First off, thank you to Donny Tiger and Gary West from WBVP-WMBA Radio in Beaver Falls for the terrific airtime last week! Plenty of great questions and I hope that I provided insightful answer. In fact, this was probably even better than the previous week on KDKA with Marty Griffin.
If your organization is looking for a guest speaker, give me a shout. I will often speak for free (or a peanut butter and jelly sandwich) if given ample opportunity of a week or more notice. Also, I can speak about most things, from investing and banking through raising two (somewhat) normal kids while writing weekly, speaking, teaching and going to school (I start my Ph.D in Finance in May.)
Now, onto.......THE BLOG...
Take a look around today and you will see a whole bunch of people trying desperately to be different from everyone else. The way they accomplish this is by their manner of dress, hair and jewelery choices. So many people are trying to be different, in fact, that everyone is pretty much the same.
Think about it for a minute. Take a look around as you're reading this, and the odds are good if you're at work, most folks dress just like you, talk just like you and have the same interests as you do. Not that you're a bad person, or that this is a bad thing. It's simply an observation.
Betcha your friends are a lot like you, too.
With that said, I'm going to go one step further and suggest that you probably follow a lot of your friends, counterparts, work associates, etc. when it comes to heeding financial advice. I'm going to suggest that you do something a little bit, dare I say, different, than the rest of the crowd. Remember, they aren't that different from you; therefore, they probably struggle to make ends meet, get the kids on the bus, argue about family and are concerned about their financial future just like you are.
Begin thinking for yourself and trust your gut instinct. What's the worst thing that could happen? Could you be wrong? Absolutely. But what if, through some minor miracle, you were actually right in your thoughts? What if everyone was selling umbrellas because it hadn't rained in three months, and you actually decided to BUY umbrellas because it hadn't rained in three months?
Is it EVER going to rain again? Absolutely. When it does, will your umbrellas be worth more than when you bought them? Absolutely! This is supply and demand. Would you rather buy an umbrella when it's raining or when it's not raining?
I like to buy coats in July and bathing suits in January (and NOT because I'm a member of the Polar Bear Club.) I like this method because I pay less when demand is down.
Guess what? We are in the middle of a blizzard in January and there are warehouses filled with bathing suits. Some of the suits that used to cost $10 now cost $4, or in some instances, even less. The odds are good it won't snow forever and in fact, the dog days of summer will be fast upon us again. Buy the suits now.
What does this have to do with investing? Glad you asked.
EVERYTHING.
Nobody is buying ANYTHING right now. I think it's almost time to start buying, but be smart about it.
Here's how I see this playing out.
We have already elected a new president, so that eliminates a little uncertainty. President-elect Obama will begin selecting cabinet members in the coming weeks, too, which should further reduce some uncertainty. Combined with an influx of bailout bucks, I think the economy is close to stabilizing. Remember, government figures look backwards, not forward.
I expect unemployment to rise about another .5% to 7.0%. Inflation will hit about 6-8% next year, but several factors are at play here to offset these trends.
1. Fuel prices are down. In fact, they are lower today than they were a year ago. And despite arguments to the contrary, we have short-term memories. Odds are good that by February or March of next year, we will have forgotten this past July when it topped $4 per gallon and folks were predicting $10 per gallon by the end of this year. Where are those folks, by the way?
2. Consumers get tired of waiting. I don't care what common sense says, no one likes to wait. The U.S. consumer has been waiting around for about a year already to buy major goods and services. By February or March of 2009, they will have waited around 15 months. That's longer than most of Britney Spears' marriages. At some point in time, the consumer is going to start buying because they want to, not because they can afford to.
3. Jobs will increase in March or April. President-elect Obama is going to force jobs down our throats if it kills us, and like it or not, unemployment will eventually go back down to 5.5%.
4. Finally, right from the "like it or not" barrel of fun is the bailout bucks. You can't ignore $800 trillion going into a bad economy. Whether you agreed with the bailout (I hated the bailout) or not, the money is going to trickle in. We will feel that in March or April.
With all of that said, I do suggest holding tight through the end of this year, as mutual fund managers begin dumping shares for tax reasons at the end of this month, and earnings season is still in full swing.
But remember, buy bathing suits in January.
There are TONS of sexy bathing suits out there right now. Notably, GE, Citibank, Pfizer, Altria (spinoff from Phillip Morris) and Caterpillar. Some simple tips to help you out.
First, the easy part. You're an expert in something, and before you shake your head and say "no way, Ola," I'm going to ask you to consider this. Do you do something regularly, like a hobby or something you enjoy, like going for a coffee, or shopping, or ice skating, or cooking? If you do, you are an expert. Nobody around you knows the cooking industry as good as you do, including egghead analysts on Wall Street. In fact, those folks don't know the difference between Cayenne Pepper and the Cayman Islands.
Look for a company that is doing great things in something you enjoy, like cooking. Then we can move onto analyzing their financials, and hope that they are paying a dividend of 5% or more and a Price/Earnings multiplier in the low teens or less. Finally, hope that the company has a Beta Coefficient (we covered those several blogs ago) below 1.00. If this company has growth estimates of 10% or more for the next five years, it's time to buy.
If analysts aren't covering your company, that's even better. They don't know the whole story and you do. To quote Homer Simpson, "WHOO HOO!"
If your company doesn't hit the criteria, you've at least begun thinking like an investor. Now you can run an industry analysis of something you enjoy, like cooking or hockey equipment, to find the industry leader that WILL fit the criteria.
And then don't look back. This is going to be a once in a lifetime opportunity. Don't be afraid. The worst thing that can happen is you'll have a surplus of umbrellas during a drought. Eventually, it will rain. It must rain.
Write some comments and visit our sponsors. It is helping me buy, buy, buy graduate school
Sunday, November 9, 2008
Sunday, November 2, 2008
Election election
What to do on Tuesday... that seems to be a perplexing thought for many of us. And while the obvious thing for me to do is blog about what seems to be a never-ending campaign of change, mavericks and mudslinging (I live in THE swing state, PA) I think that I'd rather try to uncover nuggets of truths that can help you improve your business.
In order to do this, however, we need to take the opposite approach of each candidate - who seem to be promising immediate change on everything without really planning for long-term issues.
As business people, we need to step away from our personal feelings for a few minutes in order to plan. Set our emotions aside, our personal ideologies aside and really plan for "what if" scenarios. What if Senator Obama is elected? What happens if McCain is elected? What if... you get my point.
With that said, the best advice I can give you is to begin proper planning NOW based upon either scenario. In fact, this should have been done as soon as it became evident who each party's nominee would be. It's not too late, though.
Set up a network consisting of a financial planner, accountant, attorney, local politician, marketing guru, real estate expert, college administrator, teacher, advertising person and restauranteer. Add more if you would like, but this is my mix and it seems to give me ten different angles on any certain issue.
Then ask your experts to give you "what if" scenarios based upon both candidates. You will now have 20 different insights to the same problem.
NOW you can begin to plan accordingly for the next four years based upon something other than our your own personal subjectivity. In fact, you may gain insight into multiple political views, economic arguments, educational debates and taxing issues as they relate to YOUR business.
Does it sound like you have just improved your bottom line? You betcha.
Ask each of your sources to do a SWOT analysis on your business based upon their what-if scenarios. A SWOT analysis, in case you don't know, stands for Strengths, Weaknesses, Opportunities, Threats as they relate to any item; most notably your business. Again, with ten or more experts at your disposal, you will get many answers to your questions and their personal analysis of your business. That's powerful stuff.
The other indirect benefit of doing this is that you've just included yourself in a very exclusive club compromised of various professionals in multiple industries rather than surround yourself with folks just like you. And while it might be uncomfortable for a short-time, the long-term benefits of obtaining differing views will yield results you cannot even imagine. In fact, these views will likely lead you to new markets, products and business ventures you might not have ever imagined.
Get out and vote with your conscience, but use your brain when it comes to business planning.
Drop me a comment below and let me know what you think.
In order to do this, however, we need to take the opposite approach of each candidate - who seem to be promising immediate change on everything without really planning for long-term issues.
As business people, we need to step away from our personal feelings for a few minutes in order to plan. Set our emotions aside, our personal ideologies aside and really plan for "what if" scenarios. What if Senator Obama is elected? What happens if McCain is elected? What if... you get my point.
With that said, the best advice I can give you is to begin proper planning NOW based upon either scenario. In fact, this should have been done as soon as it became evident who each party's nominee would be. It's not too late, though.
Set up a network consisting of a financial planner, accountant, attorney, local politician, marketing guru, real estate expert, college administrator, teacher, advertising person and restauranteer. Add more if you would like, but this is my mix and it seems to give me ten different angles on any certain issue.
Then ask your experts to give you "what if" scenarios based upon both candidates. You will now have 20 different insights to the same problem.
NOW you can begin to plan accordingly for the next four years based upon something other than our your own personal subjectivity. In fact, you may gain insight into multiple political views, economic arguments, educational debates and taxing issues as they relate to YOUR business.
Does it sound like you have just improved your bottom line? You betcha.
Ask each of your sources to do a SWOT analysis on your business based upon their what-if scenarios. A SWOT analysis, in case you don't know, stands for Strengths, Weaknesses, Opportunities, Threats as they relate to any item; most notably your business. Again, with ten or more experts at your disposal, you will get many answers to your questions and their personal analysis of your business. That's powerful stuff.
The other indirect benefit of doing this is that you've just included yourself in a very exclusive club compromised of various professionals in multiple industries rather than surround yourself with folks just like you. And while it might be uncomfortable for a short-time, the long-term benefits of obtaining differing views will yield results you cannot even imagine. In fact, these views will likely lead you to new markets, products and business ventures you might not have ever imagined.
Get out and vote with your conscience, but use your brain when it comes to business planning.
Drop me a comment below and let me know what you think.
Monday, October 20, 2008
Bailout part.... three? four?
I'm sorry but I have to address yet another bailout. And at the risk of running out of fingers to point, I can only address this to EVERY person living in the beltway who has a vote.
STOP SENDING ME CHECKS! That means you, speaker Pelosi, congressmen English and Altmire and Senators Specter and Casey.
The government, in their infinite wisdom, has decided that another round of stimulus checks is required to "kick start" the economy. Excuse me? Apparently the $835 billion they've passed already isn't enough of a kick start? If we need more, I would label this a quadruple bypass requiring electric paddles.
Remember folks. This is the same government that sent us a stimulus check over the summer. The same government that spent $43 million to tell us, via postal service, that we were getting a refund. Who knows how much it cost them to print the darn checks.
Somewhere down the line, don't ya think someone, somewhere would raise their hand and say "hey guys, maybe we should let things work themselves out. You know. Give the 'free market' a chance to right the ship."
Adam Smith is rolling over in his grave (he's my hero, by the way. If you want to learn more about him, read "The Wealth of Nations.")
The summertime bailout ran us about $100 billion. Apparently none of us spent our check at Walmart buying big screen televisions; instead opting to do crazy things like pay bills, fill our car with gas, save it for a rainy day.
The late summer bailout cost us $835 billion. Let's round everything up to a trillion bucks so far.
MY KIDS DON'T WANT TO PAY THIS DEBT! The Ola family is already on the hook for $33,000 EACH for the national debt. This doesn't include the defecit at the federal level or the defecit Pennsylvania is facing (abotu $3 billion.)
Isn't it time to give our kids a break and not make them pay for our sins of overspending, extending our credit and keeping up with the Jones's? Give me a break.
If you can keep a little secret, I'll let you in on something. I think the economy is already on the way back up folks. To be sure, there is room left for the dow to go down (I'm betting we'll see about 7500 before it's 'the bottom.') But have you noticed that you have a few bucks left in your wallet at the end of the week yet? If not, you will begin to feel it soon.
Want to know what it is that created that little jingle in your pocket? It's called saving your money for stuff that's really important like gasoline and lunch meat for your brown bag lunch. It's called being uncertain about how you'll make another credit card payment, so you only pay cash. It's called being responsible. It's something we all should be everyday.
To answer this call with extending another freebie is called enabling, and if we enable an alcholic another drink or a drug addict another hit from the crackpipe we are shunned by society. Why is the government enabling us and why are we sitting here taking it?
Please, fight back. If you do nothing else today, take a few minutes and call your congressman and tell him or her to stop sending you checks. You're tired of putting your kids, or grandkids, further into debt.
Tell them to paydown the national debt with the new money.
Here is what you're going to see happen, by the way. And you don't need a fancy degree to figure this one out.
We will receive an artificial infusion of cash via $1 trillion stimulus package and another round of checks to each of us. OPEC is going to reduce output, thus reducing the supply of oil. Everyone knows that as supply dwindles, prices go up.
Since there will be an extra $1.1 trillion bucks floating around by the early part of next year, prices for other things will go up. That's called inflation. We will see inflation of approximately 6% to 8% next year. So if you like the way your food bill looks this year compared to last year, you'll LOVE next year!
By the way, your wages won't keep pace, so enjoy your 3% cost of living adjustment next year. You'll be starting the year of 3% - 5% behind the 8-ball. But don't worry. By this time next year, the credit markets will be unfrozen and you can borrow again!
Remember, there's nothing a line of credit can't fix...
Please follow this simple advice. Take their check, put it in the bank and don't touch it. Payoff your credit cards and cut all but one up. Continue paying cash for everything. There's something real about knowing that $50 debit for a Wii game is coming out of your checking account immediately. Live below your means.
Sorry to go off on this tangent, but I can't take this anymore. I am going to ensure that my kids don't inherit my debts. It's unfair and it's bad parenting. It's a terrible message we are sending to them.
STOP SENDING ME CHECKS! That means you, speaker Pelosi, congressmen English and Altmire and Senators Specter and Casey.
The government, in their infinite wisdom, has decided that another round of stimulus checks is required to "kick start" the economy. Excuse me? Apparently the $835 billion they've passed already isn't enough of a kick start? If we need more, I would label this a quadruple bypass requiring electric paddles.
Remember folks. This is the same government that sent us a stimulus check over the summer. The same government that spent $43 million to tell us, via postal service, that we were getting a refund. Who knows how much it cost them to print the darn checks.
Somewhere down the line, don't ya think someone, somewhere would raise their hand and say "hey guys, maybe we should let things work themselves out. You know. Give the 'free market' a chance to right the ship."
Adam Smith is rolling over in his grave (he's my hero, by the way. If you want to learn more about him, read "The Wealth of Nations.")
The summertime bailout ran us about $100 billion. Apparently none of us spent our check at Walmart buying big screen televisions; instead opting to do crazy things like pay bills, fill our car with gas, save it for a rainy day.
The late summer bailout cost us $835 billion. Let's round everything up to a trillion bucks so far.
MY KIDS DON'T WANT TO PAY THIS DEBT! The Ola family is already on the hook for $33,000 EACH for the national debt. This doesn't include the defecit at the federal level or the defecit Pennsylvania is facing (abotu $3 billion.)
Isn't it time to give our kids a break and not make them pay for our sins of overspending, extending our credit and keeping up with the Jones's? Give me a break.
If you can keep a little secret, I'll let you in on something. I think the economy is already on the way back up folks. To be sure, there is room left for the dow to go down (I'm betting we'll see about 7500 before it's 'the bottom.') But have you noticed that you have a few bucks left in your wallet at the end of the week yet? If not, you will begin to feel it soon.
Want to know what it is that created that little jingle in your pocket? It's called saving your money for stuff that's really important like gasoline and lunch meat for your brown bag lunch. It's called being uncertain about how you'll make another credit card payment, so you only pay cash. It's called being responsible. It's something we all should be everyday.
To answer this call with extending another freebie is called enabling, and if we enable an alcholic another drink or a drug addict another hit from the crackpipe we are shunned by society. Why is the government enabling us and why are we sitting here taking it?
Please, fight back. If you do nothing else today, take a few minutes and call your congressman and tell him or her to stop sending you checks. You're tired of putting your kids, or grandkids, further into debt.
Tell them to paydown the national debt with the new money.
Here is what you're going to see happen, by the way. And you don't need a fancy degree to figure this one out.
We will receive an artificial infusion of cash via $1 trillion stimulus package and another round of checks to each of us. OPEC is going to reduce output, thus reducing the supply of oil. Everyone knows that as supply dwindles, prices go up.
Since there will be an extra $1.1 trillion bucks floating around by the early part of next year, prices for other things will go up. That's called inflation. We will see inflation of approximately 6% to 8% next year. So if you like the way your food bill looks this year compared to last year, you'll LOVE next year!
By the way, your wages won't keep pace, so enjoy your 3% cost of living adjustment next year. You'll be starting the year of 3% - 5% behind the 8-ball. But don't worry. By this time next year, the credit markets will be unfrozen and you can borrow again!
Remember, there's nothing a line of credit can't fix...
Please follow this simple advice. Take their check, put it in the bank and don't touch it. Payoff your credit cards and cut all but one up. Continue paying cash for everything. There's something real about knowing that $50 debit for a Wii game is coming out of your checking account immediately. Live below your means.
Sorry to go off on this tangent, but I can't take this anymore. I am going to ensure that my kids don't inherit my debts. It's unfair and it's bad parenting. It's a terrible message we are sending to them.
Sunday, October 12, 2008
You must be positively negative
Ah the dreaded bye week. Those of us here in Pittsburgh have come to loathe a weekend away from the Steeler football season. After all, what else is there to do on a Sunday afternoon after church and brunch besides watch football?
Glad you asked! We can talk about positive and negative coorelation and how it relates to your portfolio of stocks and investments, of course!
Let me start with a simple illustration. How many of you are married? Oops. I forgot that I can't see if you're raising your hand or not, but I can tell you this. For those of you that are married, I'm fairly certain that you and your significant other don't often see eye to eye on what to do during the dreaded bye week. Am I right?
After all, some of us (myself included) are excited that we can still watch Brett Favre throw a couple of zingers or the Colts play someone, etc. Football doesn't stop just because (gasp) the Steelers aren't playing.
Others (usually the other half of the married couple) find this a perfect excuse to head to the shopping outlets, meet aunt Ethel for a late lunch, shop some more and basically avoid the television set at all costs.
Hmph... a dilemma here for our married couple, isn't it? Well, not really.
This couple has (in investment terminology) a "NEGATIVE" coorelation. They are moving in opposite directions, and while it might not be a good thing at the time, it has great long term ramifications that are a good thing. For instance, the husband may compromise and shop for a while, so long as they can stop at the Quaker Steak and Lube for the 4 o'clock game and some wings. Both parties win out by meeting in the middle. This compromise is what eventually makes the marriage stronger, the bonds thicker and the relationship great.
The newlyweds, however, cave to each other and try to do whatever the other wants, right? This is called "POSITIVE" coorelation, and it can be deadly; not just to the strength of the marriage, but to a portfolio of stocks.
Huh? How does this relate to stocks?
Think of it like this. If you had a portfolio of stocks that had Microsoft, Dell, Gateway and Hewlitt Packard, how would all of them react to a slowdown in the economy? Well, since they're all technology stocks, all would likely respond the same way. This is just like the newlyweds reacting the same way to every issue. POSITIVE COORELATION is very bad for a portfolio.
Now think of a portfolio that has MSFT, Exxon, Pfizer and Wells Fargo. All four of these stocks are in different industries (software, oil, pharmaceuticals and banking) so all four might react differently given the same economic conditions such as an oil crisis, recession, war or market meltdown. This is NEGATIVE COORELATION and something we desperately want for our portfolio. In fact, we strive to acheive total negative coorelation in portfolios (at least the eggheads running our mutual funds do, anyway.)
We can then either OVERWEIGHT or UNDERWEIGHT our portfolio while still maintaining negative coorelation. For instance, you might really think that the oil industry is set to boom, so you can own more shares of Exxon while at the same time, still own Microsoft, Pfizer and Wells Fargo. This is what CFA (Chartered Financial Analysts) do on a daily basis to ensure diversification and negative coorelation for their clients.
With all this said, it would be unfair to NOT mention the recent pummeling the market has taken in the past two weeks. However, with proper BETA weighting, portfolio diversification and patience, I can tell you that I believe there is light at the end of the tunnel - although the Feds had nothing to do with this.
It is my best guess that there is another six to nine months of market jitters remaining, but we are through the worst at this point in time. As soon as consumer confidence rebounds (again, my opinion, but when gas prices drop below $3.00 per gallon nationwide) and we have a president elected, things will come back. It is going to be a slow, methodical climb out, but one worth watching.
I would also suggest that we are near some historic price lows for some very strong companies that have been dragged down by the market, such as GE, Pfizer, Coca Cola and Altria (Phillip Morris.) These are companies with strong fundamentals, good balance sheets and solid products that traditionally can survive a recession. I do not currently own any of the companies listed, but I plan to very shortly.
Well, the 4 o'clock game is on now (we compromised today) and that's all for now.
Click on our Google and Adsense partners to help me pay the rent and please send me some comments. It gets lonely here in cyberspace.
Glad you asked! We can talk about positive and negative coorelation and how it relates to your portfolio of stocks and investments, of course!
Let me start with a simple illustration. How many of you are married? Oops. I forgot that I can't see if you're raising your hand or not, but I can tell you this. For those of you that are married, I'm fairly certain that you and your significant other don't often see eye to eye on what to do during the dreaded bye week. Am I right?
After all, some of us (myself included) are excited that we can still watch Brett Favre throw a couple of zingers or the Colts play someone, etc. Football doesn't stop just because (gasp) the Steelers aren't playing.
Others (usually the other half of the married couple) find this a perfect excuse to head to the shopping outlets, meet aunt Ethel for a late lunch, shop some more and basically avoid the television set at all costs.
Hmph... a dilemma here for our married couple, isn't it? Well, not really.
This couple has (in investment terminology) a "NEGATIVE" coorelation. They are moving in opposite directions, and while it might not be a good thing at the time, it has great long term ramifications that are a good thing. For instance, the husband may compromise and shop for a while, so long as they can stop at the Quaker Steak and Lube for the 4 o'clock game and some wings. Both parties win out by meeting in the middle. This compromise is what eventually makes the marriage stronger, the bonds thicker and the relationship great.
The newlyweds, however, cave to each other and try to do whatever the other wants, right? This is called "POSITIVE" coorelation, and it can be deadly; not just to the strength of the marriage, but to a portfolio of stocks.
Huh? How does this relate to stocks?
Think of it like this. If you had a portfolio of stocks that had Microsoft, Dell, Gateway and Hewlitt Packard, how would all of them react to a slowdown in the economy? Well, since they're all technology stocks, all would likely respond the same way. This is just like the newlyweds reacting the same way to every issue. POSITIVE COORELATION is very bad for a portfolio.
Now think of a portfolio that has MSFT, Exxon, Pfizer and Wells Fargo. All four of these stocks are in different industries (software, oil, pharmaceuticals and banking) so all four might react differently given the same economic conditions such as an oil crisis, recession, war or market meltdown. This is NEGATIVE COORELATION and something we desperately want for our portfolio. In fact, we strive to acheive total negative coorelation in portfolios (at least the eggheads running our mutual funds do, anyway.)
We can then either OVERWEIGHT or UNDERWEIGHT our portfolio while still maintaining negative coorelation. For instance, you might really think that the oil industry is set to boom, so you can own more shares of Exxon while at the same time, still own Microsoft, Pfizer and Wells Fargo. This is what CFA (Chartered Financial Analysts) do on a daily basis to ensure diversification and negative coorelation for their clients.
With all this said, it would be unfair to NOT mention the recent pummeling the market has taken in the past two weeks. However, with proper BETA weighting, portfolio diversification and patience, I can tell you that I believe there is light at the end of the tunnel - although the Feds had nothing to do with this.
It is my best guess that there is another six to nine months of market jitters remaining, but we are through the worst at this point in time. As soon as consumer confidence rebounds (again, my opinion, but when gas prices drop below $3.00 per gallon nationwide) and we have a president elected, things will come back. It is going to be a slow, methodical climb out, but one worth watching.
I would also suggest that we are near some historic price lows for some very strong companies that have been dragged down by the market, such as GE, Pfizer, Coca Cola and Altria (Phillip Morris.) These are companies with strong fundamentals, good balance sheets and solid products that traditionally can survive a recession. I do not currently own any of the companies listed, but I plan to very shortly.
Well, the 4 o'clock game is on now (we compromised today) and that's all for now.
Click on our Google and Adsense partners to help me pay the rent and please send me some comments. It gets lonely here in cyberspace.
Sunday, October 5, 2008
Deviant Behavior and Beta
As promised from last week, now it's time to analyze risk and put some numbers to risk.
We've already discovered the difference between market risk and diversifiable risk, so how do we eliminate risk and what kind of risk can we focus on eliminating?
Well, we cannot eliminate market risk, so we are only left with the possibility of eliminating diversifiable risk. And being a finance geek, I like numbers to help me choose which project is the least risky. Let's look at an example first.
Assume that since you're my friend, I left you $100,000 to invest anyway you see fit and you're left with two possible choices. Choice "A" is to invest in a little stock we'll call "GE." GE has been around 100 years and is very steady and consistent, although not very sexy or glamorous when it comes to a crazy return. You can expect to earn 9% per year from GE.
Choice "B" is a little-known company called "Ola's Tapioca Mine and Tattoo Parlor." The main office is located in Key West, FL and they hope to franchise the concept throughout the country. They, too, expect to give you an 9% return on your investment next year.
So where do you invest and why?
Unless you have a real strong, strange urge for a new tattoo and some tapioca pudding, you will most certainly put your money into GE since there is far less risk and the return is exactly the same as a risky proposition. This is an investors natural reaction to avoid risk and maximize returns and the only way you'd consider "Ola's Tapioca Mine..." is if they had an expected rate of return greater than 9%.
But remember, greater return comes with greater risk. Let's call this risk "BETA."
Now let's also assume that the stock market has a BETA of 1.00, and we know that the average return in the stock market is about 9%. We need a number to show how much more, or less, risk is associated with our investment.
GE is old and consistent. When I hit YAHOO Finance and checked out their key statistics, their BETA was .75. This means that for every 1% the stock market moves up or down, GE will move 75% of the distance. So, if we expect the stock market to go up 10% next year, we would expect GE to go up 7.5% next year. Similarly, if we expect the stock market to go DOWN 10% next year, we'd expect GE to go down only 7.5%. So while our expected rate of return is the same as the stock market, our risk is actually 25% LESS. Hmmm..
Our Tapioca Mine might have a BETA of 1.5. This means that if the stock market went up 10%, we'd expect the Tapioca Mine to go up 15%, and vice versa if the market went down. In essence, our investment is 1.5 times riskier than the stock market and offers only a similar return. Not good.
There is a different figure we can use as well that capitalizes upon standard deviation, but that's not necessarily a blog type of entry. I just want you to be comfortable when you see the term BETA Coefficient going forward and recognize what it means.
Also recognize that BETA is utilized to compare projects that you are considering as a business, along with standard deviation and coefficient variation. If you'd like help with any project analysis, including PERT charts, please let me know as I have experience in these things and would be delighted to assist you.
Finally, recognize that you can get most of these figures for free from YAHOO Finance, CNNFN, etc. Research doesn't have to be expensive or time consuming.
Former Magellan Fund Manager and investing legend Peter Lynch often said his best source of research was his wife and his teenage daughters. They knew retail trends and hot fashion better than a 50-year old investment fund manager, so he learned to trust their judgment on what was hot and what was not. He simply put pen to paper to see if the numbers made sense, which they often did.
Use your common sense when looking at investment choices. Many times, you know something the pros don't or something they miss in their analysis; something you can use to make a lot (or save a lot) of money.
Next up: Positive and Negative Coorelation (not much of a teaser, but certainly a reminder to me of what the heck to write next week.)
Visit our sponsors and help me keep the lights on! Click the links above and please send me a comment or two. It gets lonely out here in cyberspace.
We've already discovered the difference between market risk and diversifiable risk, so how do we eliminate risk and what kind of risk can we focus on eliminating?
Well, we cannot eliminate market risk, so we are only left with the possibility of eliminating diversifiable risk. And being a finance geek, I like numbers to help me choose which project is the least risky. Let's look at an example first.
Assume that since you're my friend, I left you $100,000 to invest anyway you see fit and you're left with two possible choices. Choice "A" is to invest in a little stock we'll call "GE." GE has been around 100 years and is very steady and consistent, although not very sexy or glamorous when it comes to a crazy return. You can expect to earn 9% per year from GE.
Choice "B" is a little-known company called "Ola's Tapioca Mine and Tattoo Parlor." The main office is located in Key West, FL and they hope to franchise the concept throughout the country. They, too, expect to give you an 9% return on your investment next year.
So where do you invest and why?
Unless you have a real strong, strange urge for a new tattoo and some tapioca pudding, you will most certainly put your money into GE since there is far less risk and the return is exactly the same as a risky proposition. This is an investors natural reaction to avoid risk and maximize returns and the only way you'd consider "Ola's Tapioca Mine..." is if they had an expected rate of return greater than 9%.
But remember, greater return comes with greater risk. Let's call this risk "BETA."
Now let's also assume that the stock market has a BETA of 1.00, and we know that the average return in the stock market is about 9%. We need a number to show how much more, or less, risk is associated with our investment.
GE is old and consistent. When I hit YAHOO Finance and checked out their key statistics, their BETA was .75. This means that for every 1% the stock market moves up or down, GE will move 75% of the distance. So, if we expect the stock market to go up 10% next year, we would expect GE to go up 7.5% next year. Similarly, if we expect the stock market to go DOWN 10% next year, we'd expect GE to go down only 7.5%. So while our expected rate of return is the same as the stock market, our risk is actually 25% LESS. Hmmm..
Our Tapioca Mine might have a BETA of 1.5. This means that if the stock market went up 10%, we'd expect the Tapioca Mine to go up 15%, and vice versa if the market went down. In essence, our investment is 1.5 times riskier than the stock market and offers only a similar return. Not good.
There is a different figure we can use as well that capitalizes upon standard deviation, but that's not necessarily a blog type of entry. I just want you to be comfortable when you see the term BETA Coefficient going forward and recognize what it means.
Also recognize that BETA is utilized to compare projects that you are considering as a business, along with standard deviation and coefficient variation. If you'd like help with any project analysis, including PERT charts, please let me know as I have experience in these things and would be delighted to assist you.
Finally, recognize that you can get most of these figures for free from YAHOO Finance, CNNFN, etc. Research doesn't have to be expensive or time consuming.
Former Magellan Fund Manager and investing legend Peter Lynch often said his best source of research was his wife and his teenage daughters. They knew retail trends and hot fashion better than a 50-year old investment fund manager, so he learned to trust their judgment on what was hot and what was not. He simply put pen to paper to see if the numbers made sense, which they often did.
Use your common sense when looking at investment choices. Many times, you know something the pros don't or something they miss in their analysis; something you can use to make a lot (or save a lot) of money.
Next up: Positive and Negative Coorelation (not much of a teaser, but certainly a reminder to me of what the heck to write next week.)
Visit our sponsors and help me keep the lights on! Click the links above and please send me a comment or two. It gets lonely out here in cyberspace.
Sunday, September 28, 2008
Risk can be...well, risky!
For the last few weeks we've been hearing how much risk there is in the economy.
One of the key words being thrown around is "systemic" risk, and I thought it might be wise to analyze the two basic types of risk one faces when running or managing a business. For some readers this will be a refresher course on managing and measuring risk; for others, we're going to slap some formal terms onto things you probably already know. Consider it a free Finance course.
The first goal of ANY venture is to remove as much risk as possible from the equation. By doing so we increase our assuredness that our project or investment will be predictable. We like predictability since it helps us create reasonable, realistic figures that we can present to our banker, shareholders or business partners. The way to remove risk is by doing something called "diversifying." Many of you know that word from meeting with your financial professional and them telling you to diversify your portfolio. It's a fancy way of asking you to not own only one type of stock, but rather, many different types of stocks. This creates a layering effect, so that one investment goes down, another might go up. It's a way of offsetting one risk with another.
Any risk that can be removed through diversification is known as non-systemic risk.
Let's look at a pizza shop for example since it's Sunday and pizza goes with church and football.
A pizza shop owner wants to remove as much risk from his or her business as possible. What are some risks they face on a daily basis that can be tweaked or changed?
Costs are largely contained in ingredients, so if the cost of mozarella cheese goes up from one supplier, our owner can look to another, cheaper substitute. Similarly, if business is slow during the lunch hour, our pizza shop could expand into new products such as salads, sandwiches, finger foods, etc. If our pizza shop is in a large metroplitan area, they may decide to eliminate delivery altogether and save the cost of labor. Basically, anything that can be readily changed to keep costs down/revenue high is a non-systemic risk.
On the flip side of the coin, however, is "systemic" risk. This is risk that CANNOT be eliminated through diversification.
For example (and there are many) oil prices. There is absolutely nothing our pizza shop owner can do about the cost of oil, which ultimately results in higher produce costs. Similarly, minimum wage increases set by government bodies will have an impact on the bottom line and there is nothing our business operator can do about those either. Other examples include inflation, unemployment, acts of terror, war, election results, interest rates,etc.
So as business people, it is our job to eliminate or diversify ALL of our non-systemic risk while carefully planning for ALL systemic risk.
We are very good at the first part since we know our business forwards, backwards and inside out. But for some reason, we are not real good at the second part, whether it's a result of too little time to plan for this type of risk or we aren't really interested in figures like CPI, PPI, GDP, Prime Rate and unemployment figures (both locally and nationally.)
I'm here to tell you that if you are to be successful for the long-haul, you have no choice but to be concerned about systemic risk. Otherwise, you are living a lie even though you have every product that could appeal to any consumer in the world.
Make a plan that includes tracking interest rates, inflation figures and employment figures; whether daily, weekly or at the least monthly. This will help you begin to see where the economy is heading six, nine or twelve months from now. By doing so, you would have known that this crash was likely to occur and you could have applied for that business line of credit in May rather than scrambling now to shore up some extra cash. Maybe you held off on that new piece of equipment because you were too busy to stop by the bank and make a loan application. Now, the cost of the equipment has gone up due to production costs and you are having a tough time getting approval for the loan since lending is being restricted.
Plan for the long-run by analyzing systemic risk and run your business day to day by measuring non-systemic risk.
It's really nothing more than a study in Macroeconomics (systemic) versus Microeconomics (non-systemic.)
Next week we will uncover some figures that help us put a number to the amount of risk we're taking on.
One of the key words being thrown around is "systemic" risk, and I thought it might be wise to analyze the two basic types of risk one faces when running or managing a business. For some readers this will be a refresher course on managing and measuring risk; for others, we're going to slap some formal terms onto things you probably already know. Consider it a free Finance course.
The first goal of ANY venture is to remove as much risk as possible from the equation. By doing so we increase our assuredness that our project or investment will be predictable. We like predictability since it helps us create reasonable, realistic figures that we can present to our banker, shareholders or business partners. The way to remove risk is by doing something called "diversifying." Many of you know that word from meeting with your financial professional and them telling you to diversify your portfolio. It's a fancy way of asking you to not own only one type of stock, but rather, many different types of stocks. This creates a layering effect, so that one investment goes down, another might go up. It's a way of offsetting one risk with another.
Any risk that can be removed through diversification is known as non-systemic risk.
Let's look at a pizza shop for example since it's Sunday and pizza goes with church and football.
A pizza shop owner wants to remove as much risk from his or her business as possible. What are some risks they face on a daily basis that can be tweaked or changed?
Costs are largely contained in ingredients, so if the cost of mozarella cheese goes up from one supplier, our owner can look to another, cheaper substitute. Similarly, if business is slow during the lunch hour, our pizza shop could expand into new products such as salads, sandwiches, finger foods, etc. If our pizza shop is in a large metroplitan area, they may decide to eliminate delivery altogether and save the cost of labor. Basically, anything that can be readily changed to keep costs down/revenue high is a non-systemic risk.
On the flip side of the coin, however, is "systemic" risk. This is risk that CANNOT be eliminated through diversification.
For example (and there are many) oil prices. There is absolutely nothing our pizza shop owner can do about the cost of oil, which ultimately results in higher produce costs. Similarly, minimum wage increases set by government bodies will have an impact on the bottom line and there is nothing our business operator can do about those either. Other examples include inflation, unemployment, acts of terror, war, election results, interest rates,etc.
So as business people, it is our job to eliminate or diversify ALL of our non-systemic risk while carefully planning for ALL systemic risk.
We are very good at the first part since we know our business forwards, backwards and inside out. But for some reason, we are not real good at the second part, whether it's a result of too little time to plan for this type of risk or we aren't really interested in figures like CPI, PPI, GDP, Prime Rate and unemployment figures (both locally and nationally.)
I'm here to tell you that if you are to be successful for the long-haul, you have no choice but to be concerned about systemic risk. Otherwise, you are living a lie even though you have every product that could appeal to any consumer in the world.
Make a plan that includes tracking interest rates, inflation figures and employment figures; whether daily, weekly or at the least monthly. This will help you begin to see where the economy is heading six, nine or twelve months from now. By doing so, you would have known that this crash was likely to occur and you could have applied for that business line of credit in May rather than scrambling now to shore up some extra cash. Maybe you held off on that new piece of equipment because you were too busy to stop by the bank and make a loan application. Now, the cost of the equipment has gone up due to production costs and you are having a tough time getting approval for the loan since lending is being restricted.
Plan for the long-run by analyzing systemic risk and run your business day to day by measuring non-systemic risk.
It's really nothing more than a study in Macroeconomics (systemic) versus Microeconomics (non-systemic.)
Next week we will uncover some figures that help us put a number to the amount of risk we're taking on.
Tuesday, September 23, 2008
$700 Billion bomb
I told you that a vacation would do me a world of good. The result is two blogs in three days. But all of the credit cannot be given to rest - let's thank Treasury Secretary Paulson and Fed Chairman Bernake too. After all, it's not everyday the two get together on CNBC and talk to members of congress asking for quick passage of $700 Billion.
And at the risk of being labeled conservative in my common-sense approach to this whole thing, I would ask each of you to consider the following before giving Paulson carte blanche authority to buy these mortgages at "a deep discount."
If the assets can be purchased at such a deep discount, why isn't anyone else rushing into the market to scoop these up? Additionally, consider the fact that Bernake and Paulson are suggesting that they will pay a fair market value for these assets. Huh? If they pay fair value for these assets, or in some instances, above fair value, isn't that the same as creating profits for Wall Street?
The next point to consider is that Paulson used to work for Goldman Sachs. Before the White House tapped him to be Treasury Secretary, Paulson ran Goldman Sachs and made about $50 million per year. I can only speculate that he still has shares in GS today. By the way, Sachs is no longer an investment bank and will likely survive this implosion. The cynic in me is guessing that they will be the first in line when it comes time to dump these valuable mortgage assets, too.
Here is the point that drives it home, however. I know that we all hate history, but I'm going to ask you to go back to your eighth grade civics class and revisit the New Deal in 1933.
That year, the New Deal disallowed investment banks from also acting like commercial banks. Five years later, the New Deal created Fannie Mae to increase liquidity in the mortgage market. This allowed lower down payments and easier terms to obtain home loan financing. Freddie Maca was created in 1970.
Skip ahead to 1989 and the Savings & Loan debacle. The government stepped in when the S&L's were writing bad loans before it was en vogue and had a TON of bad loans on the books. This action changed everything - setting precedent to banks and other investment firms that if you make bad loans, the government had yoru back and would bail you out.
In 1995, Congress re-established the CRA (Community Reinvestment Act) that emphasized lending to low-moderate income borrowers in less affluent communities. If a bank was going to buy another bank or merge with another entity, it had better adhere to CRA standards in order to get its plan approved. Homeownership skyrockets to over 65% of all Americans that could be homeowners becoming homeowners.
Flash forward to 9/11. Rather than allowing the market to shoulder the burden for bad loans that occurred as a result of the business slowdown due to the terrorist acts of that day, the Feds decide to continually lower interest rates; from 6.5% to 1%. This allowed an artificial "inflation" in the market for loans and created a new demand.
Now, we find ourselves in the same predicament and we are following the same exact path! It has to stop.
Worse yet, we are allowing Paulson the ability to do whatever he wants, whenever he wants, with our money. No checks or balances here, sir.
There is an alternative and it's a simple thing to enact. Sadly for congress, it doesn't come with pomp and circumstance or a $700 Billion price tag. It's changing an accounting rule that currently requires banks to list loans as assets and value them at their current price. In case you haven't followed the mortgage market, you probably would have more luck selling sand in the desert right now than selling a mortgage on Wall Street. This is why the market liquidity crunch has hit. Not because of foreclosures, which are bad, and not because of subprime lending, which is also part of the problem.
Think about it this way. If you absolutely HAD to sell your house today. Not tomorrow, not next week, but today, would you get top dollar for it? NO WAY JOSE (my five year old daughter's favorite quote.) THAT'S what is going on in the mortgage/banking market right now.
These investment banks don't have to sell their mortgage loans today, but they have to value them on their books based upon today's demand... go figure.
The real culprit is a little accounting requirement. Sorry it's not sexier, but that's too hard to explain I guess.
Please, I am asking you as someone that really doesn't want his children to pay for this horrible plan to spend two minutes and contact Congressman Altmire and Senators Casey and Specter and ask them to please NOT sign this horrible piece of legislation.
Send me your comments and don't worry, there will be another post Monday.
And at the risk of being labeled conservative in my common-sense approach to this whole thing, I would ask each of you to consider the following before giving Paulson carte blanche authority to buy these mortgages at "a deep discount."
If the assets can be purchased at such a deep discount, why isn't anyone else rushing into the market to scoop these up? Additionally, consider the fact that Bernake and Paulson are suggesting that they will pay a fair market value for these assets. Huh? If they pay fair value for these assets, or in some instances, above fair value, isn't that the same as creating profits for Wall Street?
The next point to consider is that Paulson used to work for Goldman Sachs. Before the White House tapped him to be Treasury Secretary, Paulson ran Goldman Sachs and made about $50 million per year. I can only speculate that he still has shares in GS today. By the way, Sachs is no longer an investment bank and will likely survive this implosion. The cynic in me is guessing that they will be the first in line when it comes time to dump these valuable mortgage assets, too.
Here is the point that drives it home, however. I know that we all hate history, but I'm going to ask you to go back to your eighth grade civics class and revisit the New Deal in 1933.
That year, the New Deal disallowed investment banks from also acting like commercial banks. Five years later, the New Deal created Fannie Mae to increase liquidity in the mortgage market. This allowed lower down payments and easier terms to obtain home loan financing. Freddie Maca was created in 1970.
Skip ahead to 1989 and the Savings & Loan debacle. The government stepped in when the S&L's were writing bad loans before it was en vogue and had a TON of bad loans on the books. This action changed everything - setting precedent to banks and other investment firms that if you make bad loans, the government had yoru back and would bail you out.
In 1995, Congress re-established the CRA (Community Reinvestment Act) that emphasized lending to low-moderate income borrowers in less affluent communities. If a bank was going to buy another bank or merge with another entity, it had better adhere to CRA standards in order to get its plan approved. Homeownership skyrockets to over 65% of all Americans that could be homeowners becoming homeowners.
Flash forward to 9/11. Rather than allowing the market to shoulder the burden for bad loans that occurred as a result of the business slowdown due to the terrorist acts of that day, the Feds decide to continually lower interest rates; from 6.5% to 1%. This allowed an artificial "inflation" in the market for loans and created a new demand.
Now, we find ourselves in the same predicament and we are following the same exact path! It has to stop.
Worse yet, we are allowing Paulson the ability to do whatever he wants, whenever he wants, with our money. No checks or balances here, sir.
There is an alternative and it's a simple thing to enact. Sadly for congress, it doesn't come with pomp and circumstance or a $700 Billion price tag. It's changing an accounting rule that currently requires banks to list loans as assets and value them at their current price. In case you haven't followed the mortgage market, you probably would have more luck selling sand in the desert right now than selling a mortgage on Wall Street. This is why the market liquidity crunch has hit. Not because of foreclosures, which are bad, and not because of subprime lending, which is also part of the problem.
Think about it this way. If you absolutely HAD to sell your house today. Not tomorrow, not next week, but today, would you get top dollar for it? NO WAY JOSE (my five year old daughter's favorite quote.) THAT'S what is going on in the mortgage/banking market right now.
These investment banks don't have to sell their mortgage loans today, but they have to value them on their books based upon today's demand... go figure.
The real culprit is a little accounting requirement. Sorry it's not sexier, but that's too hard to explain I guess.
Please, I am asking you as someone that really doesn't want his children to pay for this horrible plan to spend two minutes and contact Congressman Altmire and Senators Casey and Specter and ask them to please NOT sign this horrible piece of legislation.
Send me your comments and don't worry, there will be another post Monday.
Sunday, September 21, 2008
Deja Vu... All Over Again
I'm sorry. I can't drop the whole buyout situation going on right now. And while I realize this is a business-oriented blog, I teach Macroeconomics to very impressionable 19-20 year-olds. It's my job to ensure that they understand the gravity of this current situation we're in.
Consider the following quote:
"Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs."
Whoever said that seems to have their finger right on the pulse of our current dilemma, don't they?
Is it Fed Chairman Bernake? Maybe Hank Paulson, or former Chairman Greenspan?
Nope.
Try Thomas Jefferson. Yes, THE Thomas Jefferson, and he said this in 1814 when addressing Thomas Cooper.
It's good to see that nothing has changed in the past 200 or so years now, isn't it?
And what a burden it is going to be, my friends. Early estimates put this little project at $700 billion, but we know that our estimates always come in short. If you have any doubt, ask any good home builder or remodeler and they'll tell you to throw an extra 10-20% on top. That puts this project at about a Trillion bucks. Now we're talking real money, not little 'chump change' in billions.
Why do we do it?
Economists (I don't consider myself one even though I teach it) say it's necessary to avoid financial calamity. For whom, though?
My house, while probably worth less today than a year ago, still has a solid roof over it and I'm not behind on my payment. Same goes with my cars, although I don't drive a Bentley.
I didn't speculate on an investment condo in Miami or Vegas, so I didn't get to participate in the great real estate land grab during the past five years. Oh well. My loss.
Again, review my previous post with mind boggling phrases such as "risk equals reward." My reward now is for not taking on huge financial risk. My reward is sleeping each night. My families reward is enjoying meals at home instead of a restaurant (Suzy Q's is exempted from this since they've got the best grilled cheese in America.) Our reward is (hopefully) a stable environment that is fairly consistent in its approach to living, working and worshipping.
Now, the speculator in me is taking hold, however. Everyone is running for the door, exclaiming financial armegeddon. Sell, sell sell! Head for the doors and don't let them hit you in the rear on the way out.
Hmmmm.... aren't these the same folks that told me to BUY BUY BUY four year ago?
I wonder if they're selling? Because to be honest, I'm in a buying mood right now.
Call it contrarian, unorthodox or crazy, but I think the time to buy is soon. Not right now, but very, very soon. So soon, in fact, that I'm storing up money for down payment and might go shopping for an itty-bitty condo in SC or FL sometime around Christmas. Don't worry. It's one I can afford without a renter and one that will likely double in value in about 15 years. That's only a 5% annual return if you're keeping score at home. I don't think my 401k will do that well anytime soon, quite frankly, and it will leave me with two homes I own free and clear 15 years from now. Just about the time I'm ready to retire...
Email me your thoughts on this, folks. I really do value your judgment and opinions, and if I get out of line with my economic preaching, smack me in the head and tell me to stick with writing about business.
Help me pay the rent, too, by checking out the advertisers and their links.
Consider the following quote:
"Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs."
Whoever said that seems to have their finger right on the pulse of our current dilemma, don't they?
Is it Fed Chairman Bernake? Maybe Hank Paulson, or former Chairman Greenspan?
Nope.
Try Thomas Jefferson. Yes, THE Thomas Jefferson, and he said this in 1814 when addressing Thomas Cooper.
It's good to see that nothing has changed in the past 200 or so years now, isn't it?
And what a burden it is going to be, my friends. Early estimates put this little project at $700 billion, but we know that our estimates always come in short. If you have any doubt, ask any good home builder or remodeler and they'll tell you to throw an extra 10-20% on top. That puts this project at about a Trillion bucks. Now we're talking real money, not little 'chump change' in billions.
Why do we do it?
Economists (I don't consider myself one even though I teach it) say it's necessary to avoid financial calamity. For whom, though?
My house, while probably worth less today than a year ago, still has a solid roof over it and I'm not behind on my payment. Same goes with my cars, although I don't drive a Bentley.
I didn't speculate on an investment condo in Miami or Vegas, so I didn't get to participate in the great real estate land grab during the past five years. Oh well. My loss.
Again, review my previous post with mind boggling phrases such as "risk equals reward." My reward now is for not taking on huge financial risk. My reward is sleeping each night. My families reward is enjoying meals at home instead of a restaurant (Suzy Q's is exempted from this since they've got the best grilled cheese in America.) Our reward is (hopefully) a stable environment that is fairly consistent in its approach to living, working and worshipping.
Now, the speculator in me is taking hold, however. Everyone is running for the door, exclaiming financial armegeddon. Sell, sell sell! Head for the doors and don't let them hit you in the rear on the way out.
Hmmmm.... aren't these the same folks that told me to BUY BUY BUY four year ago?
I wonder if they're selling? Because to be honest, I'm in a buying mood right now.
Call it contrarian, unorthodox or crazy, but I think the time to buy is soon. Not right now, but very, very soon. So soon, in fact, that I'm storing up money for down payment and might go shopping for an itty-bitty condo in SC or FL sometime around Christmas. Don't worry. It's one I can afford without a renter and one that will likely double in value in about 15 years. That's only a 5% annual return if you're keeping score at home. I don't think my 401k will do that well anytime soon, quite frankly, and it will leave me with two homes I own free and clear 15 years from now. Just about the time I'm ready to retire...
Email me your thoughts on this, folks. I really do value your judgment and opinions, and if I get out of line with my economic preaching, smack me in the head and tell me to stick with writing about business.
Help me pay the rent, too, by checking out the advertisers and their links.
Sunday, September 14, 2008
Bailing More than Water
Well it's been one of those weeks in the economy. And while I attempt to stress the importance of everything to my students, I can't help but wonder if any of them get it.
The reality of the situation is very simple: our federal government is bailing out private enterprises faster than Homer Simpson can dunk a donut. It concerns me beyond compare.
To date, the feds have stepped in and assisted Lehman Brothers buy out Bear Stearns, and they've also taken over Fannie Mae and Freddie Mac. As of this writing, there is speculation that they might assist an entity buy out Lehman Brothers. Yes, the same Lehman Brothers that just purchased Bear Stearns about six months ago. The automakers are also asking for $50 billion in government handouts (fortunately, they will probably only get $25 billion.)
Throw in an election year with two candidates that desperately want to win, and it's evident our federal reserve system is really just an ATM (except they don't get to keep the $2.00 fee each time.)
I'm not going to argue whether or not the economy is in dire straits. It is. I don't need Ben Bernake to tell me that and my students don't need me to remind them that their dollar is worth about $.85 compared to last year. That's called inflation.
What I am going to argue, however, is this: I don't think the government should step in and bail ANYONE out - ever.
Get your pencils out for this terribly complex economic/financial formula. Risk = reward. Whew. Got it? Good. Repeat after me. Risk = reward.
So I have to ask you this. Where is the risk to start and mismanage a business if you know the government is going to come in and save the day?
And make no mistake about it. Each of the companies seeking goverment assistance has been horribly mismanaged for years, not just the last few months. Fannie Mae and Freddie Mac epitomize mismanagement, providing deep pockets for Wall Street while simultaneously spending in excess of $150 million in lobbying during the past decade. There is a reason prices of housing escalated so quickly - both agencies allowed consumers to qualify for loans they couldn't afford, with debt ratios in excess of 50% of a homebuyers GROSS income. Think about that for a moment. You make $4000 per month before taxes, utilities, groceries, car insurance, etc. and Fannie Mae tells you to go ahead and take that $2000 per month payment. Where does the rest of the money go?
Throw in the fact that you could purchase a home with $0 down payment (as in ZERO) and you have a recipe for disaster. Nevermind the fact that often the buyer had impaired credit and the seller was paying part, or all, of the closing costs associated with the transaction. Appraised values were inflated, inspections were skewed and sometimes even the real occupancy of the owner came into question. Oh, and everyone made gobs of money.
Even my first year business student recognizes the flaws in this business model. Mismanagement 101, my friend.
So I return to my basic question. Are you willing to kick in the $10-15 BILLION required to bailout Fannie Mae and Freddie Mac?
To be sure, GMAC isn't exactly the model of efficiency and Lehman has been called "greedy" from time to time. They, too, are asking for help.
For argument sake, recognize that we are spending about $10 billion per month on the war on terror in Iraq. Should we rob Peter to pay Paul? That's what we're doing.
How do you pay for these bailouts? There are two ways and neither one is a good option.
1. Alternative revenue sources (political speech for "raise taxes.")
2. Print more money since the value of Treasury Bonds will run more risk than current yields support. If this occurs, something called Hyperinflation will occur and yes, that's worse than it sounds.
There is an answer and it is a painful one.
Allow the markets to take care of themselves. Penalize Fannie, Freddie, GMAC, Lehman and any other company that fails due to mismanagement by letting them become extinct. Yes, it will hurt - bad. But investors will learn their lesson and adjust accordingly. If they don't, they will risk losing on their next investment.
The message being sent right now is "too big to fail." Tell that to Enron, MCI/Worldcom, Adelphia. On the flip side, is Microsoft too big to succeed? We try to break up successful models, calling them a monopoly. Where is the fairness? Is Wal Mart next to be broken up, or are they better of simply running themselves into the ground too?
Risk = reward. If you take big risks, you are entitled to big rewards - or big losses.
You cannot regulate risk any better than you can regulate deman; something communist countries discovered through the black market. And while I don't want to insinuate that we are heading toward communism, we are certainly further away from a free market economy today than we were a mere ten years ago.
The reality of the situation is very simple: our federal government is bailing out private enterprises faster than Homer Simpson can dunk a donut. It concerns me beyond compare.
To date, the feds have stepped in and assisted Lehman Brothers buy out Bear Stearns, and they've also taken over Fannie Mae and Freddie Mac. As of this writing, there is speculation that they might assist an entity buy out Lehman Brothers. Yes, the same Lehman Brothers that just purchased Bear Stearns about six months ago. The automakers are also asking for $50 billion in government handouts (fortunately, they will probably only get $25 billion.)
Throw in an election year with two candidates that desperately want to win, and it's evident our federal reserve system is really just an ATM (except they don't get to keep the $2.00 fee each time.)
I'm not going to argue whether or not the economy is in dire straits. It is. I don't need Ben Bernake to tell me that and my students don't need me to remind them that their dollar is worth about $.85 compared to last year. That's called inflation.
What I am going to argue, however, is this: I don't think the government should step in and bail ANYONE out - ever.
Get your pencils out for this terribly complex economic/financial formula. Risk = reward. Whew. Got it? Good. Repeat after me. Risk = reward.
So I have to ask you this. Where is the risk to start and mismanage a business if you know the government is going to come in and save the day?
And make no mistake about it. Each of the companies seeking goverment assistance has been horribly mismanaged for years, not just the last few months. Fannie Mae and Freddie Mac epitomize mismanagement, providing deep pockets for Wall Street while simultaneously spending in excess of $150 million in lobbying during the past decade. There is a reason prices of housing escalated so quickly - both agencies allowed consumers to qualify for loans they couldn't afford, with debt ratios in excess of 50% of a homebuyers GROSS income. Think about that for a moment. You make $4000 per month before taxes, utilities, groceries, car insurance, etc. and Fannie Mae tells you to go ahead and take that $2000 per month payment. Where does the rest of the money go?
Throw in the fact that you could purchase a home with $0 down payment (as in ZERO) and you have a recipe for disaster. Nevermind the fact that often the buyer had impaired credit and the seller was paying part, or all, of the closing costs associated with the transaction. Appraised values were inflated, inspections were skewed and sometimes even the real occupancy of the owner came into question. Oh, and everyone made gobs of money.
Even my first year business student recognizes the flaws in this business model. Mismanagement 101, my friend.
So I return to my basic question. Are you willing to kick in the $10-15 BILLION required to bailout Fannie Mae and Freddie Mac?
To be sure, GMAC isn't exactly the model of efficiency and Lehman has been called "greedy" from time to time. They, too, are asking for help.
For argument sake, recognize that we are spending about $10 billion per month on the war on terror in Iraq. Should we rob Peter to pay Paul? That's what we're doing.
How do you pay for these bailouts? There are two ways and neither one is a good option.
1. Alternative revenue sources (political speech for "raise taxes.")
2. Print more money since the value of Treasury Bonds will run more risk than current yields support. If this occurs, something called Hyperinflation will occur and yes, that's worse than it sounds.
There is an answer and it is a painful one.
Allow the markets to take care of themselves. Penalize Fannie, Freddie, GMAC, Lehman and any other company that fails due to mismanagement by letting them become extinct. Yes, it will hurt - bad. But investors will learn their lesson and adjust accordingly. If they don't, they will risk losing on their next investment.
The message being sent right now is "too big to fail." Tell that to Enron, MCI/Worldcom, Adelphia. On the flip side, is Microsoft too big to succeed? We try to break up successful models, calling them a monopoly. Where is the fairness? Is Wal Mart next to be broken up, or are they better of simply running themselves into the ground too?
Risk = reward. If you take big risks, you are entitled to big rewards - or big losses.
You cannot regulate risk any better than you can regulate deman; something communist countries discovered through the black market. And while I don't want to insinuate that we are heading toward communism, we are certainly further away from a free market economy today than we were a mere ten years ago.
Sunday, September 7, 2008
Even it up
Wow. It's been a while since the last post; for that I apologize. However, for the long vacation and time away from the writing/business, I do not apologize. You don't realize you're in a rut until you have gone through it and look back. My rut was deeper than the lines on my face.
With that said, and a new perspective (I'm back in the classroom again - summer always makes me stale) I can tell you that my brain has a million article ideas running through it.
One thing that often comes up in initial conversations, however, is "breaking even." For whatever reason, we tend to not worry about profits but instead, we focus on breaking even. While I'm all for capitalism, I thought that I'd tackle the very basic, easy formula for breaking even, as many of us have not been property taught.
Take out your calculator or abacus for this one folks. The sample will be easy, though. I promise.
Let's assume that you own a Pizza Parlor (it's Sunday and that's what the Ola family ate during the Steeler game.) You know that it costs you $3 in ingredients per pizza, $1 for the delivery service you supply and you pay rent of $500 per month and charge $9 for a pizza. How many pizzas do you need to sell to break even?
(sound of crickets chirping here and an anxious 'gulp.')
We hate math, don't we?
Here's the easy way to calculate this.
Take your Sales price ($9) and subtract your total cost per pizza ($3 ingredients + $1 delivery.)
That equals $5.
Divide your fixed costs ($500 rent) by this amount, so that $500/$5 appears. Voila! You need to sell 100 pizzas at $9 per pizza to break even. The fancy formula for this is nothing more than BEP= F/(S-V) if you're ever at a cocktail party and want to win a bet.
Knowing this model, however, we can then begin to work figures and determine whether or not delivering pizzas is really worth it. Too many times we add a service just because we might make a few extra bucks and not realize it's counter-productive.
For instance, you might realize that only 10% of your orders come from delivery. Just for giggles, you send the delivery guy home and do takeout only.
Your new break even point becomes $500/(9-3), or 500/6, which is 83 pizzas. This number workable, as you estimated only a 10% reduction in orders and you needed 100 to break even with the delivery kid. Send the kid home in this instance and enjoy the extra profits with fewer headaches! After all, that's why you're in business, right?
If you like what you've read and you own a pizza joint, send me a coupon for a freebie and click on the advertisers here so that I can pay the rent. Plenty of comments keep me inspired too!
Thanks and I'm happy to be back!
Pat yourself on the back if you got it without my help. If you needed my help, keep reading
With that said, and a new perspective (I'm back in the classroom again - summer always makes me stale) I can tell you that my brain has a million article ideas running through it.
One thing that often comes up in initial conversations, however, is "breaking even." For whatever reason, we tend to not worry about profits but instead, we focus on breaking even. While I'm all for capitalism, I thought that I'd tackle the very basic, easy formula for breaking even, as many of us have not been property taught.
Take out your calculator or abacus for this one folks. The sample will be easy, though. I promise.
Let's assume that you own a Pizza Parlor (it's Sunday and that's what the Ola family ate during the Steeler game.) You know that it costs you $3 in ingredients per pizza, $1 for the delivery service you supply and you pay rent of $500 per month and charge $9 for a pizza. How many pizzas do you need to sell to break even?
(sound of crickets chirping here and an anxious 'gulp.')
We hate math, don't we?
Here's the easy way to calculate this.
Take your Sales price ($9) and subtract your total cost per pizza ($3 ingredients + $1 delivery.)
That equals $5.
Divide your fixed costs ($500 rent) by this amount, so that $500/$5 appears. Voila! You need to sell 100 pizzas at $9 per pizza to break even. The fancy formula for this is nothing more than BEP= F/(S-V) if you're ever at a cocktail party and want to win a bet.
Knowing this model, however, we can then begin to work figures and determine whether or not delivering pizzas is really worth it. Too many times we add a service just because we might make a few extra bucks and not realize it's counter-productive.
For instance, you might realize that only 10% of your orders come from delivery. Just for giggles, you send the delivery guy home and do takeout only.
Your new break even point becomes $500/(9-3), or 500/6, which is 83 pizzas. This number workable, as you estimated only a 10% reduction in orders and you needed 100 to break even with the delivery kid. Send the kid home in this instance and enjoy the extra profits with fewer headaches! After all, that's why you're in business, right?
If you like what you've read and you own a pizza joint, send me a coupon for a freebie and click on the advertisers here so that I can pay the rent. Plenty of comments keep me inspired too!
Thanks and I'm happy to be back!
Pat yourself on the back if you got it without my help. If you needed my help, keep reading
Monday, July 21, 2008
Money Money Money
Now it's time to shift gears and move over the the payables side of the ledger. While it's fun to talk sales, receivables, etc., it's also naive to think that you can grow a business without taking on some added expenses. As the saying goes: It takes money to make money.
With that said, it's also important to think about how you spend, or invest, your money.
I can't tell you how many times a client has said to me "Ola, I paid for this really great advertising campaign. I only need to sell 10 widgets to break even!"
The client has so much enthusiasm in their voice, it breaks my heart to tell them that they may have made a bad investment.
After all, who is in business to break even? Even Tiger Woods knows better than to simply par every hole, right? Why would anyone invest in a campaign and attempt to only get their investment back? Let me show you the numbers aside from the basic rationale.
If you spend $1000 on a targeted mailer, you no longer have that $1000 to spend somewhere else. Duh, you might say, right? Just keep reading.
If you make $100 per sale, you need to make 11 sales to be ahead. And to keep the numbers simple, you'd gross $1100 on your $1000 investment. That's a 10% return. Easy math, right? Not so fast Einstein.
If you elected not to invest in that campaign and instead targeted 10 existing clients, spending $100 on each of them, you'd probably have a higher return on your investment. These are existing clients that already order from you on a regular basis. Assume that your show of affection generates 1 additional sale from each of them next month. Again, you've generated $1000 in sales, so this is break even, right?
Wrong.
This existing client takes no extra work by your support staff since the account is already set up and in place. Think about that for a minute. No extra hand-holding, coddling, training or walking them through ordering on-line while attempting to develop a relationship. By the time you add up man hours involved in a new account, the cost will likely be well over $1100. Assume 11 hours (1 hour per new client) at $10 per hour. Now, you've essentially spent $1100 on ten new accounts who may, or may not, use you again depending upon how well you "performed" for them. In essence, the only person who made out on the deal is your salesperson. You've just gone $1000 in the red. Congratulations.
Consider spending your money on existing relationships to solidify future business, new technology opportunities, data sharing, etc.
If you don't like spending your money on existing clients, stick the $1000 in a 30 day CD generating 3% per year or sponsoring a contest for your sales reps who exceed goals by 20%. Whatever number works out to be $1001 or more. Give a $1000 AMEX card to the sales rep who can increase her top account invoice by 10% or more in a month. Do something...anything. But always be cognizant of the numbers behind your new campaign.
We're going to move on to paying our receivable next week, so be prepared to dust off the abacus (or TI BAII plus.) If you don't have one, I do and I'll do the math for you and prove that sometimes it doesn't make sense to pay your bills ahead of time to receive a 2% discount.
That's called a "teaser," by the way.
Profitable week to you all and please post some comments!
With that said, it's also important to think about how you spend, or invest, your money.
I can't tell you how many times a client has said to me "Ola, I paid for this really great advertising campaign. I only need to sell 10 widgets to break even!"
The client has so much enthusiasm in their voice, it breaks my heart to tell them that they may have made a bad investment.
After all, who is in business to break even? Even Tiger Woods knows better than to simply par every hole, right? Why would anyone invest in a campaign and attempt to only get their investment back? Let me show you the numbers aside from the basic rationale.
If you spend $1000 on a targeted mailer, you no longer have that $1000 to spend somewhere else. Duh, you might say, right? Just keep reading.
If you make $100 per sale, you need to make 11 sales to be ahead. And to keep the numbers simple, you'd gross $1100 on your $1000 investment. That's a 10% return. Easy math, right? Not so fast Einstein.
If you elected not to invest in that campaign and instead targeted 10 existing clients, spending $100 on each of them, you'd probably have a higher return on your investment. These are existing clients that already order from you on a regular basis. Assume that your show of affection generates 1 additional sale from each of them next month. Again, you've generated $1000 in sales, so this is break even, right?
Wrong.
This existing client takes no extra work by your support staff since the account is already set up and in place. Think about that for a minute. No extra hand-holding, coddling, training or walking them through ordering on-line while attempting to develop a relationship. By the time you add up man hours involved in a new account, the cost will likely be well over $1100. Assume 11 hours (1 hour per new client) at $10 per hour. Now, you've essentially spent $1100 on ten new accounts who may, or may not, use you again depending upon how well you "performed" for them. In essence, the only person who made out on the deal is your salesperson. You've just gone $1000 in the red. Congratulations.
Consider spending your money on existing relationships to solidify future business, new technology opportunities, data sharing, etc.
If you don't like spending your money on existing clients, stick the $1000 in a 30 day CD generating 3% per year or sponsoring a contest for your sales reps who exceed goals by 20%. Whatever number works out to be $1001 or more. Give a $1000 AMEX card to the sales rep who can increase her top account invoice by 10% or more in a month. Do something...anything. But always be cognizant of the numbers behind your new campaign.
We're going to move on to paying our receivable next week, so be prepared to dust off the abacus (or TI BAII plus.) If you don't have one, I do and I'll do the math for you and prove that sometimes it doesn't make sense to pay your bills ahead of time to receive a 2% discount.
That's called a "teaser," by the way.
Profitable week to you all and please post some comments!
Saturday, June 28, 2008
Show me the money!
So you've hired a superstar salesperson, or you are a superstar salesperson, and your sales volume has picked up tremendously. This is a good problem to have in most instances.
However, what if you've sold on credit to your clients? Can they be trusted to pay you back in a timely manner? Did the salesperson merely sell a lot during a contest that you were having so that they could win? Was due diligence used when making a credit determination?
These are the questions that keep business owners up at night.
Not everyone is going to pay you on time. It's the nature of who we are. So how do we handle this delicate situation with our customer?
The answers are many, and the first question that needs to be asked is this: How long have you had a relationship with the client?
If you've known the client for a million years, gone to his or her daughter's wedding, etc. it's probably best to simply give your client a phone call as a gentle reminder. Provide them an "out" before threatening them. Maybe something like this:
"Hey Bill, just wanted to let you know that we were having some printing problems last month with our invoices and I wanted to confirm that you received yours. Going through my paperwork, it appears that we never received a payment - and it's most likely something on our end."
This provides Bill with the perfect alibi, while at the same time, making him aware that he hasn't paid you yet. It may have been an oversight, it may have been deliberate or it may have gotten lost - or the dog may have eaten it. Regardless, Bill now has an opportunity to deliver the payment on time immediately, or utilize your excuse and make it his own.
Because of your sensitivity to the issue, though, you've not damaged a great relationship.
Let's look at a different scenario. Assume Bill fumbles the ball and tells you "I did receive the invoice, and frankly, we're having a tough run at things right now. I'm hoping you might be able to give me a little latitude this month."
What do you do? Who is your obligation to?
If you're the AP Clerk, your obligation is to your company. You want that money NOW! However, it's probably wise to talk to your boss.
If you're the boss and your reading this, I have bad news for you. You are going to have to go with some creativity to solve this problem.
A.) Is this something that has become a habit? If so, draw a line in the sand and stick with it.
B.) If it's a one time occurence, throw Bill a bone and extend him 15 days for free.
C.) Is this a cue for you to ask what's the "tough run" he's talking about? Odds are good that this is what is really happening. You owe your client a good conversation about business and the business climate you find yourself in. Ask what he suggests you do to solve this dilemma, or how he's handled this situation in the past with his clients. If the relationship is a good one, an amicable solution will follow without jeopardizing a personal relationship.
Now, what if the client is brand new and has no track record? How do you handle a late-payment without killing the contact your salesperson worked so hard to get?
DO NOT COME OUT WITH GUNS BLAZING! Why play hardball with them when you've never collected a dime from them? They owe you nothing anyway, so if you fly out of the gates like Al Pacino in Scarface, you'll only end up with a dead customer and no money in the bank. Focus on the money in the bank.
Instead, place a call to the purchasing agent first and do a little discovery. Make small talk, get around to why you called and find out when you can expect payment? After all, your rep will be over that way in two days, can he pick up the check and bring it back if it's more convenient to them?
Again, place them in the apparent drivers' seat. Allow them to choose their own fate, while simulateneously making them aware that you are all over the account to ensure timely repayment.
One solution to this dilemma is to utilize a factoring company for your billing, invoices, collections, etc.
A factor is a company that will purchase all some, or all, of your receivables at a discount. Based upon the timeliness of their repayments, the factor will often pay $.95 on the dollar or as little as $.80 on the dollar.
Regardless, you should take a good long look at your costs of conducting credit-driven business. You probably have an AR Clerk making a decent wage, maybe some benefits, etc. And you also send out bills, either electronically or through the mail, both attached to your letterhead, using your postage meter and then your time spent going to the bank to deposit checks. Once the payments go 30 days or later, you are owed money, so you send out another round of bills, make some calls, etc. It can be extremely costly.
Sometimes, outsourcing those costs at a 5% discount is worth it considering you get your cash from the factoring company in as little as 5 days upon review of the receivables. Additionally, once a relationship is established with your factoring company, you can often negotiate more advantageous terms.
This cash flow increase can have a dramatic impact on your business model, thus allowing you to go after new clients, hire new sales staff or even make much needed capital improvements to yoru facilities. There are times that using a factor makes you a better risk to a bank when you look for a loan to grow, as cashflows are stronger than if you handled billing on your own.
While it's not the only answer, factoring is a viable option in many instances. Industries that make use of factors quite frequently include trucking firms, large manufacturers, outplacement firms, supply firms or any company that secures government contracts.
Another possibility is to sell your credit card receivables on a monthly basis. Called "merchant lending," this option can be somewhat expensive, but again, selling your credit card receivables frees up time, energy and effort to sell more, expand and continue to focus on the bottom line.
Write me with your comments, concerns or ideas, and please visit our sponsoring links!
However, what if you've sold on credit to your clients? Can they be trusted to pay you back in a timely manner? Did the salesperson merely sell a lot during a contest that you were having so that they could win? Was due diligence used when making a credit determination?
These are the questions that keep business owners up at night.
Not everyone is going to pay you on time. It's the nature of who we are. So how do we handle this delicate situation with our customer?
The answers are many, and the first question that needs to be asked is this: How long have you had a relationship with the client?
If you've known the client for a million years, gone to his or her daughter's wedding, etc. it's probably best to simply give your client a phone call as a gentle reminder. Provide them an "out" before threatening them. Maybe something like this:
"Hey Bill, just wanted to let you know that we were having some printing problems last month with our invoices and I wanted to confirm that you received yours. Going through my paperwork, it appears that we never received a payment - and it's most likely something on our end."
This provides Bill with the perfect alibi, while at the same time, making him aware that he hasn't paid you yet. It may have been an oversight, it may have been deliberate or it may have gotten lost - or the dog may have eaten it. Regardless, Bill now has an opportunity to deliver the payment on time immediately, or utilize your excuse and make it his own.
Because of your sensitivity to the issue, though, you've not damaged a great relationship.
Let's look at a different scenario. Assume Bill fumbles the ball and tells you "I did receive the invoice, and frankly, we're having a tough run at things right now. I'm hoping you might be able to give me a little latitude this month."
What do you do? Who is your obligation to?
If you're the AP Clerk, your obligation is to your company. You want that money NOW! However, it's probably wise to talk to your boss.
If you're the boss and your reading this, I have bad news for you. You are going to have to go with some creativity to solve this problem.
A.) Is this something that has become a habit? If so, draw a line in the sand and stick with it.
B.) If it's a one time occurence, throw Bill a bone and extend him 15 days for free.
C.) Is this a cue for you to ask what's the "tough run" he's talking about? Odds are good that this is what is really happening. You owe your client a good conversation about business and the business climate you find yourself in. Ask what he suggests you do to solve this dilemma, or how he's handled this situation in the past with his clients. If the relationship is a good one, an amicable solution will follow without jeopardizing a personal relationship.
Now, what if the client is brand new and has no track record? How do you handle a late-payment without killing the contact your salesperson worked so hard to get?
DO NOT COME OUT WITH GUNS BLAZING! Why play hardball with them when you've never collected a dime from them? They owe you nothing anyway, so if you fly out of the gates like Al Pacino in Scarface, you'll only end up with a dead customer and no money in the bank. Focus on the money in the bank.
Instead, place a call to the purchasing agent first and do a little discovery. Make small talk, get around to why you called and find out when you can expect payment? After all, your rep will be over that way in two days, can he pick up the check and bring it back if it's more convenient to them?
Again, place them in the apparent drivers' seat. Allow them to choose their own fate, while simulateneously making them aware that you are all over the account to ensure timely repayment.
One solution to this dilemma is to utilize a factoring company for your billing, invoices, collections, etc.
A factor is a company that will purchase all some, or all, of your receivables at a discount. Based upon the timeliness of their repayments, the factor will often pay $.95 on the dollar or as little as $.80 on the dollar.
Regardless, you should take a good long look at your costs of conducting credit-driven business. You probably have an AR Clerk making a decent wage, maybe some benefits, etc. And you also send out bills, either electronically or through the mail, both attached to your letterhead, using your postage meter and then your time spent going to the bank to deposit checks. Once the payments go 30 days or later, you are owed money, so you send out another round of bills, make some calls, etc. It can be extremely costly.
Sometimes, outsourcing those costs at a 5% discount is worth it considering you get your cash from the factoring company in as little as 5 days upon review of the receivables. Additionally, once a relationship is established with your factoring company, you can often negotiate more advantageous terms.
This cash flow increase can have a dramatic impact on your business model, thus allowing you to go after new clients, hire new sales staff or even make much needed capital improvements to yoru facilities. There are times that using a factor makes you a better risk to a bank when you look for a loan to grow, as cashflows are stronger than if you handled billing on your own.
While it's not the only answer, factoring is a viable option in many instances. Industries that make use of factors quite frequently include trucking firms, large manufacturers, outplacement firms, supply firms or any company that secures government contracts.
Another possibility is to sell your credit card receivables on a monthly basis. Called "merchant lending," this option can be somewhat expensive, but again, selling your credit card receivables frees up time, energy and effort to sell more, expand and continue to focus on the bottom line.
Write me with your comments, concerns or ideas, and please visit our sponsoring links!
Sunday, June 22, 2008
Focus, Focus, Focus
Thank you to the many responses so far and the visits to the advertisers that move me up in the blogging lists! (I have no idea what that means, but it sounds pretty techie...)
Let's get back to business, though.
Many responses via email and comments (always welcome) suggesting that we might just be onto something here with regard to cashflow and watching our receivables - particularly if we are a small business with a few large customers.
How do we handle our receivables, though? After all, as business people, we are probably type "A" and need control. Additionally, we like to count all of the money before, during, and after business hours, right?
The answer is one word - focus.
FOCUS can be broken down as follows:
F - Be FISCALLY responsible to yourself, and your business, first. If you have a client that you wouldn't lend a pencil to, you probably don't want to extend credit to them - even if it means losing the sale. Better to have not lost production costs, shipping costs, paying your salesperson and your staff and then not get paid than to never make the sale at all.
O - Be OPPORTUNISTIC when you do extend credit to your client. Create a competitive advantage if you open a receivable line to a new client by suggesting minimum orders or requiring a larger down-payment amount. This allows you to relax standards for the client once they've established a timely history with your company.
C - Be COST CONSCIENTIOUS. If you have a vendor that requires payment in 30 days or less, be aware of that fact as well as when your receivables are due. It makes absolutely NO SENSE to make your billing date due the first of the month if your suppliers require payment within 30 days from time of receiving their shipment. If you received supplies on the 15th of May, for instance, payment would be due June 15th. Likewise, if you make a credit sale on June 1st, your client has until July 1st to pay you in full. That's a 15 day difference between funds coming in and funds going out.
U - Avoid being UTOPIAN in your approach to lending. While we like to think that everyone pays their bills ahead of time like we do, that's not the case, folks. In fact, many larger companies take advantage of smaller companies and deliberately push payments back 45, 60 or 75 days! Not everyone in business is a nice guy. Don't fall into the trap of assuming we all want a "touchy feely" approach to collecting bills.
S - Finally, be STERN when dealing with deadbeat accounts. This is YOUR business, not theirs. They can lay anything out there as a possible reason for the delay in payment, but stick to your guns and demand payment. Accept cashier checks or money orders if a client has a "spotty" record of repayment history, and develop strong relationships with that AP Clerk at your clients' offices. Sales are an important element in any business, but collecting money is probably more important. Without money coming in, there is no sense selling anything. In fact, if you keep selling and NOT get paid, yours is a losing business my friend!
To be sure, there are plenty of good clients that will pay on time. Obviously, it's a win-win situation that grows out of respect and integrity toward each others' business. However, what do you do when someone DOES NOT pay you on time? How do you handle it?
The answers are as many as the days of summer are long. We will explore them next week, but I urge you to begin thinking about how you handle your existing relationships with clients, and vendors. I'm certain there are things that can become uncomfortable from time to time and as a result, your operating system could likely be modified to accomodate these changes.
In the mean time, I urge you to comment, write and phone me with any of your questions, and I hope you're enjoying this weekly update as much as I enjoy posting it!
Here's to a profitable week ahead.
Let's get back to business, though.
Many responses via email and comments (always welcome) suggesting that we might just be onto something here with regard to cashflow and watching our receivables - particularly if we are a small business with a few large customers.
How do we handle our receivables, though? After all, as business people, we are probably type "A" and need control. Additionally, we like to count all of the money before, during, and after business hours, right?
The answer is one word - focus.
FOCUS can be broken down as follows:
F - Be FISCALLY responsible to yourself, and your business, first. If you have a client that you wouldn't lend a pencil to, you probably don't want to extend credit to them - even if it means losing the sale. Better to have not lost production costs, shipping costs, paying your salesperson and your staff and then not get paid than to never make the sale at all.
O - Be OPPORTUNISTIC when you do extend credit to your client. Create a competitive advantage if you open a receivable line to a new client by suggesting minimum orders or requiring a larger down-payment amount. This allows you to relax standards for the client once they've established a timely history with your company.
C - Be COST CONSCIENTIOUS. If you have a vendor that requires payment in 30 days or less, be aware of that fact as well as when your receivables are due. It makes absolutely NO SENSE to make your billing date due the first of the month if your suppliers require payment within 30 days from time of receiving their shipment. If you received supplies on the 15th of May, for instance, payment would be due June 15th. Likewise, if you make a credit sale on June 1st, your client has until July 1st to pay you in full. That's a 15 day difference between funds coming in and funds going out.
U - Avoid being UTOPIAN in your approach to lending. While we like to think that everyone pays their bills ahead of time like we do, that's not the case, folks. In fact, many larger companies take advantage of smaller companies and deliberately push payments back 45, 60 or 75 days! Not everyone in business is a nice guy. Don't fall into the trap of assuming we all want a "touchy feely" approach to collecting bills.
S - Finally, be STERN when dealing with deadbeat accounts. This is YOUR business, not theirs. They can lay anything out there as a possible reason for the delay in payment, but stick to your guns and demand payment. Accept cashier checks or money orders if a client has a "spotty" record of repayment history, and develop strong relationships with that AP Clerk at your clients' offices. Sales are an important element in any business, but collecting money is probably more important. Without money coming in, there is no sense selling anything. In fact, if you keep selling and NOT get paid, yours is a losing business my friend!
To be sure, there are plenty of good clients that will pay on time. Obviously, it's a win-win situation that grows out of respect and integrity toward each others' business. However, what do you do when someone DOES NOT pay you on time? How do you handle it?
The answers are as many as the days of summer are long. We will explore them next week, but I urge you to begin thinking about how you handle your existing relationships with clients, and vendors. I'm certain there are things that can become uncomfortable from time to time and as a result, your operating system could likely be modified to accomodate these changes.
In the mean time, I urge you to comment, write and phone me with any of your questions, and I hope you're enjoying this weekly update as much as I enjoy posting it!
Here's to a profitable week ahead.
Saturday, June 14, 2008
Cover your Assets
Sorry about the adult-themed title, but again, grabbing your attention early is important.
First, thank you to the many who have written and/or commented! We even have some non-business type among us. Welcome from the rest of us capitalistic idealists.
Now, onto your assets.
With a show of hands, who has heard the phrase "our greatest assets are our employees?" EVERYONE! Good!
It's a lie, of course.
At the risk of sounding cynical, your company's greatest assets are not the people that work with you, or even the people you bring in (consultants like me.)
Rather, the greatest assets your business possesses are those that are most easily converted into cash! Even my four year old daughter knows that "cash is king, baby." (That was one of her first sentences. I'm so proud.)
Sure, the people are important, and the technology, and the ideas, and the thinking, etc. But at the end of the day, are you in the people business or the profit business? I choose the latter, and you do to if you're still reading this post. If the people really are the focus of your business, I hope that you are self-employed as a counselor, psychologist, hypnotist or palm-reader. After all, people really are your business. Even outplacement firms are more concerned about cash than the employees they place at the end of the day!
For the rest of us, it needs to be about assets and the accumulation of assets. By doing so, every decision we make will ultimately be decided by answering two questions. 1) Is it legal? If the answer is "yes," continue onto question #2 which is: Is it profitable?
A "yes" answer here and all systems go!
A third question, "is it ethical?" needs to be answered, but I need to assume that all of you are acting ethically. Otherwise, I have surrounded myself with frauds and schemers, and I don't believe any of you are unethical.
Now, the asset portion of our discussion.
There are rules, of course.
1. Cash is king. This is self-explanatory. If you have cash, you have power. You have the ability to get into a price war with your competitor, so long as they have less cash than you do. You have the ability to pay for projects without borrowing (we'll discuss leverage in a later post.)
2. Inventory isn't cash. I have a friend that likes to show me all the "stuff" in his warehouse. Stuff in the warehouse equates to several things he doesn't understand. As his inventory sits there, it is taking up space and costing his company money. Lots of money. Additionally, if his inventory is perishable, the longer it sits, the cheaper it gets to his end customer. Valuing receivables can be a challenge. Turn inventory frequently. One of the ratios often overlooked is the "inventory turnover ratio." This is basically a number that tells you how often you sell out of your inventory on a yearly basis. The higher the figure, the better you're doing.
3. Receivables aren't a sure thing. While we might like to think that all of our customers are folks that like to pay on time, the reality is that some of them can't or won't. That creates headaches for us that often go beyond measurability. Sure, it's a tough call to make and say "Stan, I've known you forever and all, but I need paid." What we can't measure, however, is how much are you really losing by not having that money in your account for expansion, price wars, rising cost for fuel and production, etc? Remember, unless you are a bank, you ARE NOT A LENDER!
Many times you can arrive at this number by simply taking SALES/INVENTORY. Wow. That's hard math. A better method, however, might be to take your COST OF GOODS SOLD/AVERAGE INVENTORY. This second method is probably a better indicator, since Sales are recorded at MARKET PRICE, while COGS are recorded at COST. Additionally, using AVERAGE INVENTORY reduces the seasonality of your business.
4. Stocks/bond/securities aren't a sure thing. First, let me tell you that I am a big proponent of diversifying your personal portfolio so that all of your eggs aren't in one basket. However, business and personal are two different things.
I remember a case study I did on Intel back in 1999 and recall that over half of their income came from the sale of stocks and securities. This was INTEL, not Goldman Sachs or Lehman Bros. What in the heck was Intel doing buying and selling stock? Not surprisingly, they had a couple of rough years after that until they got back to focusing on their Core Competencies.
Remember, your company is in business to do "X." While I have no problem with a business that hedges risk through treasuries, derivatives or even businesses that have opposite business cycles, don't count on your investments to be easily liquidated in the future for the same value they hold today. There is a reason they are expected to have higher returns than that boring sweep account you have at the bank - they are riskier! As a result, they can, and will, rise and fall in value each day.
So how do we get to the cash?
First, do what you do best and rely upon your CFO/Banker/CPA when it comes to investments. Remember, you are not in the investment business.
Next, watch your inventory! Don't be proud of your warehouse facility unless you only have an empty warehouse that you are now leasing to your competitor since you've pushed back everything onto your vendors. For an example of his, just look at DELL. They are fairly successful, right? And they have no inventory.
Finally, and this is paramount, is if you must act as a bank to your customers, do so sparingly and cautiously! We will discuss payables in a later post, but the odds are good that you are more forgiving to your customers than you're suppliers are to you. Therefore, when you act as a credit facility, you are likely losing money.
I can't preach enough about this last point, folks. Too many great companies have gone down the tubes due to their inability to lend appropriately. Heck, even the big guys on Wall Street are having struggles right now, and they're supposed to be experts.
Receivables also create extra expenses in the form of a receivable clerk, mailing out billings, invoices, phone calls, collections, etc. Receivables can be a bad thing.
There are plenty of things to add to this, but I believe this is more than enough on a rainy Saturday. Can you tell that I had two glasses of iced-tea this morning at Suzie Q's?
Comments are always welcomed and appreciated, and please visit our sponsoring links provided at the top of this blog so that we can continue to move up Google's blog list!
First, thank you to the many who have written and/or commented! We even have some non-business type among us. Welcome from the rest of us capitalistic idealists.
Now, onto your assets.
With a show of hands, who has heard the phrase "our greatest assets are our employees?" EVERYONE! Good!
It's a lie, of course.
At the risk of sounding cynical, your company's greatest assets are not the people that work with you, or even the people you bring in (consultants like me.)
Rather, the greatest assets your business possesses are those that are most easily converted into cash! Even my four year old daughter knows that "cash is king, baby." (That was one of her first sentences. I'm so proud.)
Sure, the people are important, and the technology, and the ideas, and the thinking, etc. But at the end of the day, are you in the people business or the profit business? I choose the latter, and you do to if you're still reading this post. If the people really are the focus of your business, I hope that you are self-employed as a counselor, psychologist, hypnotist or palm-reader. After all, people really are your business. Even outplacement firms are more concerned about cash than the employees they place at the end of the day!
For the rest of us, it needs to be about assets and the accumulation of assets. By doing so, every decision we make will ultimately be decided by answering two questions. 1) Is it legal? If the answer is "yes," continue onto question #2 which is: Is it profitable?
A "yes" answer here and all systems go!
A third question, "is it ethical?" needs to be answered, but I need to assume that all of you are acting ethically. Otherwise, I have surrounded myself with frauds and schemers, and I don't believe any of you are unethical.
Now, the asset portion of our discussion.
There are rules, of course.
1. Cash is king. This is self-explanatory. If you have cash, you have power. You have the ability to get into a price war with your competitor, so long as they have less cash than you do. You have the ability to pay for projects without borrowing (we'll discuss leverage in a later post.)
2. Inventory isn't cash. I have a friend that likes to show me all the "stuff" in his warehouse. Stuff in the warehouse equates to several things he doesn't understand. As his inventory sits there, it is taking up space and costing his company money. Lots of money. Additionally, if his inventory is perishable, the longer it sits, the cheaper it gets to his end customer. Valuing receivables can be a challenge. Turn inventory frequently. One of the ratios often overlooked is the "inventory turnover ratio." This is basically a number that tells you how often you sell out of your inventory on a yearly basis. The higher the figure, the better you're doing.
3. Receivables aren't a sure thing. While we might like to think that all of our customers are folks that like to pay on time, the reality is that some of them can't or won't. That creates headaches for us that often go beyond measurability. Sure, it's a tough call to make and say "Stan, I've known you forever and all, but I need paid." What we can't measure, however, is how much are you really losing by not having that money in your account for expansion, price wars, rising cost for fuel and production, etc? Remember, unless you are a bank, you ARE NOT A LENDER!
Many times you can arrive at this number by simply taking SALES/INVENTORY. Wow. That's hard math. A better method, however, might be to take your COST OF GOODS SOLD/AVERAGE INVENTORY. This second method is probably a better indicator, since Sales are recorded at MARKET PRICE, while COGS are recorded at COST. Additionally, using AVERAGE INVENTORY reduces the seasonality of your business.
4. Stocks/bond/securities aren't a sure thing. First, let me tell you that I am a big proponent of diversifying your personal portfolio so that all of your eggs aren't in one basket. However, business and personal are two different things.
I remember a case study I did on Intel back in 1999 and recall that over half of their income came from the sale of stocks and securities. This was INTEL, not Goldman Sachs or Lehman Bros. What in the heck was Intel doing buying and selling stock? Not surprisingly, they had a couple of rough years after that until they got back to focusing on their Core Competencies.
Remember, your company is in business to do "X." While I have no problem with a business that hedges risk through treasuries, derivatives or even businesses that have opposite business cycles, don't count on your investments to be easily liquidated in the future for the same value they hold today. There is a reason they are expected to have higher returns than that boring sweep account you have at the bank - they are riskier! As a result, they can, and will, rise and fall in value each day.
So how do we get to the cash?
First, do what you do best and rely upon your CFO/Banker/CPA when it comes to investments. Remember, you are not in the investment business.
Next, watch your inventory! Don't be proud of your warehouse facility unless you only have an empty warehouse that you are now leasing to your competitor since you've pushed back everything onto your vendors. For an example of his, just look at DELL. They are fairly successful, right? And they have no inventory.
Finally, and this is paramount, is if you must act as a bank to your customers, do so sparingly and cautiously! We will discuss payables in a later post, but the odds are good that you are more forgiving to your customers than you're suppliers are to you. Therefore, when you act as a credit facility, you are likely losing money.
I can't preach enough about this last point, folks. Too many great companies have gone down the tubes due to their inability to lend appropriately. Heck, even the big guys on Wall Street are having struggles right now, and they're supposed to be experts.
Receivables also create extra expenses in the form of a receivable clerk, mailing out billings, invoices, phone calls, collections, etc. Receivables can be a bad thing.
There are plenty of things to add to this, but I believe this is more than enough on a rainy Saturday. Can you tell that I had two glasses of iced-tea this morning at Suzie Q's?
Comments are always welcomed and appreciated, and please visit our sponsoring links provided at the top of this blog so that we can continue to move up Google's blog list!
Sunday, June 8, 2008
Finding the Perfect Balance
Okay, I confess.
This is a misleading title intended to draw in you readers that are opposed to doing hard numbers and would rather focus on the soft sciences of psychology, marketing, etc.
Gotcha!
The perfect balance I am referring to is the Balance Sheet. This simple, usually one-page document gives a snapshot of any given business at one point in time - typically at the end of the month of a business quarter/cycle.
The beauty with the balance sheet, though, is that while tiny in size, it is a magnifying glass to everything goin on within the business itself.
Remember, the left side has to equal the right side! As a result, the assets (left side) are equal to liabilities (debt) + capital (owner's equity.) Whew. That was hard.
Take a look at the one below:
This is a misleading title intended to draw in you readers that are opposed to doing hard numbers and would rather focus on the soft sciences of psychology, marketing, etc.
Gotcha!
The perfect balance I am referring to is the Balance Sheet. This simple, usually one-page document gives a snapshot of any given business at one point in time - typically at the end of the month of a business quarter/cycle.
The beauty with the balance sheet, though, is that while tiny in size, it is a magnifying glass to everything goin on within the business itself.
Remember, the left side has to equal the right side! As a result, the assets (left side) are equal to liabilities (debt) + capital (owner's equity.) Whew. That was hard.
Take a look at the one below:
Weeklybusinesstips
June 8, 2008
Assets Liabilities
Cash $50,000 Short-term Debt $30,000
Accounts Rec $40,000 Accounts Payable $50,000
Merchandies/ Salaries $110,000
Inventory $100,000 Total Current Liabilities $190,000
Total Current
Assets $190,000 Long-term Debt $20,000
Plant/Equip $30,000
Accumulated
Depreciation (2000) Owner Equity $8000
Total Assets $218,000 Total Liability/Equity $218,000
Yes, I know it's exciting to read a balance sheet on a blog; especially one as basic as this. But the ramifications from the balance sheet are enormous, and our understanding of the business grows tremendously once we begin to dig into the balance sheet and discover that things exist there.
First, and foremost, is notice that the assets are listed from most liquid to least liquid.
Why is this the case?
As business owners, I don't need to tell you that cash is king. It's the most easily understood, and universally accepted, forms of payment. You don't need to process anything more than a receipt and the corresponding deposit slip, as the bank accepts these funds the instant they hit your account.
Account receivable, on the other hand, are from your credit paying customers. Aside from the credit card comany taking their 2-3.5% fee on each transaction from you, there is always the risk of the purchase being disputed by the customer, and the processing time takes a few more days. Thus, AR is not as liquid as cash.
Finally, inventory is listed as a current asset and considered the least liquid. This is the result of fluctuations in the business cycle and an ever-changing consumer demand for your product. Additionally, your accounting method will need to be considered for the balance sheet, as the price you paid two weeks ago to make your product may be higher or lower than when you purchased the materials. FIFO and LIFO are important elements to consider for this entry.
On the liability side, the same science is applied, using short term debts and accounts payable as the most necessary payments, followed by longer-term liabilities.
So you don't need to be a rocket scientist to realize that if you reduce your liabilities, a.k.a. - costs, expenditures, debts, etc. and your assets stay the same, your owners equity has to increase in order to balance the account! That's why costs are so important with what we do.
Imagine how great this balance sheet would improve if we simply cut our accounts payable by 20% to a total of $40,000. The owners equity would increase from $8000 to $18,000! And that doesn't even factor the possibility of increasing cash balances with increased sales or higher prices.
A few final thoughts on the balance sheet.
1. It is not wise to skip over a balance sheet. While elementary in scope, that is intentional. The balance sheet is intended to be the glossary for accompanying financial statements such as the income statement, statement of cash flows, profit and loss statement, etc.
2. The balance sheet is a snapshot of one day in time! Keep it consistent and monitor your balance sheet frequently. If not daily, at least weekly, and make it the same time each week. For instance if you have large sales on the weekend, get a Monday morning balance sheet.
3. Pay attention to variables within your business that fall into categories that can jeopardize your equity position on the balance sheet, such as accounts receivable and accounts payable. While it might increase sales in the short-run, relaxing credit standards to sell more items is seldom a wise move for the long-haul. Similarly, review your vendor accounts frequently and push for better terms as your performance paying the accounts improve. For example, you may have a perfect record paying within 30 days to all of your vendors. Go back and ask for a reduced bill if you pay in full within 15 or 20 days, such as a 2/15 net 30 (this means a 2% reduced bill if you pay it within 15 days, or just full payment if you pay after 15 but before 30 days.) Most vendors will work with you so long as your credit history with them is positive.
4. Don't dwell over the numbers! It's too easy to become bogged down and get frustrated when things don't turn your way on the balance sheet. We will later discuss how to improve cash flows, so just be cognizant of your balance sheets and find ways to make minor modifications to your business process that result in increased cash balances, reduced inventories and lower costs.
Please send your questions and/or comments to me anytime! I'd love to know that you're reading and enjoying.
Thursday, June 5, 2008
Finance 101
The first question I ask students each semester is "who wants to be here?"
No hand ever goes up. The next, obvious, question is "who has to be here?"
All hands go up.
Such is the life of a Finance teacher and number junkie. My goal is to teach every person I come into contact with in an appropriate setting about numbers. There is no need to be afraid of numbers.
In fact, as business people, it is our job to EMBRACE numbers. This is the language of our business, folks! Regardless of what marketing people tell you, or your lawyers tell you, or your advertising department tells you, the bottom line for your business is, well, the bottom line!
Please understand something, though. Finance is NOT Accounting! Accounting is a tiny segment within Finance, kind of like being a quarterback is part of a football team or cheese is a part of pizza.
So why do we run from numbers?
The answer is simple - numbers paint an accurate picture. All the time. Everytime.
Reality is a hard thing to comprehend when we have plans for big things. Reality gets in the way of our dreams and desire to grow, grow, grow!
It's the same reason we don't write down our Mission Statement, Vision Statement, Business Plan or even a daily plan!
When we see it in writing, it becomes real to us. It reminds us that there are things left to do on our list - things we haven't accomplished yet, rather than things we have accomplished so far.
As business people, we don't like to be reminded of our failures, and finance does just that on a daily basis through our balance sheet.
Each week, I am going to discuss a different element of finance and why it is so important to simly learn the language of finance, whether you are the President of a billion dollar company or a sole proprietor doing part-time work to supplement your "real" job. Once you learn the language of business (finance) you will make smarter business decisions based upon increasing cashflow rather than simply focusing upon what is in the bank account each day. The difference between the two is like night and day, yet few business owners really "get it."
My job is to make you "get it," and I will utilize many means to get you there.
I urge you to write me with questions, comments or opinions, as I am a lifelong student of the game of business and finance. No topic is too small or too big, and I am also simply asking you to pass this site on to two people that you think could benefit from this site. I can also answer personal finance questions, although I am not a licensed financial advisor. (I am, however, in the process of trying to pass my series 6, 63 and 7 - but it's merely for my own skill set and not for profit right now.)
The blog will be updated weekly, most likely every Monday morning to get you started.
Thanks!
No hand ever goes up. The next, obvious, question is "who has to be here?"
All hands go up.
Such is the life of a Finance teacher and number junkie. My goal is to teach every person I come into contact with in an appropriate setting about numbers. There is no need to be afraid of numbers.
In fact, as business people, it is our job to EMBRACE numbers. This is the language of our business, folks! Regardless of what marketing people tell you, or your lawyers tell you, or your advertising department tells you, the bottom line for your business is, well, the bottom line!
Please understand something, though. Finance is NOT Accounting! Accounting is a tiny segment within Finance, kind of like being a quarterback is part of a football team or cheese is a part of pizza.
So why do we run from numbers?
The answer is simple - numbers paint an accurate picture. All the time. Everytime.
Reality is a hard thing to comprehend when we have plans for big things. Reality gets in the way of our dreams and desire to grow, grow, grow!
It's the same reason we don't write down our Mission Statement, Vision Statement, Business Plan or even a daily plan!
When we see it in writing, it becomes real to us. It reminds us that there are things left to do on our list - things we haven't accomplished yet, rather than things we have accomplished so far.
As business people, we don't like to be reminded of our failures, and finance does just that on a daily basis through our balance sheet.
Each week, I am going to discuss a different element of finance and why it is so important to simly learn the language of finance, whether you are the President of a billion dollar company or a sole proprietor doing part-time work to supplement your "real" job. Once you learn the language of business (finance) you will make smarter business decisions based upon increasing cashflow rather than simply focusing upon what is in the bank account each day. The difference between the two is like night and day, yet few business owners really "get it."
My job is to make you "get it," and I will utilize many means to get you there.
I urge you to write me with questions, comments or opinions, as I am a lifelong student of the game of business and finance. No topic is too small or too big, and I am also simply asking you to pass this site on to two people that you think could benefit from this site. I can also answer personal finance questions, although I am not a licensed financial advisor. (I am, however, in the process of trying to pass my series 6, 63 and 7 - but it's merely for my own skill set and not for profit right now.)
The blog will be updated weekly, most likely every Monday morning to get you started.
Thanks!
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