The importance of knowing the costs of a company

The finances in a company represent one of the guiding and fundamental axes, whose management has a direct impact on the daily operations and strategic perspective of the same. The importance of a well-focused analysis and with the correct data, makes it easier for senior management to achieve the objectives of maximizing shareholders’ equity, as well as the expansion of the company with solid foundations, which allow it to respond in the best possible way to internal and external events. It is worth remembering what recently happened in 2020, when various companies faced extraordinary closures or superlative indebtedness derived from a public health event that tested all work teams worldwide, at all hierarchical levels.

Within the financial world there are various tools and techniques that are useful to be able to analyze and interpret the financial situation of an economic entity, with the sole purpose of having the best possible information, which is objective, truthful, reliable and concise for decision making. within any organization. Roughly speaking, they solve two questions in a practical way: how much does it cost? What benefit do I have? in other words, everything is based on the cost-benefit principle.

Bearing in mind the structure of the balance sheet (assets = liabilities + capital), there are two ways in which a company can finance its assets: through the contracting of liabilities (issues, credits, suppliers) and through the injection of capital by the shareholders (equity).

One of the most used techniques to assign a cost to the above is the Weighted Average Cost of Capital (WACC). This financial indicator is intended to consolidate in percentage terms the cost of the various sources of financing used by the company to finance its assets. In other words, it is the sum of the cost of debt, plus the cost of equity as a weighted average.

Assuming that a company has liabilities of 1,000 pesos and capital of 500 pesos, it is assumed that the company is financed with capital by 33% (capital / capital + debt), while 67% (debt / capital + debt) It does it with passives. In other words, for every peso that the company has in assets, 67 cents come from the liability side and 33 cents come from shareholder contributions. Said debt, as well as the capital, have a cost, either due to the interest rates of the credits or the risk premiums on the capital. It is assumed that the weighted rate of the cost of liabilities is 8%, while that of capital is 11%. Therefore, to calculate the WACC, it is necessary to do the following: (67% of liabilities) x (8% of costs) + (33% of capital) x (11% of costs) equals 8.99%. That is, the assets have a weighted average cost of 8.99 percent.

This number offers extremely valuable information, since it will provide an objective and clear number of what it costs the company to generate its assets and any performance below this cost, would mean that the company is not optimizing its assets in an efficient way that adds economic value for its shareholders and collaborators. This indicator, together with others, helps to know where the company is and will give certainty to have a better and adequate decision making.

*The author is ALM Manager at BBVA ALM & Capital.

brayangabriel.delarosa@bbva.com