MOVEMENT OF FINANCIAL RESOURCES
IN AFFILIATED SMES
Diana Shamilevna Usanova
Kazan Federal University, Institute of Management, Economics and Finance, Russia
Eugenia Urievna Strelnik
Kazan Federal University, Institute of Management, Economics and Finance, Russia
Elvira Ildarovna Khairullina
Kazan Federal University, Institute of Management, Economics and Finance, Russia
Elena Evgenievna Beloglazova
Kazan Federal University, Institute of Management, Economics and Finance, Russia
E-mail: diana-diana@rambler.ru
Recepción: 05/08/2019 Aceptación: 18/09/2019 Publicación: 23/10/2019
Citación sugerida:
Usanova, D.S., Strelnik, E.U., Khairullina, E.I. y Beloglazova, E.E. (2019). Movement of
nancial resources in aliated SMES. 3C TIC. Cuadernos de desarrollo aplicados a las TIC. Edición
Especial, Octubre 2019, 316-329. doi: https://doi.org/10.17993/3ctic.2019.83-2.316-329
Suggested citation:
Usanova, D.S., Strelnik, E.U., Khairullina, E.I. & Beloglazova, E.E.(2019). Movement of
nancial resources in aliated SMES. 3C TIC. Cuadernos de desarrollo aplicados a las TIC. Special
Issue, October 2019, 316-329. doi: https://doi.org/10.17993/3ctic.2019.83-2.316-329
3C TIC. Cuadernos de desarrollo aplicados a las TIC. ISSN: 2254-6529
318
ABSTRACT
The object of the study is represented by non-public companies not listed on the
Russian organized stock market, with related, subsidiary, aliated companies.
All companies are small and medium-sized enterprises. The subject of the study
was cash ows of companies associated with the attraction, distribution and
redistribution of nancial resources within the aliate structure. We observed
94 SMEs of the Republic of Tatarstan, forming 12 aliated structures. In 92%
of aliated structures, the interests of the owners of the parent companies or
the interests of the owners of key companies were violated. The following results
were obtained: we studied and described two main types of aliated structures
with violated interests of the owners; we highlighted the essential features of
aliated structures in which the interests of owners are violated; we described
the basic scheme of movement of nancial resources indicating a violation of
the owners’ interests; we proposed a method of justifying the price of providing
nancial resources for distribution within the aliate structure.
KEYWORDS
Investor, Aliates, Financial resources, Parent company, Tax eect, Cost of
nancial resources, Movement of nancial resources, Cash ow.
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1. INTRODUCTION
The ability to generate and properly manage nancial resources is an important
feature of a successful company. This is especially true in the current conditions,
when the unstable situation in the money and stock markets forces companies to
look for alternative sources of nancing. One of the options to optimize sources
of nancial resources is the creation of aliated structures where it is possible to
accumulate, distribute and redistribute both own and attracted nancial resources.
At the same time, it is important to lay the main criterion for the movement of
nancial resources, namely: nancial resources should be distributed within the
aliated structure in the direction of their most ecient use, allowing to improve
the welfare of the owners of the aliated structure. In practice, this criterion is
not always met, which leads to a decrease in the welfare of individual groups of
owners in an aliated structure, and therefore their interests are infringed.
In domestic legislation there is no unity in the denition of the terms “aliated
parties”, “aliated structure” (Civil Code of the Russian Federation, 1994;
Federal Law on Joint-Stock Companies, 1995; Federal Law on Limited-Liabilities
Companies, 1998; RSFSR Act on Competition and Limitation of Monopolistic
Activity in Commodity Markets, 1991; Federal Law on the Protection of the
Rights and Legal Interests of Investors on the Securities Market, 1999). For
example, from a regulatory point of view, an aliate structure can be understood
as a group of legal entities that can inuence the activities of legal entities engaged
in entrepreneurial activity. The Civil Code interprets the term “aliation” as
“relatedness” (Civil Code of the Russian Federation, 1994).
In this matter, we will rely on the conceptual view set out in IAS 24 “Disclosure of
information about related parties.” Under the aliated parties we will understand
the company associated with the company that constitutes its nancial statements
(Young, 2000; Avdonina et al., 2016). This relationship may arise in the following
situations: both companies are members of the same group of companies; one
of the companies is associated with the other; companies conduct joint activities
with each other, or with the same third party; one and the same individual has a
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signicant impact on the activities of companies, etc. By an aliated structure,
we mean the aggregate of legal entities aliated with each other (Ankudinov &
Lebedev, 2016; Akhmetov & Rysaeva, 2015; Kirpikov & Nugaev, 2016).
2. METHODOLOGY
The object of the study is represented by non-public companies not listed on the
Russian organized stock market, with related, subsidiary, aliated companies.
All companies are small and medium-sized enterprises, in foreign practice the
abbreviation SMEs is applied.
The subject of the study was cash ows of companies associated with the attraction,
distribution and redistribution of nancial resources within the aliate structure
(Kaspina et al., 2015; Shaykheeva, 2015; Fundamentals of Entrepreneurship: the
study guide, 2017).
The study identies similar signs, which make it possible to cast doubt on the
expediency of attracting, distributing and redistributing nancial resources within
the aliated structure. All the studied aliated structures are characterized by
the following main features, which are, in our opinion, essential in the matter of
violation of the interests of investors (owners):
• The lack of public quotes for stock prices or public assessments of ownership
shares in the company;
• The presence of two or more owners of the parent (key) company;
• The presence of at least ve legal entities that are part of an aliated
structure.
To the selected features we should add quite often observed lack of competence
of management in complex issues related to the peculiarities of the domestic
nancial legislation, as well as lack of knowledge of the modern nancial
fundamentals of business.
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In the course of the research, we identied and studied two main types of
aliated structures formed by non-public joint-stock companies and limited
liability companies:
1) Aliated structures consisting of a parent company, established, as a
rule, in the form of a non-public joint-stock company, and a number of
subsidiaries, established in the forms of limited liability companies;
2) Aliated structures, consisting of several aliated companies, created, as
a rule, in the form of non-public joint-stock companies or limited liability
companies with no pronounced parent company, however, consisting of
one or several key companies. Key companies occupy a leading position in
the aliated structure, have the authority to make strategic and operational
decisions that may aect the activities of the entire aliate structure.
As a rule, the parent company in the form of a non-public joint-stock company,
establishes a number of aliated and subsidiary companies. One of the goals
of creating, for example, subsidiaries can be vertical or horizontal integration,
which will result in the achievement of additional synergistic advantages with
a certain monetary value. Such integration is carried out in the interests of the
owners only if the total market value of the company with its subsidiaries is
higher than the value of the company without the establishment of subsidiaries.
In the conditions of the modern Russian market, the justication for separating
horizontally or vertically integrated subsidiaries, due solely to synergistic benets,
is questionable (Saullin & Gubaidullina, 2018; Gurianova et al., 2018).
Another goal of creating subsidiaries is to optimize the tax burden. In this case, it
is possible to use transfer pricing, reorganize in order to obtain benets for certain
types of activities (for example, agriculture) or use other organizational and legal
forms subject to preferential taxation; due to tax deductions (for VAT, export,
etc.). The creation of such subsidiaries is carried out in the interests of the owners
of the parent company if it can take advantage of the release of part of nancial
resources as a result of savings on tax payments.
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Creating subsidiaries, companies may pursue other goals. For example,
optimization of the company’s management system, political considerations, etc.
However, if a joint-stock company grows within one region, city, district, when
it is dicult to realize any other benets besides synergistic and tax advantages,
it is reasonable for owners to demand from management a justication of the
reasons to create the new subsidiaries. The creation of new subsidiaries within
an aliated group may lead to a decrease in transparency within the group,
and, consequently, the inability to assess the performance of managers. Creating
new subsidiaries can occur at the request of individual owners, then, one of the
consequences may be infringement of the interests of other owners included in
the aliated structure.
3. RESULTS AND DISCUSSION
Simplied, the ow of nancial resources in an aliated structure with the
participation of the parent company is shown in Figure 1.
Parent
Company
Subsidiary 1
Subsidiary 2
Subsidiary 3
Subsidiary 4
Figure 1. Movement of nancial resources in an afliate structure with the participation of the parent
company.
In the variant presented in Figure 1, the interests of the owners of the parent
company may be violated as follows: the parent company provides the subsidiary
1 with money in the form of a low interest (or interest-free) loan, and takes, in
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turn, money as an interest loan from the subsidiary 4. Redistribution of nancial
resources reduces the degree of informational transparency between subsidiaries.
At the same time, in the corporate reporting of the parent company, the amounts
issued are reected in the composition of nancial investments, and the funds
received - in the form of paid long-term funding sources. If the parent company
used its cash on its own, the corporate reporting amounts would be in the cash
account, and there would be no increase in debt obligations. Table 1 presents
the option when the parent company does not provide “non-market” lending to
aliated companies. To illustrate the example, assume that the company initially
did not have paid sources of borrowed funds.
Table 1. Statement of nancial position of the parent company without issuing funds to afliated
companies RuR.
Assets Equity and liabilities
PPE 500 Ordinary shares, RuR 1 900
Inventories 100
Cash 400 Trade payables 100
Total 1000 Total 1000
Table 2 presents the option when the parent company sends its own funds to
an aliate company under “non-market” conditions and receives them back at
“market prices”. At the same time, suppose that in such a way 300 rubles are
redistributed.
Table 2. The report on the nancial position of the parent company after the redistribution of funds
with the participation of afliated companies RuR.
Assets Equity and liabilities
PPE 500 Ordinary shares, RuR 1 900
Inventories 100
Financial investments 300 Long-term liabilities 300
Cash 400 Trade payables 100
Total 1300 Total 1300
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When the above-mentioned redistribution of the most liquid assets due to
unreasonable market laws leads to a distortion of corporate reporting data, and,
consequently, to incorrect analytical indicators, calculated on its basis, which,
in turn, may aect the adoption of investment and credit solutions, both by the
owners of the company and other stakeholders.
Aliation of companies does not always mean the allocation of the parent
company. Figure 2 presents one of the options for the movement of nancial
resources in aliated structures without a pronounced parent company.
Company 7
Company
(key) 6
Company 5
Company 4
Company 3
Company
(key) 2
Company 1
Figure 2. Movement of nancial resources in an afliate structure without a parent company.
In the course of the study, we concluded that in the variant presented in Figure
2, the violation of the interests of the owners will occur in the same way as in the
variant shown in Figure 1. Theoretically, the interests of the owners of any of the
companies may suer here, but in practice, as a rule, there is a violation of the
interests of key companies’ owners.
4. SUMMARY
It should be noted that in market conditions, the company’s nancial management
is carried out in three main areas: management of investment projects (assets),
management of sources of nancing (liabilities) and management of dividend
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policy. Therefore, the distribution of nancial resources within the aliate
structure in substantial amounts should contribute to the achievement of the
company’s long-term goals. Companies assume the implementation of certain
investment projects and carry out a search corresponding to the cost and volume
of nancial resources. Investment projects should be economically viable, i.e. lead
to an increase in the welfare of the company owners. In a market economy, the
attraction of nancial resources for the implementation of investment projects
is fee-based. This means that each new ruble attracted will cost the company a
few kopecks. If the parent (or key) company has a WACC value of 18%, then, by
nancing aliated companies at an eective rate of less than 18% per annum,
it destroys its market value. An exception will be situations where the economic
benets from cooperation with an aliated company, by monetary terms, will
cover losses from the provision of nancial resources at a “low” price.
In general, the minimum cost of nancial resources for an aliated company can
be determined by the formula (1):
(1)
Where:
СС
min
: the minimum cost of nancial resources released to the aliated company
(%),
WACC: weighted average cost of capital of a company that disburses the nancial
resources to an aliated company (%),
NI: is the company’s annual net income from cooperation with an aliated
company (RuR),
CE
af
: capital invested in an aliated company - the total amount of nancial
resources provided to an aliated company (RuR).
Providing the aliate company with nancial resources at the minimum price
(СС
min
), theoretically, will not entail a negative impact on the market value of the
giver.
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5. CONCLUSIONS
During the study we observed 94 SMEs of the Republic of Tatarstan, forming
12 aliated structures. In 92% of aliated structures, the interests of the owners
of the parent companies or the interests of the owners of key companies were
violated. Consequently, the problem of protecting the interests of investors in
aliated SMEs is extremely acute today.
The need to protect the interests of investors in the movement of nancial
resources is primarily due to the low degree of transparency of information
provided by a non-public SMEs to its owners regarding cash ows and their
distribution and redistribution within an aliated group of companies.
Thus, based on our study, the following results were obtained:
• We studied and described two main types of aliated structures with the
violated interests of the owners;
• We highlighted the essential features of aliated structures in which the
interests of owners are violated;
• We described the basic scheme of movement of nancial resources
indicating a violation of the interests of owners;
• We proposed a method of justifying the price of providing nancial
resources for distribution within the aliate structure.
In our research, we were faced with the fact that none of the available databases
contain information about aliated structures in the planes we need, which
signicantly limited our research. Nevertheless, we obtained the results described
in this article, which can be a subject for discussion, as well as a starting point for
further research.
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6. ACKNOWLEDGEMENTS
The work is performed according to the Russian Government Program of
Competitive Growth of Kazan Federal University.
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