Cadi University ‫ﺽ‬ ‫ﺍ‬

AYYAD
‫ﺍﻡ‬ ‫ﺍ‬
Faculty of Sciences
Legal ‫ﻭﺍ‬ ‫ﺩ‬ ‫ﺍﻭ‬
Economic and Social ‫ﺏ‬ ‫ﺍ‬- ‫ﺍ‬
Marrakech - Morocco

Course: Financial Engineering

Master MFE

Presenter: Mohamed LOULID

1
Chapter I: Definitions and Objectives
Financial engineering can be understood as a set of tools and operations.
allowing
to leaders to structure or restructure their financing, to support the
development of their firm through external growth operations or to transfer it
in satisfactory conditions;
to allow investors to take control of healthy or struggling companies while
minimizing their contributions;

to dominant shareholders to call on external capital without taking the

control of their company, etc.
To achieve these objectives, financial engineering has gradually equipped itself, over the years,
an empirical method aimed at promoting the management of stable assets and resources
the company.
The upper part of the balance sheet provides an overview of the power dynamics between shareholders.

majority and minority, creditors and managers. Power relations are at

operation center focused on capital, debt, and hybrid securities. From this
perspective, the agency theory that studies shareholder-manager conflicts,
creditor actions, etc. often provides a deep explanation of the mechanisms
financiers, the justification of sometimes complex operations. Reflections on corporate
governance also provides interesting insight into the conflicting interests that
animate these tripartite relations. The operational tools of financial engineering play
a considerable role in the search for the necessary balance of power.

Characterized by its purpose and its field, financial engineering finds its specificity
in the method she proposes, a contingent, developed, innovative, and transversal method.

In contrast to the common solutions provided to corporate finance problems, to

"ready-to-wear", financial engineering falls under "tailor-made finance". The procedures
envisaged and the solutions found are specific to a given problem, adapted to
particular circumstances. They are not intended to be used in other situations.

2
but have a contingent nature.
Financial engineering leads to setups, to elaborate architectures that stand out.
with ready-made solutions. It stands out from more usual financial operations that
require a certain standardization, given their more repetitive nature and the deadlines
very brief often imposed.
Ingenuity characterizes the setups that have been established. Creativity, imagination, innovation
apply not only to the invented tools but also to their arrangement.
Financial engineering is not a purely financial technique. It also involves
business law, taxation law, economics, strategy, etc. The profession of engineer
the financier finds his interest and wealth in this transversal aspect of the discipline.

This book addresses all these aspects; it is composed of two parts:

The first studies the tools of financial engineering through informational tools.
(the diagnosis of the target company and its evaluation) and operational tools, the products (the
securities) and structures (holdings)
The second deals with financial engineering operations, distinguishing between the operations of
development (with maintenance or takeover) and reorganization operations (of the
passive and active).

Engineering, which has gradually replaced the English word in common language.
engineering is generally defined as the set of intellectual activities that
allow for designing a work in a rational and functional way, ensuring
the coordination of the various disciplines that contribute to its realization.

Of ancient origin, the notion is more willingly associated with the military art from which it originates.
in civil engineering, in energy management and raw materials, or, more recently, to
telecommunications and computing, as well as jobs related to money. It has only been since
A few years since the concept of financial engineering made its entrance into the universe of
the company and its shareholders. It imposes itself today even though it is not always easy to...
clearly outline the objectives, the works, or the scope of action.

Who has the expertise? Should financial engineering be considered as a service?

specialized multi-purpose bank responsible for adapting to a wider clientele,
market or over-the-counter operations once reserved for companies that have established
3
 intimate relations with an investment bank? Is it the business of non-banks, firms of
advice of all sizes and origins?

Do financial engineers deserve a specific status? In the banking world,

should they be autonomous, even filial, or on the contrary integrated into structures with
broader purposes of which they would only be the showcase? Moreover, is it still...
bank?

The difficulties encountered in precisely defining the functions of financial engineering,

to locate the optimal position in an organizational chart, in a decision-making process, in
measuring the scope of action, interest, and effectiveness justify the deepening of a
semantic approach.

Originally, the engineer is, in any company, the specialist capable of discerning everything
the technical components of an achievement and who bears responsibility for the reliability of the

selected solutions that he personally chose. Gradually, the sophistication

techniques, the increasing complexity of industrial processes, the diversity of sectors, have
led to work in a team. From now on, he could not claim to dominate the whole alone.
the necessary knowledge for the realization of a project.

Despite its recent nature, financial engineering is not immune to these major trends:
meeting point between securities law, taxation, actuarial science, it requires
also a good knowledge of the economic sectors covered, a skill relating to
foreign or international rules and practices. It is a team, more than a man, that
contributes. This team must have the ability to adapt quickly to
changes by demonstrating creative spirit, to precede or accompany the
reflection of his mandate, to innovate alongside him or to share an acquired knowledge with him

staff. She must be able to align her response as closely as possible with the specifications
required, even if it means reconfiguring even proven solutions for each specific case, and this without
to expose their principal to abnormal risks.

Finally, it is appropriate to refine the spectrum with some reflections on the content of the approach:

- Financial engineering has the primary objective of successfully completing a project.

4
it may - and often must - integrate a dimension of strategic advice or analysis upstream
financial, but it cannot be identified with a mission of an expert that would find its purpose in
the drafting of a report and the formulation of a recommendation whose implementation would be
decided and managed by others;
- Financial engineering provides global responses that rely on
essentially on the support of securities: a syndication of bank loans,
the financing or transfer of a real estate asset, a country risk will only retain its interest if
if they appear to significantly influence the reliability or profitability of an operation
financial encompassing the issues they raise or the opportunities they create:
- The intervention in financial engineering takes time, and ends with one or more
contracts that are rarely contracts of adhesion. The 'negotiation' part is
often at least as delicate as the part 'assembly in the preparation of an operation.'
each of the concerned parties may assert requirements or constraints
particular. Contracts, even if they often contain standard clauses, are indeed the
reflection of the diversity of situations encountered, of the relative negotiation capacity of
signatories of financial innovation.

The present work, whose purpose is to facilitate access for medium-sized retail businesses
and their leaders in the 'high balance' operations, and more specifically 'funds
"own", engages the debate from a micro-economic angle.

Within the defined scope of reflection, four study axes will be selected:

- the intimate knowledge of the company, the subject of the operation, and that of its
Economic or financial potentialities determine a suitable value whose degree of
realism exerts a predominant influence on the balance of an operation, even its feasibility.
The company's 'financial engineering' approach cannot be carried out without it being
well-known in depth, not only from a financial perspective, which corresponds to an approach
of traditional banking commitments, but based on all its potential and weaknesses.
Beyond the traditional appreciation of risk, it is indeed necessary to anticipate a rate of
growth and the induced needs for equity to assess the opportunity of any
intervention.

A thorough investigation, combined with a forecasting approach, serves thus a

5
strategic diagnosis on which the separate asset evaluation will be added. It will be possible to
to deduce a global enterprise value, as well as, in certain cases, the price of values
movable equipment for complex or deferred operations over time.
(1 part. Diagnosis and evaluation).
the legal and tax environment of the company, the objectives of the shareholders,
constitutes in parallel an area of investigation inseparable from the previous one which
leads to the knowledge of the financier's 'toolbox', then its practical mastery.
In addition to the company, the financial engineer must therefore quickly analyze the objectives.
pursued by the protagonists, in order to better satisfy or combat them. A
A finer understanding facilitates a business approach, obtaining a mandate,
the outline of solutions, access to the consensus required if necessary. It also allows to
better read the existing, the unspoken of the organization charts, to precisely locate the centers
of interest in an already established group, to establish, comment on or propose to amend a
map of the perimeters or financial flows to improve their efficiency.

Even without any immediate project in this area, mastering certain techniques
legal or tax enables access to a more complete view of a financial strategy of a
CEO, to make the dialogue with him more substantial, to upgrade.
in the hierarchy of interlocutors, to finally dispel false representations or to thwart
traps. Led in a deliberate manner, the approach to financial tools, already used or
suggested, thus appears as the pivot of a strong relationship.
(2emepart: Financial toolbox.

the operational dimension connects us with the heart of the engineer's profession
financier: the reflection must indeed be validated by the development of products more or less
complexes, more or less capital-intensive, more or less risky, that could be
evoked and then implemented after negotiation. In this regard, the sum division is no longer between

equity-based products and debt-based products, or even between listed businesses and
non-listed. The division of projects depends on the changes induced at the level of positions.
of the shareholder, which determines two types of basic situations.

Is it about opening the capital without significant modification of control, in order to finance
investment or refinance the shareholder? Two solutions can be compared,
you successively choose: private equity or accessing the financial market.
6
Is it advisable, on the contrary, to take or relinquish control? One would then oppose the

free transfer, to the marketing of the transfer-acquisitions whose methods of

financing has become bolder with the rise of leveraged transactions, the
family transmission not excluding, in certain cases, the sale.

These few product lines require benefits from intermediaries.

different and complementary competitors: address book, technical expertise, financial power,
acceptance of the risk. The measures implemented must be in accordance with the products
proposed for the selected customer segments.
(3thsection: Products (engineering).

7
 Leverage Buy Out

Introduction

The year 2000 reached new heights in terms of corporate acquisitions, leading to its
an increase in leveraged operations such as LBO, LBI, LMBO,... In Europe we have
counted no less than 503 MBO / MBI operations for a total amount of over 37
billions of euros in 2000.
The LBO is often a solution for a family succession or a sale by a group.
from a division. The value creation often observed during an LBO cannot be explained
not by leveraging, nor by the deductibility of financial expenses, but much more by the weight
debt that strongly encourages leaders to manage the company they become responsible for.
often on this occasion shareholders, which increases their motivations.
The level of profitability of invested capital, often significant, of this type of operation
It is explained to him by the leverage effect generated by the heavy use of debt.
The Leveraged Buy Out (LBO) is the financial technique used by investors
eager to acquire a profitable company but only having financing means
limited internal considerations regarding the value of the target company to be acquired, the proportion between the two

elements generally ranging from 0% to 50%.

I - Definition:

The LBO is a transaction that involves acquiring a healthy company through significant use of
indeed, a holding company is created which goes into debt to purchase a
target company whose available cash flows will be regularly reported to
level of the holding through dividends in order to allow it to pay the interest on its debt and
to reimburse her.
A LBO is carried out around an existing management (this is referred to as Leverage Management.
Buy Out, LMBO) or a new management team and is funded with equity by
specialized private equity funds. The arrangement is based on
debts with different repayment priorities (senior debt, junior debt, mezzanine debt)
and therefore increasing risks and rewards.

8
II-The steps of an LBO transaction:

First step: identify an investment fund

The first step of an LBO is to identify the investment funds likely to

participate in this type of operation and choose the one who will support the business. Indeed, the funds
Investment is classified based on the amounts involved in the transactions.
to which they participate: 10 million francs, 100 million francs, one billion of
francs and beyond, etc. A 'Private Equity' fund, which conducts operations on
unlisted companies receive an average of 200 applications per year, but complete an average of 10
business. It is also necessary to define the structure of the management team that will lead the
company after the takeover. It must include all the necessary skills in order to
to develop a plan for at least 5 years: finance, sales, marketing, factories, logistics, resources
human.

Second step: build the business plan

Once the fund is chosen, the second step is to build the business plan, or plan of
business development. This plan is designed according to an iterative process.
Financial investors, like strategic investors, express their opinion on
the opportunity for an investment based on a business plan. It is from the documents
the constituent that every investor will be able to form an opinion and a conviction.
These documents generally include:
• A memorandum of explanation
• Financial projections
• Studies
• Appropriate presentation documents
The assumptions of the business plan are very important and will allow for the construction of the
financial and legal framework constituting the operation. The preparation stage of an operation
strategic (whatever it may be) is long, often tedious, but strategic, since it
allows you to lay the foundations of your future building (project), and therefore prepares the conditions for

sharing of the value creation that you will achieve as your ambitions grow

9
realize.

Third step: determine the debt leverage and establish the structure
Financier

The most delicate part of an LBO operation is determining the level of leverage.
the principle of the LBO consists of investing the least amount of capital possible in the acquisition price and to

maximize debt. It is necessary to find a balance between capital and debt, depending on the
valuation range, projected cash flows, and expected EBIT. Once the debts
reimbursed, the small capital acquired will be multiplied at the time of the investors' exit,
a few years later.
The financial setup includes the structuring of debt between senior debt and mezzanine.
This senior debt is the bank borrowing taken on to finance an acquisition through leverage.
It lasts for a period of three to seven years. The senior banker has guarantees on the assets.
from the buyout holding. Mezzanine is a hybrid financing between senior debt and equity.
clean. Its repayment occurs after that of the senior debt. In return, it offers
generally a higher remuneration.
The investment fund is responsible for finding banks capable of syndicating and raising
the debt. This work is not easy. Indeed, the level of remuneration for the actors who lend
the funds in the context of an LBO are extremely low, but their exposure to risk is
strong. The commission rate for banks that syndicate debts is 2 to 4% of the amount
loaned for periods of 5 to 7 years, with, in some cases, a high risk of seeing the company
not functioning. Certainly, the bank is secured on the business assets or other elements,
but her pay remains low while she takes risks in a field that she
is not a specialist. When the leading bank is chosen, the management team must make
proof of his motivation and demonstrate the strength of his business plan.

Last step: negotiate with the seller and sign

Once the debt is structured, the sellers and buyers set a final acquisition price.
This is followed by a period of several months during which the appointed auditors
the buyer reviews the thousands of pages that the seller has prepared to present
the company. The buyer's auditors can consult all of these documents in
a special room, the data room. After the seller and the buyer have agreed on a
10
approximate price level - in our case, a number of price adjustments are
intervened between August and December 2000 –, begins a period of due diligence during
which a certain number of people and businesses appointed by the buyer proceed with
to financial audits, Resuming also means creating 69 environmental, commercial,
marketing, whose objective is to verify the viability of the business against the validity of the data,
related to the activity, proposed by the seller.
Once the negotiation is completed, the deal can be signed at the time of a meeting called
closing.

III - The general mechanism of the LBO:

The level of leverage must take into account:

1- Forecasted cash flows of the target:

The feasibility of an LBO is determined by its ability to repay the loans.

of acquisition, thanks to future cash flows.
It is these flows that the lending bankers will analyze, checking that the overall debt
The holding and the target remain compatible with certain reference prudential ratios.
VThe indebtedness of the holding company is determined based on the capacity.
self-financing forecast incorporating the financing needs of the
growth (investments; increase in working capital needs) and the
repayment of the target's loans. The project incorporates these elements by leaving a
maneuvering margin to cope with uncertainties.
VThe medium-term debt with a maximum duration of seven years (referred to as senior debt) is pegged to
the predictable and recurring cash flows.
VThe 'mezzanine' debt (often made up of Warrants)
(Actions) is an intermediate financing between equity and loans.
banking. It corresponds to the fraction of projected cash flows for which visibility is
more uncertain (for example: what is related to a recovery of margins or to a
acceleration of growth). Its repayment annuities can be deferred or
in the end at the expiration of seven or eight years.

11
 VConvertible Bonds subscribed by shareholders can provide
additional flexibility in the assembly. They are intended to be either reimbursed by
the excess cash flow, that is to be converted.

2-The distribution capacity:

The loans of the holding company are repaid through the dividends distributed by the
target.
They are not subject to any taxation when the holding company owns 95% or more of the capital.
of the target, and a very minimal tax if it is not the case.
The repayment of loans is generally expected over a period of 5 to 7 years, determined
so that the percentage of the distributed result does not generally exceed two thirds of the result
net of the target.
When there is surplus cash not needed for operations, it is also
possible to transfer it to the holding company through an exceptional distribution of reserves
previous.

Three ratios are generally considered:

VThe debt ratio, that is to say the ratio of bank and financial debts (acquisition and
operational) / EBIT. The ratios required by banks are generally below 4;
VThe available cash-flow ratio / total debt repayment annuities that must be
greater than 1, with a safety factor of at least 5 to 10%;
VThe EBIT / total financial expenses (operating and acquisition borrowing) ratio that the
banks wish to maintain above 3.
These ratios that banks use to evaluate a structure are then formalized.
(covenants) in loan agreements. Their compliance requires appropriate management of
the company. However, they may evolve over time or be readjusted accordingly
new events (external growth, asset disposals, ...)

IV- The Secondary LBO:

In France, the secondary LBO would be the second form of divestiture in 2003, representing 19%
outputs valued at a total amount of 207.6 million euros.
12
The secondary LBO provides various advantages to the different participants in the operation.
compared to the primary LBO:
Capital and debt are less subject to risks in a secondary LBO because the company has
already demonstrated its ability to repay the acquisition debt based on proven cash flows and has
generally set up a management control and monitoring system tailored to the requirements
of shareholders and bankers.
2. Management knows how to manage the partnership with the financier(s).
The transfer process is better prepared, more structured, and better documented.
4. The risk profile is more favorable for banks that generally leverage.
senior financier.
On the other hand, the main technical constraints are relatively similar to those of
Primary LBOs.
The risk of a speculative bubble related to secondary LBOs is unlikely, primarily in
reason for a standardized market today and competitive transfer processes leading to
average to a fair valuation of assets

The risks and motivations of LBO:

1-The risks involved:

In your new roles

As a representative and CEO of the company, you assume the responsibilities.
correspondents. It is common for a Liability Insurance of Mandataries
Socials may be contracted to limit certain risks associated with your business management. It
also covers financial investors who would hold social mandates there.
In the same way, insurance can be taken out that would cover the loss of your mandate.
(GSC).
As a shareholder:
Your risk is to lose the amount of your capital investment. But it also depends on
of the quality of your work.
But you should not take risks beyond your initial stake. The presence of a or
Having financial investor(s) by your side, for example, allows you to avoid giving your
personal caution to banks.
13
LBO, attention, warning...

The financial engineering of a leveraged buyout (LBO) requires a rigorous approach. This is
intellectually very simple, the details of the implementation are complex and, there, it can be
to have for the future seller, a major risk of lost earnings.
The transfer of a company to an industrialist or a financier as part of an LBO is
always a transaction, meaning that the buyer's goal is to "pay the least amount"
possible by obtaining as many guarantees as possible." In the context of an LBO setup,
a conflict of interest. The interests only become common once the LBO is completed
when the seller is a shareholder of the acquisition holding. It should therefore not be forgotten that a

The LBO setup is primarily a business sale.

The buyers are not interchangeable. Each participant has specific characteristics.
sectoral and financial, which will allow it to be more or less generous in
the evaluation of a company. That's why, obtaining the best terms of transfer
impose, not to respond to the more or less aggressive and seductive approach of a financier,
but to organize, to structure a real competition among financiers according to a
LBO scheme initiated by the seller and their advisors in the interest of the shareholders.
To counter the consequences of these 3 mistakes, there is only one solution: the business leader,
whether facing industrialists or a financier, must proceed in the same way, that is to say,
to rely on a Corporate Finance specialist who, with their advice, will enable him to
find an optimized solution

2-The motivations of buyers:

The position of a buyer is primarily a leadership position rather than that of an employee.
The spirit of entrepreneurship is the foundation of your motivation: it combines the desire to succeed in a project.

ambitious in a setting where your responsibility is total and your taste for
Taking risks is real.
The most common motivating factors can be grouped into two categories:

In your new roles:

Be independent, be your own boss.
14
Successfully carry out a human and operational project.
° Gain and maintain the trust of your financial shareholders by agreeing to render them
accounts.
As a shareholder:
VYou are building an asset by enhancing your participation.
VYou share with the investor a capital gain objective through the sale of the company to
medium term.
VYou benefit from favorable taxation.
The LBO is not a win win win deal but a win win win win deal
The 1hewinner: the buyer
The 2thwinerle cedant
The 3thwinner: private equity investors for the contribution
The 4èmelenders: the banks lending for senior debt
Indeed, several banks are involved in the process:

Example

15
16
 CH II: THE BALANCE SHEET ANALYSIS

The balance sheet is the snapshot of the company's assets at a given time, generally the
closing day of the financial year. This asset can be presented using two methods.
The functional balance,
The liquidity, asset or financial balance sheet.
The balance sheet is the basic tool of financial analysis. However, it is necessary to
reprocess the elements constituting the balance sheet to allow for: An analysis
economic (the positions are classified into homogeneous groups according to their respective function.
The functional balance sheet is very close to the balance sheet presented by the P.C.G. 82. It is a presentation

of the company's assets, according to the cycles (investment, operation, and

financing). It is from the functional balance sheet that the concepts of funds are calculated.
global net turnover and working capital requirements (concepts themselves defined by the
cycles).
The balance sheet allows for the evaluation of the company's assets and liabilities at their current value.
It allows to check the company's ability to repay its debts. For this approach
financial, assets are assessed in order of increasing liquidity and liabilities in order
increasing enforceability.
Schematic presentation of the PCG 82 balance sheet

Jobs Resources

Capital
Reserves
Result
Immobilisation
intangible
physical
financial
provisions for risks and
charges

Stock
Operating receivables Financial debts
Various receivables Operating debts
- Disponibilités Various debts
 The functional balance sheet

Basic principles
The role of the functional balance is:
- To assess the financial structure of the company
- To assess the financial needs and the type of resources available to the company
- To determine the equilibria between the different masses
- To calculate the financial safety margin of the company
- To enable decision-making
Schematic presentation of the functional balance sheet

Ranking criterion: Types and destinations of assets and liabilities (ranking by

function)

Equity
Function Depreciation and Function
Investment Gross Fixed Assets provisions: financing
for depreciation (resources
risks and charges durables)
Financial debts
Function
Exploitation
Current assets Function
exploitation Operating debts Exploitation

hors
Exploitation

Active out of operation Passive outside operation outside

Exploitation

Cash resources
Availability

Although similar to the P.C.G. 82 presentation, the functional balance sheet presentation requires
some reclassifications and adjustments. These will be used for the calculation of the fund of
net overall turnover and working capital requirement.
18
 a) The reclassifications of the functional balance sheet

The reprocessing consists of:

Reclassify certain items in the balance sheet according to their function
Integrate off-balance sheet items:
Remove certain items from the balance sheet

Depreciation and provisions for impairment of balance sheet assets

are reclassified as stable resources in the liabilities of the balance sheet.

The charges to be allocated are reclassified with fixed assets.

The redemption premiums of bond loans, as indicated in
the assets on the balance sheet are reclassified to liabilities, reducing the loans

bondholders.
The accrued interests included in the financial debts listed in the liabilities.
of the balance sheet are reclassified as various debts. (The same applies to the

interest accrued on receivables related to registered equity interests in

active outside of operation.
Bank competitions listed as financial debts are reclassified with
negative cash flow.
Conversion differences are eliminated and reintegrated into the items.
concerned.
Customers with credit (advances and deposits received on order are
reclassified with trade receivables).
Investment securities whose amount is liquid and without
risk of loss are recorded in available funds.
The subscribed but uncalled capital is deducted from equity.

b- The adjustments of the functional balance sheet

The functional balance sheet must provide a picture of the asset values by cycle. It
It is therefore appropriate to reintegrate into the balance sheet elements excluded due to their legal nature.

19
 or usage.

Expected effects not due and assignment of commercial receivables (Dailly):

These processes allow for the refinancing of accounts receivable through the discounting of bills of exchange.

sale or transfer of commercial receivables. The amounts discounted or transferred

"disappear" from the client account of the asset on the balance sheet to improve the bank balance.
This does not allow for a good measurement of the receivables related to the operations.

retreatment involves listing in the assets of the balance sheet the amount of discounted bills and
receivables assigned with a counterpart in liabilities in bank loans.

Leasing: Leasing is a mode of financing for

assets. Legally, the company is not the owner of the asset until the end
of the contract but only after having exercised the 'purchase option'. The asset
therefore does not appear on the assets side of the balance sheet.

The reprocessing involves recording the original gross value as an asset,

calculated fictitious amortizations coming in stable resources and the net value in debt
financial.

Structure of the functional balance sheet after adjustments

20
 ASSET (financing needs) LIABILITIES (financing resources)

Stable jobs STABLE RESOURCES

Gross fixed assets Equity

+ V.O of the equipment financed by Depreciation and provisions for
lease financing depreciation
+ Charges to be distributed gross Amortizations of the lease purchase
Accrued interest on loans Provisions for risks and charges
Uncalled capital
Financial debts
Net value of the equipment
posts to be eliminated: financed by leasing
unissued capital Reimbursement premiums
repayment premiums bonds
bonds Accrued interest on loans
Bank competitions and credit balances
banks

Gross Current Assets CIRCULATING DEBTS

Exploitation Exploitation
Stocks Advances and deposits received
Advances and deposits paid on Operating debts
commands Deferred products
Operating receivables operation
Expected effects not yet due Social and tax debts
Advance charges recorded exploitation
exploitation Passive conversion gap
Active conversion gap Active conversion spread
Passive conversion gap

Out of operation Out of service

Non-operating receivables Debt outside of operations
Prepaid expenses Tax liabilities (corporate tax)
out of exploitation Prepaid expenses
Unpaid subscribed capital out of exploitation
+ Accrued interest on loans Accrued interest on loans
Active treasury Passive Treasury
VMP Current bank competitions and balances
Availability bank creditors
Expected effects not due

The functional balance sheet is established from the accounting balance sheet before the distribution of the result.

21
 The adjustments
The adjustments consist of:
RECLASSIFY certain items in the balance sheet according to their function.

INTEGRATE off-balance sheet items

the anticipated effects not due: commercial papers presented to the bank
before the deadline;
the assignments of professional debts (DAILLY law). The effects and
assigned receivables disappear from the current assets of the balance sheet. It is prudent to them
reintegrate into the functional balance sheet, as the company must repay the bank in case of
client default on the due date;
leasing the functional balance considers the equipment
financed by leasing like fixed assets funded by a loan.
ELIMINATE certain items of the balance sheet
subscribed capital not called;
reimbursement premiums for bonds.

22
Definition: Functional balances

Net working capital = Sustainable resources - Stable uses

Working capital requirement = Operating working capital + Non-operating working capital

B.F.R. exploitation Operating assets - Operating liabilities

B.F.R. out of service Non-operating assets - non-operating liabilities

Treasury Availability - Bank overdrafts

Treasury Net working capital - funding requirement

of rolling

23
 Fonds de roulement net global, besoin en fonds de roulement, trésorerie
schematic.

Gross fixed assets Equity

Provisions for risks

& charges

Expenses to be allocated Amortization & provision of

the asset

F.R.N.G. }
Financial debt

Raw stocks B.F.R. of operations Gross stock }

Operating suppliers
Gross clients

Tax and social debts

Other operating receivables
brutes
Other operating debts

BFR Out of service

Other receivables Outside of operations

V.M.P. non liquid (values Other debts Excluding operations

investment furniture

Treasury
Current banking competitions
V.M.P. Liquids

Availability
•Banques
Box

24
a) Basic principles

1) The net working capital

The net working capital is the excess of sustainable resources after financing.
stable jobs.

It is therefore the permanent capital that remains in the company, to make its operations work.
exploitation.

Basic example:

The SARL du marron chaud is created with the aim of selling chestnuts, waffles.
the end of school.
Investment needs Chestnut pot 1,000 dirhams

Gas bottles 800Dh

Van 60,000 Dirhams

61,800 Dirhams

Operational needs Chestnut stock 5,000 Dh

minimum permanent

The stable financing needs are 61,800 Dh but before any funding.
of the activity (operation).

Sustainable resources must be at least 61,800 Dh to cover the

stable jobs but this is insufficient to finance the need for funds
operating cash flow (5,000 Dh).
For the company to operate without 'bank overdraft' (negative cash flow), the
working capital must be at least 5,000 Dh and sustainable resources of
66,800 Dh.

25
 Immovables Permanent capital
61800 Dh 66800Dh

F.R.N.G. 5,000 Dirhams

- The larger the net working capital, the more the company will be able to
easily finance his business.

The net working capital is usually always positive (see case

. If it were negative, it would mean that the company does not have the capacity
to finance its operating cycle, either it is the operating cycle that finances
stable jobs. Funding a stable job with a cyclical resource
generates serious financing problems as soon as activity decreases.
Example:

Stable jobs Sustainable resources

FRNG }
} B.F.R.
Negative
exploitation
Cyclical assets Cyclical liabilities

In this case, the negative operating working capital allows for

financing the overall net working capital deficit. The working capital requirement
Negative exploitation can be explained by a significant supplier payment position.
120 days) cash sales and low stock
As soon as activity decreases (poor sales...), purchases decrease the accounts.
suppliers are settling and the working capital requirement is no longer able to
fund part of the stable jobs.

26
 Specific case: Distribution companies 'supermarket type'.

Despite the aforementioned danger, hypermarket-type distribution companies

can afford to have a negative net working capital and
low sustainable resources, due to the structure of their funding needs
operating turnover.

Suppliers are paid within a period of 90 to 120 days.

Customers pay in cash,
The inventory turnover rate is high (the time between arrival in stock and sale)
average of 10 days.
Companies thus continuously benefit from a cash credit equal to the
difference between the supplier credit period and the turnover period of the valued stock
average purchase cost.

2) The need for working capital in operations

In summary, one can consider that receivables and debts are

operating from the moment they are linked to expenses and revenues
which make up the Gross Operating Surplus.

It is the financing need of the company's activity. The cycle refers to

for exploitation, the time needed for the company to complete all of
phases of its economic activity.
There is a need for financing in that it:
There are payment deadlines (clients and suppliers)
There is a manufacturing lead time (production cycle)
There is storage of raw materials, finished products, and goods.
A company that would sell goods immediately after having them
purchased, without obtaining credit from its suppliers, without granting any to its customers and
Without storage delays, there would be no need for working capital.

27
 The working capital requirement is therefore dependent on the deadlines.
of the flow or rotation of the elements that make it up.

3) The need for working capital outside of operations

Working capital requirement outside of operations is the difference between assets and
passives of investment cycles, financing of profit distribution
the company.

Unlike the working capital required for operations, which is in its

recurring majority, the elements that make up the working capital requirement excluding
exploitation are not necessarily recurring but generally occasional.

Receivables from asset disposals

Traditionally, investment securities are integrated into the
working capital needs outside of operations.

4) The treasury

The cash flow is the result of the net working capital and the funding requirements.
rollover (operational + non-operational). It is also the total of available resources under
deduction of bank loans.
The cash flow is explained by the gap between working capital and the need for funds.
Working capital. A working capital greater than the need for working capital will lead to a
positive cash flow. A working capital lower than the working capital needs
will generate a negative cash flow.
The treasury thus summarizes, in itself, all the balance sheet equilibriums and the analysis of its
The variation will be included in many flow charts.

28
 5) The Ratios
From the functional balance sheet, the company can calculate:
a) Financing stable jobs

This ratio measures job coverage Stable resources

stable by stable resources
Stable jobs

b) Financial autonomy

Own resources
Indebtedness

This ratio measures the debt capacity of

the company. It must not be less than 1

B Le bilan patrimonial ou financier

The financial balance favored by the approach of the 1957 accounting plan is today
less used as we pointed out in the introduction.

Its use is generally banking and aims to assess the creditworthiness of

the company.

Ranking criteria:

Assets are grouped in order of increasing liquidity.

Liabilities ranked by increasing order of maturity.

29
 Schematic presentation of the financial statement:

Jobs Fixed assets Equity Resources to

more than a year more than a year

Provisions for =
risks & charges Capital
permanents
Jobs at Current assets Long-term debts
less than a year
Short-term debts Resources to
less than a year
Treasury Availability

a) Règles d'évaluation
Fixed assets are listed at their net value. If the current value is
different from the net book value resulting from the depreciation plan, a
depreciation or an exceptional recovery is practiced.
Assets are classified in order of increasing liquidity, with the least liquid assets first.
(assets) being recorded at the top of the balance sheet. All assets are evaluated
net worth.

The distinction "less than one year, more than one year" for receivables and debts is
function of the maturity of loans and borrowings and not of their origin to more than one
in less than a year. Thus a financial debt can be shared among the capitals
permanent for the part to be reimbursed in more than a year and the debts to be reimbursed at
less than a year for the repayments due in the following financial year.

The transition from the accounting balance sheet P.C.G. to the financial balance sheet mainly requires the

restructuring of receivables and debts based on the remaining maturities of more than one year and
30
less than a year.

All marketable securities are included in cash holdings.

The balance sheet represents the company's assets regardless of their origin.
(exploitation, investments...)

b) The adjustments of the financial balance sheet

* The expected effects not yet due and receivables "Dailly Law" are restated in the same way.
what is in the functional balance.
The heritage design being close to the evaluation of the company:
Removal of non-values (charges to allocate, establishment expenses),
•Recording of latent tax liabilities, regulated provisions are divided into
equity and debts.
Provisions for risks and charges could be broken down.
In equity for the reserve character part.
In long-term debts for the portion intended to cover a cash expense beyond
for a year.
In short-term debts for the cash-out part within less than a year.
Dividends payable are deducted from equity and recorded as short-term liabilities.
balance being processed after distribution.
The following advanced reprocessing can be performed
Permanent stock The companies having a minimum permanent stock necessary for the
production (tool stock) or a permanent safety stock can record this part of stock
in fixed assets. The same may apply for stocks with a low turnover rate by
example, stock of spare parts ...

Note: Since the company does not own the assets acquired under a leasing agreement, there is no need to ...
retraiter.

31
 Chapter III: The analysis of the CPC

The income statement is a snapshot of the activity of the’business over a given period.
This period is generally the "financial year" which covers 12 months but it can also
It is a matter of analyzing the activity for a shorter period during the fiscal year.

The analysis of the income statement is done by nature. For example, all expenses for
staff is grouped on one line, as is the’total sales of goods.

It does not allow for analysis:

The costs incurred by a functional service of the company: production distribution

general administration
A specific activity:
- A geographical area: sales Europe, sales Asia...

The income statement does not allow for a marginal analysis because it does not separate the
fixed costs, variable costs: what are the fixed production costs (depreciation,
permanent staff...) and the variable production costs (energy, seasonal staff,
raw materials...). This makes it difficult to analyze in terms of breakeven point.

As we have just seen, the analysis of the income statement, a global analysis of
the activity by nature will be insufficient. For a precise measure of the company's activity, it
will need to resort to analytical accounting and management control techniques.

The intermediate management balances

The major items of the income statement

Operating expenses

Operating products
Operating result

Financial products

32
 Financial charges Financial result

Exceptional charges

Exceptional result Exceptional products

The income statement is divided into three blocks of unequal importance:

The operation. It is the recurring activity of the company, the result of its industry.
Operating result allows for comparison between two companies in the same sector.
regardless of the financing method of this activity (after reprocessing of
leasing.

The financier. It is the cost of financing the activity. The cost of financing can
be a function of productive choice (strong substitution of capital for labor and investments
important for example). The financial result is also dependent on the history of
the company. An old company that has accumulated significant positive results and
so financial reserves will have a positive financial result. A recent company
will be more heavily indebted (weakness of its equity, strong increase in its
working capital needs due to the rapid increase in activity.

A very negative financial result always signifies poor balance sheet ratios.
but not necessarily of a company in poor health, the economic dynamism creating
often financial imbalances (Importance of financial debts in capital
permanents or imbalance (F.R.N.G. - B.F.R.).

The exceptional. The exceptional result is non-recurring, it is generally rare.

significant in the activity of the exercise and therefore requires little comment. Some cases
However, they must be analyzed, for example, the disposal of significant assets (branch
The activity...) will lead to questioning the recurrence of the operating result, etc...
Significant penalties recorded as exceptional charges may be indicative of
dysfunction

The intermediate management balances

I Generalities

The intermediate management balances are a tool for analyzing activity and
profitability of the business.

33
The calculation of GIS allows:

1. TO APPRECIATE the creation of wealth generated by the activity of the company;

2. TO DESCRIBE the distribution of the wealth created by the company among

employees and social organizations,
The state,
the capital contributors,
the company itself.

3. UNDERSTAND the formation of net income by breaking it down.

II Terminology

1) Commercial margin
It is also called GROSS MARGIN and only concerns trading businesses.
businesses or those with commercial activities. It measures the operating resources of
the company. It is an indicator for tracking the evolution of a commercial policy.
It is often expressed as a percentage of revenue.

Margin rate
Margin rate = x100
CA HT

The margin rate should be compared to the industry rate. The analysis of its evolution in
Time allows for judging the effectiveness of trade policy.

2) Production of the exercise

It only concerns production companies and evaluates the level of production activity.
of the company. It represents the entire production activity of the period
sold production
the one that remains in stock,
♦the one that the company manufactured for itself.

34
Value added
She evaluates the economic dimension of the company. She determines the wealth created and
constituted by the work of the staff and by the company itself.
It measures the economic weight of the company.
The analysis over time allows for measuring the growth or decline of the company. It
allows for the appreciation of the company's structures and their performance by comparing them to the expenses

of personnel, to the workforce, to investments, to results.

It allows to calculate:
♦the rate of integration of the company in the production process (does the company do
Does she herself use subcontracting?

VA
CA HT

the productivity rate

VA
production

4) Gross operating surplus (GOS)

It represents the share of the added value that goes to the company and the capital contributors.
It indicates the resource generated by the exploitation of the company:
Regardless of the depreciation policy (allocations), and
Regardless of the funding method (financial charges)

It is an indicator of industrial and commercial performance or economic profitability.

corporate name.

It allows you to calculate

the economic profitability rate

35
 EBE
stable resources

- the weight of the company's debt

Interest charges
EBE

- the share of EBITDA in the value added

EBE
VA
the operating gross margin rate

EBE
CA HT

5) Operating result

It represents the result generated by the activity that conditions the existence of the company.
It measures the industrial and commercial performance of the company independently of
its financial policy. It constitutes a net economic result.

6) Current result before tax

It measures the performance of the company's economic and financial activity.

It is interesting to compare it to the operating result to analyze the impact of its
financial policy on the formation of results.

Exceptional result

It is not calculated from a previous balance. It is the result of non-recurring operations.

36
of the company. It can reflect the company's investment policy if the disposals
investments are significant.

Net result of the period

It indicates what remains available to the company after the payment of the profit-sharing.
of employees and payment of corporate tax, or the income of partners after tax.
It allows calculating the financial profitability of the company.

NET Result
Equity

9) Result on disposals of fixed assets

This balance is already included in the extraordinary result. It allows for the calculation of plus or minus.

values on the disposals of assets.

Reclassifications

The financial analysts at the balance sheet center adjust certain items of the SIG from
PCG in order to provide them with a more economical approach.

1) Adjustments related to personnel costs

Temporary staff and employee participation in results are integrated into

staff costs in order to determine the cost of labor. This results in
modify the added value and the EBITDA.

2) Adjustments related to leasing

The lease payment is divided into depreciation allowances and expenses.

of interest. These adjustments provide a better picture of the cost of technical capital.
The added value, the operating result, and the current result before taxes can be found

37
modified.

3) Adjustments related to operating subsidies

Operating grants are included in the added value. They are handled
as supplementary revenue.

Reclassifications of added value

Critiques can be made regarding the definition of intermediate consumptions. It is

the legal nature of the operation will determine the accounting account.

The temporary staff billed by a supplier will be registered under "other services".
The more the company's productive choice will be the substitution of temporary staff.
the more permanent staff there is, the more the added value will decrease. It will be appropriate in most cases,
to reclassify temporary staff costs as personnel costs.

Lease rents are classified as external services, which does not allow for analysis of the
cost of the investment incorporated into production. The rents will be restated in
two parts the depreciation that would have been practiced if we had been owners of
the immobilization of one part; the financial charges paid to the leasing organization for
the difference. This will increase the added value to decrease the result
d'exploitation pour la dotation aux amortissements et le résultat financier pour les frais
financiers. The reprocessing can also be actuarial (see above for the reprocessing of
functional balance sheet)

EBIT adjustments

The temporary staff added to the added value is subtracted at the level of the surplus.
gross operating profit.

Employee participation can also be adjusted at the level of gross surplus.

operating If it is estimated that it is recurring and is part of the overall cost of
staff.

Operating subsidies: these may relate to specific items in the account of

result for example subsidy for the employment of an employee... These subsidies can be
deducted from the amount of the corresponding expense accounts.

Adjustments to operating profit

The portion of the lease rent corresponding to the depreciation allowances that
If one had been the owner of the asset, it would have been deducted at the level
of the operating result.

Transfer of operating charges They may concern consumption accounts

38
(quote-part of expenses reimbursed by a company occupying shared premises). They can
also concern salaries (reimbursement of daily Social Security allowances) or
other positions.

It is appropriate to assign the charge transfers to each concerned intermediate balance for
make the positions homogeneous.

Adjustments of current result

The financial fees included in the leasing royalties are deducted at the level of
financial result.

4) Reclassifications of taxes and duties

Taxes and related payments are included in the consumption of the fiscal year.
from third parties; the added value is then modified.

The self-financing capacity (SFC)

The self-financing capacity is the potential cash flow generated.

All collectible products were cashed and if all the charges
deposits were withdrawn.

Conversely, it is the company's ability to self-finance its investments and

the increase in its working capital requirement, to repay its
financial debts.

Generalities
The company has financing needs, for example to finance the acquisition.
of immobilizations, etc.

To finance its needs, the company has resources from different origins:

External Origin Internal Origin

capital increase through contributions; self-financing capacity

39
 loans; generated by the activity
subsidies

The self-financing capacity represents, for the company, the surplus of internal resources.
generated during the exercise, through all of its activities and that it can allocate to its
self-financing.

The self-financing capacity allows

RECOMPENSE the partners;
RENEW and increase investments.
AUGMENT the working capital
REFUND Financial debts;
MEASURE the development capacity of the company as well as its
financial independence
The calculations of the CAF

The self-financing capacity is calculated from the income statement. It is necessary to

distinguish

THE THE
CHARGES PRODUITS

DECALABLES NO ENCASABLES NO
DECAISSABLES collectible

charges that calculated charges products that calculated products

lead to that do not lead to generate which do not generate
expenses (purchases, of expenses recipes (number of recipes
external charges (donations to business (covers on
charges of amortizations revenues depreciation and
staff, etc) to the provisions and financiers, etc. provisions, quote-
book value share of subsidies
assets investments
ceded 40 result outings
 The redeemable products
(except for products from transfers
of assets)

The CAF is the difference between ET

DISCHARGEABLE CHARGES

The CAF is calculated using two methods:

CAF

starting from the net result

Starting from EBE contributes to the formation of CAF
Because it is obtained by the difference between products
encashable and disbursement charges

Subtractive method
Additive method

E.B.E
Net income for the period
+ Other cashable products
+ Non-disbursable charges
Other payable charges
Non-cash products
+or- Result / disposals of assets

CONTROL

The CAF is the indicator of the financial independence of the company. It is also called

41
Cash flow.

42