements the theoretical research by putting into practice the information
on the financing decision within an economic entity.

3. FINANCING DECISION AND SHORT-TERM FUNDING SOURCES

The set of activities and operations carried out, starting from the supply of raw
materials, consumables, etc. and continuing with the collection of receivables from
customers - beneficiaries of goods delivered, services provided or works performed, is
the operating cycle of an economic entity, and the financing of the operating cycle is the
 Study on the Microeconomic Financing Decision 93

set of short-term financing, lasting up to one year. In the operating cycle, successive
stocks are formed by buying goods from third parties, storing and processing them, and
finally delivery to customers.
The management of the operating cycle aims at increasing the profitability of
the activity in conditions of diminishing the economic and financial risk. The
harmonization of the profitability-risk relationship is achieved within the balance
between the need for current assets and the sources mobilized for its
completion. Therefore, operating cycle financing provides the sources of financing for
short-term allocations called current assets or current assets.
In order to substantiate the financing decision, the principle according to which
current assets are financed from short-term sources and fixed assets from long-term
sources is respected. Depending on how it is set up, the sources of financing the
operating cycle are from own sources, attracted and borrowed.
Financing the financing cycle from own sources ensures financial autonomy,
and the risk of unforeseen withdrawal of capital is practically non-existent. The
financing of the financing cycle from permanent sources is justified by the renewable
nature of current assets, and if there are no structural changes there is a minimum level
of current assets to be financed.
Attracted sources, also called operating liabilities, have a level, structure and
evolution depending on the characteristics of the operating cycle that determine both the
size of the operating liabilities and their maturity. Until the maturity date, the debts of
the economic entity to third parties are sources of capital attracted to finance some needs
of the operating cycle.
The sources borrowed to finance the operating cycle are short-term loans with a
maturity of less than one year, obtained from credit institutions.

4. FINANCING DECISION AND SOURCES OF LONG-TERM FINANCING

In order to carry out its specific activity, each economic entity needs important
sources of financing both for the operating cycle and for the development, restructuring
and / or modernization activity. Thus, the economic entity, in order to provide long-term
financing sources, in addition to equity (share capital, capital-related premiums,
reserves, current income, deferred income) is constrained to use borrowed capital which
consists of loans from the issue of bonds, medium and long-term loans from credit
institutions and leasing, respectively.
The own capitals are formed from external contributions (the contribution of the
owners, possibly the contribution of the state, of some specialized bodies or
collectivities) and internal (resources that emerge from the self-financing capacity of the
economic entity).
Contributions in cash are sources of direct financing, and in-kind contributions
are forms of indirect financing. The most efficient way to finance permanent capital
needs is through self-financing, but sometimes this is insufficient and it is necessary to
resort to external capital contributions that can be their own, through new capital
contributions, both in cash and in kind or borrowed.
94 Răscolean, I.; Rakos, I.S.

Total self-financing has two components, namely maintenance self-financing

and net self-financing. The maintenance is formed by the establishment of depreciation
and provisions, ensuring the maintenance of the level of assets reached at a given time,
and net self-financing ensures the capitalization of the company, by allocating a share of
profit for development, increasing the financial autonomy of the company.
The basic financial instruments of the capital market are stocks, and by trading
them, some investors have the opportunity to make a profit and at the same time,
economic entities have the opportunity to finance themselves. Investors can make a
profit by buying shares at a certain price and selling at a higher price, and companies can
finance themselves by issuing new shares and selling them to interested investors.
The internal contributions to the formation of own capitals are released from the
own activity ensuring the self-financing with positive effects on the financial
autonomy. In order to carry out specific activities, expenses are incurred and three
categories of income are generated, respectively: operating, financial and extraordinary.
With regard to borrowed capital, leasing is a modern and advantageous form of
financing for the provision of fixed capital elements necessary for the activity of
economic entities.
Leasing is both an alternative form of financing for investment and a form of
trade. Depending on the participants in the leasing operations, there are two forms of
leasing: direct (operations carried out between the manufacturer and the beneficiary) and
indirect (between the supplier and the user there is a specialized company).
Depending on the contractual clauses, there are two types of leasing, operational
(the user returns the good or has the option to extend the contract) and financial (the user
becomes the owner of the good after paying a residual value).
Bond loans represent the equivalent value of bonds issued by public
subscription. After the economic entity has issued bonds, it will regularly pay
interest, according to the assumed obligations, and at the maturity of the loan, the
nominal value of the purchased bonds will be repaid to the investors.

5. THE DECISION AND THE SOURCES OF FINANCING OF AN ECONOMIC

ENTITY FROM ROMANIA

The operational responsibilities of financial management within an economic

entity are divided into three phases of a fundamental cycle, namely a first phase of
financial diagnosis or financial analysis, which assesses the financial situation and
performance of the entity, highlighting the strengths and weaknesses in order to take
managerial measures to eliminate deficiencies and capitalize on those advantages, the
second phase of establishing and making financial decisions based on the analysis and
identification of the best solutions to maximize the value of the economic entity and the
third phase and the control of projects whose implementation has been decided and
allows the identification of deviations from the actual achievements, compared to the
initial projects, as well as the taking of corrective measures.
 Study on the Microeconomic Financing Decision 95

The empirical study was conducted on the example of an economic entity whose
main activity is restaurants and other food service activities. The activity of this entity
takes place in Hunedoara County. At the beginning of 2021, the average number of
employees was 49, the expenses regarding the salaries amounting to 1,480,599 lei. At
the beginning of 2021, the company registered a turnover of 6,012,543 lei and a net
profit of 1,945,238 lei.

5.1. The main economic and financial indicators determined on the basis of the
simplified balance sheet

The main economic-financial indicators were determined based on the

accounting data from the balance sheet, structured according to the financial criteria and
recorded in the financial years 2019 and 2020, being presented in table 1.

Table 1. Structuring the balance sheet according to financial criteria

- lei -
No Explanations In 2019 In 2020
1 Tangible fixed assets 2,376,135 3,302,730
2 Permanent allocations (fixed assets) 2,376,135 3,302,730
3 Inventories 43,245 167,694
4 claims 655,839
5 Cash 1,792,262 1,658,329
6 Cyclic allocations (current assets 3 + 4 + 5) 1,835,507 2,481,862
7 Equity 2,350,045 1,948,504
8 Medium and long term debt 188,509 1,252,061
9 Permanent sources (7 + 8) 2,538,554 3,200,565
10 Operating debts 1,673,088 1,761,393
11 Short-term loans - 822,635
12 Cyclic sources (10 + 11) 1,673,088 2,584,028

Thus, the following indicators were determined:

1) Liquidity indicators
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 2.481.862 𝑙𝑒𝑖
Current liquidity = = = 0,96 (1)
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑑𝑒𝑏𝑡𝑠 2.584.028 𝑙𝑒𝑖

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠−𝑠𝑡𝑜𝑐𝑘𝑠 2.314.168 𝑙𝑒𝑖

Immediate liquidity = = = 0,90 (2)
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑑𝑒𝑏𝑡𝑠 2.584.028 𝑙𝑒𝑖
96 Răscolean, I.; Rakos, I.S.

2) Risk indicators
𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 800.000 𝑙𝑒𝑖
Degree of indebtedness = x 100 = x 100 = 40% (3)
𝑜𝑤𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 1.984.504 𝑙𝑒𝑖

3) Activity indicators
𝑓𝑖𝑠𝑐𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 6.012.543 𝑙𝑒𝑖
Rotation rate of fixed assets = = = = 1,82 (4)
𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 3.302.730 𝑙𝑒𝑖

𝑓𝑖𝑠𝑐𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 6.012.543 𝑙𝑒𝑖

Total asset turnover = = = 1,04 (5)
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 5.784.592 𝑙𝑒𝑖

4) Profitability indicators
𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑜𝑓 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥
Return on capital employed = = (6)
𝑐𝑜𝑚𝑚𝑖𝑡𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

1.959.174 𝑙𝑒𝑖
= = 0,34
5.784.592 𝑙𝑒𝑖

Also, based on the structured data from the balance sheet, the analysis of the
structure rates of the economic entity's liabilities was performed, which allows the
assessment of the structure and financial policy of the economic entity, by highlighting
the composition of liabilities. By financial structure is meant the relationship between
short-term and medium-term and long-term financing that influences the financial
management of the economic entity, by the costs it determines (cost of capital), its
profitability is affected and investment policy is determined.
Therefore, the choice of a certain financial structure is an important aspect of
the financial policy, and the decision of the financial structure depends on the objectives
of the economic entity, the level of expected profitability, as well as the risks
assumed. At the same time, in addition to the internal factors, the decision of the
financial structure also depends on certain factors external to the economic entity, such
as the economic situation - the situation of the financial market, inflation, interest rate
fluctuations.
Thus, the following structure rates of the liability were determined:
1) Financial stability rate (Rsf) which reflects the link between permanent capital
which the economic entity has on a stable basis (for a period of at least 1 year) and the
total patrimony.

𝑝𝑒𝑟𝑚𝑎𝑛𝑒𝑛𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 2.538.554 𝑙𝑒𝑖

Rsf 2019 = x 100 = = 0,60 (7)
𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4.211.642 𝑙𝑒𝑖

𝑝𝑒𝑟𝑚𝑎𝑛𝑒𝑛𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 3.200.565 𝑙𝑒𝑖

Rsf 2020 = x 100 = = 0,55 (8)
𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 5.784.592 𝑙𝑒𝑖

The economic entity is in a favorable situation as a result of the values between

50% and 66% highlighting the permanent nature of the financing, which gives a certain
security to the entity in carrying out its activities.
 Study on the Microeconomic Financing Decision 97

2) The overall financial autonomy rate (Rafg) expresses the entity's suitability
to meet financial commitments, measured by rates that express the degree of liquidity-
solvency and the degree of indebtedness.

𝑜𝑤𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 2.350.045 𝑙𝑒𝑖

Rafg2019 = x 100 = = 0,55; (9)
𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 4.211.642 𝑙𝑒𝑖

𝑜𝑤𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 1.948.504 𝑙𝑒𝑖

Rafg2020 = 100 = = 0,33 (10)
𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 5.784.592 𝑙𝑒𝑖

It is difficult to establish a reference rate, as the share of equity, respect for

liabilities in total liabilities differs from one case to another, depending on both the
financial policy of each economic entity and the specific conditions of each entity. partly
by the efficiency of financial decisions. Thus, in the literature, a rate higher than 0.33 or
33% is recommended as satisfactory for the financial balance.
3) The rate of financial autonomy in the long term allows a more accurate
assessment, through
involvement of the permanent capital structure, as follows:

𝑜𝑤𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 2.350.045 𝑙𝑒𝑖

Raft2019 = x 100 = = 0,92; (11)
𝑝𝑒𝑟𝑚𝑎𝑛𝑒𝑛𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 2.538.554 𝑙𝑒𝑖

𝑜𝑤𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 1.948.504 𝑙𝑒𝑖

Raft2020 = x 100 = = 0,61 (12)
𝑝𝑒𝑟𝑚𝑎𝑛𝑒𝑛𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 3.200.565 𝑙𝑒𝑖

To ensure financial autonomy, equity is considered to be at least half of the

permanent capital, ie (0.5). Below this limit, the economic entity would be in an
unfavorable situation with regard to the risk of insolvency and would thus be affected
by its financial autonomy, which is not the case for the entity under analysis.

4) The global indebtedness rate (Rîg) measures the share of debts in the patrimony
economic entity and expresses the degree of dependence of the entity on financial
resources from third parties:

𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑠 1.861.597 𝑙𝑒𝑖

Rîg2019 = x 100 = = 0,44 (13)
𝑡𝑜𝑡𝑎𝑙 𝑝𝑎𝑠𝑠𝑖𝑣𝑒𝑠 4.211.642 𝑙𝑒𝑖

𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡𝑠 3.836.089 𝑙𝑒𝑖

Rîg2020 = x 100 = = 0,66 (14)
𝑡𝑜𝑡𝑎𝑙 𝑝𝑎𝑠𝑠𝑖𝑣𝑒𝑠 5.784.592 𝑙𝑒𝑖

The further away the value of this indicator is from 0.5 or 0.66, the higher the
financial autonomy of the company, the lower the risk of insolvency, and the economic
entity has the capacity to borrow.
98 Răscolean, I.; Rakos, I.S.

5.2. Analysis of the financing decision based on financial balance indicators

Also depending on the structure of the financial balance sheet, the financial
balance indicators are determined, respectively the working capital, the necessary
working capital and the net treasury.

1) Working capital (FR) = Permanent sources - Permanent allocations = (15)

= (Equity + Debts on TM and TL) - Fixed assets
FR 2019 = (2,350,045 lei + 188,509 lei) - 2,376,135 lei = 162,419 lei
FR 2020 = (1,948,504 lei + 1,252,061 lei) - 3,302,730 lei = - 102,165 lei

2) Equity (FRP) = Equity - Fixed Assets (16)

FRP 2019 = 2,350,044 lei - 2,376,135 lei = 153,909 lei
FRP 2020 = 1,948,504 lei - 3,302,730 lei = - 1,354,226 lei

4) Working capital requirements (NFR) = (Stocks + Receivables) - Operating

liabilities (17)
NFR 2019 = 43,245 lei - 1,673,088 lei = -1,629,843 lei
NFR 2020 = 823,533 lei - 1,761,393 lei = - 937,860 lei

5) Net Treasury (TN) = FR – NFR (18)

TN 2019 = 162,419 lei + 1,629,843 lei = 1,792,262 lei
TN 2020 = - 102,165 lei + 937,860 lei = 835,695 lei

The analysis of these results reveals the following aspects:

- the working capital in 2019 registered positive values which means a state
of financial equilibrium, the permanent allocations in fixed assets being
covered in their entirety from permanent sources consisting of equity and
medium and long term debts with a maturity of more than 1 year ;
- the process of financing fixed assets generates a working capital surplus that
can be used to finance operating needs;
- the working capital recorded positive values, which means that the
financing of fixed assets can fully insure their own capital, there is even a
surplus that can be used to finance current assets;
- in 2020, the working capital recorded negative values, so that the permanent
allocations in fixed assets are partially financed from permanent sources
consisting of equity and debts with a maturity of more than 1 year, with the
possibility of resorting to short-term financing sources in to the detriment
of some needs of the operating cycle;
- the share capital of the analyzed entity is 220 lei, specific to limited liability
companies;
- the profit realized in 2019 was distributed in full for the granting of
dividends, so that, although the entity made a profit, it does not go through
a capitalization process, the profit not being allocated for development; and
the one from 2020 was an element of the own capitals to be distributed;
 Study on the Microeconomic Financing Decision 99

- reserves were set up in the amount of 3,047 lei;

- debts with a maturity of more than 1 year represent debts from leasing
operations, in the amount of 188,509 lei in 2019 and 1,252,061 lei
respectively in 2020, which consist of a leasing contract regarding some
means of transport necessary for the good development of the activity. ;
- The required working capital was negative in both years, which means
that cyclical allocations in inventories and receivables are lower than
operating liabilities, such as debts to suppliers, debts to the state - taxes and
duties, debts to various creditors, debts to employees;
- notes that there is a favorable gap between the average duration of debt
collection and the average duration of debt repayment, with positive effects
on net cash;
- During the analyzed period, the net treasury registered positive values,
which means a state of financial balance that ensures the financial autonomy
of the economic entity, being the result of a profitable activity and the
synchronization of receipts with payments.

6. CONCLUSIONS

From the analysis made, some conclusions can be drawn regarding the economic
entity in question. Thus, it can be said that the financing decisions influence the financial
structure of the company as well as the average cost of capital, the objective pursued by
the management being to obtain the lowest cost of capital acquisition, under conditions
of a reasonable and controllable degree of indebtedness.
Therefore, the financing decision must be taken as a result of the correlation
between the costs of capital and the profitability of the projects undertaken. The normal
values recorded by the financial stability rate place the economic entity in a favorable
situation and highlight the permanent nature of the financing, which confers a certain
state of security in carrying out its own activity. Also, the rate of financial autonomy
indicates a satisfactory level for maintaining the financial balance, and the overall
indebtedness rate indicates an increase of financial autonomy, the risk of insolvency
being quite low and the economic entity having the capacity to borrow.
The analysis of the financial equilibrium indicators shows a state of financial
equilibrium, the permanent allocations being fully covered by permanent sources
consisting of equity and medium and long-term debts, with a maturity of more than 1
year. Also, the process of financing fixed assets generates a surplus at the level of
working capital that can be used to finance some needs of the operating cycle.
Particular attention should be paid to permanent allocations as in 2020 they were
partially financed from permanent capital and debts with a maturity of more than 1 year,
there is a need to resort to short-term financing sources, to the detriment of some needs
of the operating cycle, aspect also attributed to the 2020 pandemic year with continuity
in the following years.
100 Răscolean, I.; Rakos, I.S.

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