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Finance Management Advice

The following are the most popular expert advice articles on finance management:

Finance Management Advice 1

Corporate Finance in Europe: Confronting Theory With Practice.

We present the results of an international survey of 313 European CFOs on capital budgeting, cost of capital, capital structure, and corporate governance. We find that although large firms often use present value techniques and the capital asset pricing model to assess the feasibility of an investment opportunity, CFOs of small firms still rely on the payback criterion. In capital structure policy, financial flexibility appears to be the most important factor in determining the amount a/corporate debt. Corporate finance practice appears to be influenced mostly by firm size, to a lesser extent by shareholder orientation, and least by national influences.

In this article, we conduct a survey on how professionals deal with different dilemmas within modern financial management. We measure the extent to which theoretical concepts have been adopted by professionals from a wide range of firms from the UK, the Netherlands, Germany, and France.

Recent studies have documented fundamental differences between the financial markets and systems when comparing the United States with Europe. La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997, 1998) focus on the underlying disparities between the legal systems encompassing both continents, as well as on the relation between legal systems and the development of capital markets. Rajan and Zingales (2003) stress the continental differences by comparing the polar forms of financial systems: the institution-heavy relationship-based, more prevalent in Europe, and the market-intensive arms' length, more prevalent in the United States. Finally, from a corporate governance perspective, Chew (1997) shows how the Anglo-Saxon marked-based corporate governance system differs significantly from the relation-based or insider system, which is most widespread in Europe. In this study, we investigate the effect of the corporate governance system on individual firms and include this important issue in our overall analysis of European corporate finance practices. We conclude that the US and European financial markets and firms differ considerably. We contribute to the debate in the current literature by comparing the corporate finance practice of individual firms in both continental markets. We test whether the apparent differences in institutional settings translate into significantly different financial management practices.

To address theory with the behavior of financial managers in practice, we apply survey research. (1) We analyze many corporate finance issues, ranging from capital budgeting techniques to capital structure and corporate governance. Doing so allows us to link the different issues and to deepen our analysis.

Furthermore, we analyze the responses in our survey conditional on firm-specific characteristics. This approach enables us to test whether these factors drive the results. We sample a cross-section of 6,500 companies from the UK, Netherlands, France, and Germany. We collect 313 responses. The size of our sample represents one of the largest survey samples in the financial literature.

Survey research is relatively rare within the empirical corporate finance literature, in which most studies are based on large samples of financial observations. Although these large samples offer cross-sectional variations and the statistical power to analyze these variations, they are limited in their ability to deal with non-quantifiable issues. Our approach combines a relatively large sample with the ability to ask qualitative questions.

Survey research is also associated with some limitations. We measure beliefs rather than actions. In doing so, we implicitly assume that managers "do what they say they do." To test this assumption, we consider the consistency of the answers and where possible, compare our survey evidence with other research. Moreover, the anonymity of our survey stimulates frank responses. Another limitation of survey research is potential respondent bias. We take this drawback into consideration when we compose our samples and construct our questionnaire. Thus, we are able to limit this bias to the minimum.

By using an international sample we are able to assess whether existing insights on corporate finance practices documented by Graham and Harvey (2001) also hold outside the US. Furthermore, we address the corporate governance policy of firms, which enables us to investigate whether corporate governance differences influence the way in which firms organize their financial management. Finally, we extend the univariate results of Graham and Harvey (2001) by using multivariate regression analysis.

This study complements and adds to Bancel and Mittoo's (2004) survey of European CFOs (published in this same issue). We complement Bancel and Mittoo's work as we include questions on capital budgeting and cost of capital estimation and we study both public and private firms. Bancel and Mittoo focus exclusively on the debt policies of publicly listed corporations. Our data set facilitates cross-country comparisons, while Bancel and Mittoo cluster countries into four legal systems (their study covers 87 observations from 16 countries). We complement Bancel and Mittoo's analysis of legal systems and country-level governance characteristics, because we include firm-level corporate governance characteristics. We limit our discussion of the capital structure results to a comparison of the relative importance of the static trade-off and pecking-order theories.

Our results on capital budgeting show that European firms are still remarkably keen on applying the payback criterion, instead of discounting their cash flows by using the internal rate of return (IRR) or the net present value (NPV). Similar to their US colleagues, European CFOs determine their cost of capital using the capital asset pricing model (CAPM), rather than applying arithmetic-average historic returns or the dividend discount model.

Overall, we find that firm size is positively related to the use of the discounted cash flow method and the application of the CAPM. Smaller firms and firms less oriented towards maximizing shareholder value are more likely to evaluate their investment opportunities by using the payback period criterion and setting their cost of capital at whatever level their investors tell them.

For capital structure, we find smaller disparities between corporate debt policies. In all four national samples, respondents report that financial flexibility is the key factor when determining their debt structure. This result corroborates previous studies from the US.

Our main results show that corporate financial management practices are predominantly determined by firm size, to a lesser extent by shareholder orientation, and least by country of origin. Interestingly, we can relate our findings on the role of shareholder orientation to the international differences in legal systems and capital markets documented by La Porta et al. (1997, 1998), Rajan and Zingales (2003) and Chew (1997). We confirm that shareholder orientation prevails in the UK and in the Netherlands, but in the German and French firms shareholders are less important. We also find that in capital budgeting, the orientation towards shareholders induces managers to apply techniques that are based on maximizing the wealth of these stakeholders. However, in capital structure choice, we find neither a role for shareholder orientation nor strong country differences. Apparently the fundamentals of capital structure choice are independent of legal system and capital market development.

The article is organized as follows. In the next section, we present the sample collection procedures and sample statistics. Section II offers a comprehensive overview of our results on capital budgeting. Section III deals with the common practices regarding the cost of capital. Section IV focuses on our capital structure results. Section V concludes.

I. Data and Method

This section details the procedures we used to obtain our data and the robustness tests we performed. We also present our sample statistics.

A. Sample Collection Procedures

Our survey comprises four groups of questions. First, we use several questions to describe the firm and its CEO. Next, we pose questions on the firm's capital budgeting techniques and the ways in which the firm estimates its cost of capital. We continue by focusing on capital structure policy. We finish our questionnaire by asking firms about their goals and their perception of the importance of different stakeholders.

The starting point for our questionnaire is the survey of Graham and Harvey (2001). To facilitate a fair comparison of both sets of survey results, we ask exactly the same questions. In addition we add questions on the firm's goals and stakeholders.

We surveyed firms in the UK, the Netherlands, Germany, and France. The survey of Graham and Harvey (2001) has been translated into German and French by a certified translation agency and into Dutch by the authors. Next, in order to test whether the translations were correct and whether the wording was understood, we conducted several interviews in each of the four countries. In these interviews, potential respondents first filled out the questionnaire, and then discussed each question. We learned that the average time to fill out the questionnaire was about 15 minutes. We adjusted some of the wording and added brief explanations, based on the interviewees' feedback.

We use the Amadeus data set of Bureau Van Dijk as our sample universe. This data set covers public and private firms in Europe. From it we select all firms with 25 or more employees. We also use the Kompass database, which gives us the names and positions of the high-ranking officials. We search for the name of the CFO in the Kompass data for each firm in the Amadeus data. Our goal is to select 2,000 firms in the UK, Germany, and France, and 500 firms in the Netherlands. We first select all public firms in each country. Then, we complement our sample sets with randomly chosen private firms for which we know the name of the CFO.

The questionnaire was sent out by a third party. This approach ensures that the results are handled anonymously, which stimulates respondents to answer frankly. Between November 1 to 8, 2002, the mailing firm sent the questionnaires and mail to the sample firms. Each firm received a cover letter, the four-page questionnaire, a pre-stamped envelope, and a response form for requesting a free report of the results. The latter served as an incentive to fill in the questionnaire. The respondents could return their questionnaire and form by mail or by fax.

About two weeks after the firms received the questionnaire, our survey partner contacted all non-respondents by phone by native speakers, and reminded them to return the questionnaire. During the phone conversation, the respondents could either answer the questions over the phone immediately, or receive an email link to a web page for filling in the questionnaire. This telephonic and email effort lasted until January 7, 2003. We received our last response on January 30, 2003.

In total, we received 313 responses, 68 in the UK, 52 in the Netherlands, 132 in Germany, and 61 in France. (2) We received 50.5% of the questionnaires by mail or fax, 19.2% by telephonic interviews, and 30.3% through the web page.

In analyzing our results we paid particular attention to potential response biases, which threaten survey research.

We first investigate whether the questionnaires show a bias caused by the type of response medium or by the sequence of questions. We cluster our results according to the way in which the responses were received (mail, fax, telephone, or Internet) and analyze both the average responses and the distributions within each cluster. We obtain a total of 146 items and four response clusters. Using a standard mean-test for all six comparisons between the four clusters, we find 87 differences significant at the 10% level. This finding implies that the results are not biased, because for a random set we expect 88 significant differences (10% of 146 times six). At the 5% level, we find 66 differences and expected 44. We find no distinct patterns in the differences between clusters.

For our second test we sent out two versions, this time interchanging questions 1-4 and 11-14. We find five differences between the two sets at the 10% significance level, where a random set would yield 15 differences (10% of 146). At the 5% level we expected seven differences and find four. Thus, we detect no significant differences in responses based on the questionnaire structure.

We also perform an experiment to investigate whether our results are affected by nonresponse bias. We follow the example of Moore and Reichert (1983) by comparing characteristics such as firm size, industry, and public status of the responding firms to the nonrespondents. We find no statistically significant differences between the two groups at a 5% confidence level.

Overall we find that our sample is representative of the overall universe of firms, and we detect only a small variation in answers based on the response technique. The overall response rate is 5%, which is somewhat lower than studies such as those by Trahan and Gitman (1995) and Graham and Harvey (2001), which obtained 12% and 9% response rates, respectively. However, given the length and depth of our questionnaire and the vast size of our sample, we feel confident when analysing our results.

B. Corporate Governance Characteristics

La Porta et al. (1998) describe institutional details for 49 different countries, including the five countries that are part of our study. Their results clearly show that external capital is most important in the US, UK, and the Netherlands. The importance of the capital markets in the US and UK is further stressed by the large number of listed firms and IPOs per million.

Author: Brounen, Dirk ; de Jong, Abe ; Koedijk, Kees

Finance Management Advice 2

Learn How Economics Affects Stocks

Economics. Double ugh! No, you aren’t required to understand “the inelasticity of demand aggregates” or “marginal utility”. But a working knowledge of basic economics is crucial to your success and proficiency as a stock investor. The stock market and the economy are joined at the hip. The good (or bad) things that happen to one have a direct effect on the other.

Getting the hang of the basic concepts

Alas, many investors get lost on basic economic concepts (as do some so called experts that you see on television). I owe my personal investing success to my status as a student of economics. Understanding basic economics helped me (and will help you) filter the financial news to separate relevant information from the irrelevant in order to make better investment decisions.

Be aware of these important economic concepts:

Supply and demand:

How can anyone possibly think about economics without thinking of the ageless concept of supply and demand? Supply and demand can be simply stated as the relationship between what’s available (the supply) and what people want and are willing to pay for (the demand). This equation is the main engine of economic activity and is extremely important for your stock investing analysis and decision-making process. I mean, do you really want to buy stock in a company that makes elephant-foot umbrella stands if you find out that the company has an oversupply and nobody wants to buy them anyway?

Cause and effect:

If you pick up a prominent news report and read, “Companies in the table industry are expecting plummeting sales,” do you rush out and invest in companies that sell chairs or manufacture tablecloths? Considering cause and effect is an exercise in logical thinking, and believe you me, logic is a major component of sound economic thought.

When you read business news, play it out in your mind. What good (or bad) can logically be expected given a certain event or situation? If you’re looking for an effect, you also want to understand the cause.

Here are some typical events that can cause a stock’s price to rise:

- Positive news reports about a company: The news may report that a company is enjoying success with increased sales or a new product.

- Positive news reports about a company’s industry: The media may be highlighting that the industry is poised to do well

- Positive news reports about a company’s customers: Maybe your company is in industry A, but its customers are in industry B. If you see good news about industry B, that may be good news for your stock.

- Negative news reports about a company’s competitors: If they are in trouble, their customers may seek alternatives to buy from, including your company.

Economic effects from government actions:

Political and governmental actions have economic consequences. As a matter of fact, nothing has a greater effect on investing and economics than government. Government actions usually manifest themselves as taxes, laws, or regulations. They also can take on a more ominous appearance, such as war or the threat of war. Government can willfully (or even accidentally) cause a company to go bankrupt, disrupt an entire industry, or even cause a depression. It controls the money supply, credit, and all public securities markets.

What happens to the elephant-foot, umbrella stand industry if the government passes a 50 percent sales tax for that industry? Such a sales tax certainly makes a product uneconomical and encourages consumers to seek alternatives to elephant-foot umbrella stands. It may even boost sales for the wastepaper basket industry.

The opposite can be true as well. What if the government passes a tax credit that encourages the use of solar power in homes and businesses? That obviously has a positive impact on industries that manufacture or sell solar power devices. Just don’t ask me what happens to solar-powered elephant-foot umbrella stands.

Author: Anthony Green

Finance Management Advice 3

Market Cycle Investment Management

Whatever happened to the Stock Market Cycle; the Interest Rate Cycle; Baby Jane? How did Wall Street get away with pushing these facts of financial life down the basement stairs? Most investors, I'm beginning to believe, and all financial advisors, media representatives, and market gurus have abandoned these fascinating curves for the comfort of a straight-edged twelve-month playing field... simple, yes; realistic, not. I have to wonder if things would be different with a more investor-friendly tax-code, but that would be far less lucrative for The Wizards...

Investing with a calendar year focus has no basis in the realities of finance, business, or economics... isn't it obvious that the Stock and Bond Markets are far more closely related to the Business Cycle than to the Earth's around the Sun? Investopedia reports that, during the last sixty years, most business cycles have lasted three to five years from peak-to-peak. The Stock Market Cycle (in terms of the S & P 500 Average) is the period of time between the two latest highs of that average which are separated by at least a 15% decline in the average. The second high needs only to be 15% above the nadir, it doesn't have to represent a new All Time High (ATH). Interest rates (based on the 10 Year Treasury Bond), seem to cycle in the two to five year range, and are much more closely related to Business or Economic cycles than they are to the Stock Market Cycle. Confused?

Well, you should be. Although they are closely intertwined, none of these financial realities are predictable and, therefore, need to be dealt with as hindsightful tools in the performance analysis process... a process that needs to be undertaken using personalized expectations. How many times in the last 20 years do you think that any of these cycles peaked on a December 31st? The "I'll try this approach for a year or so and then change if it doesn't work out better than everything else" mentality, combined with a regressive tax code that rewards losses more than gains, has killed cyclical analysis dead. It's time to get back on our hogs and try something old. Let's re-cycle peak-to-peak analysis like we do plastics and paper products. It might just put more "green" in our retirement programs. As recently as 1980, Separate Account (the first Mutual Funds) Investment Managers were reporting fund performance in terms of income generation and peak-to-peak growth in Market Value. But that was before investing became the number-two spectator sport in America.

Few investment professionals would argue with the observation that a viable investment program begins with the development of a realistic plan, and most would agree that investment planning requires the identification of long-term personal goals and objectives. Some experts would even agree that the end result should be a near autopilot, long-term and increasing, retirement income. Asset Allocation is used to organize and control the structure of the portfolio so that it operates in a goal directed manner. Is this easy or what! It would be if the average investor would just let things alone long enough for them to work out according to the plan. That's the rub. Wall Street, the financial media, and financial professionals (including CPAs) have no interest in letting things work out according to plan... even if it's a plan that they designed.

Is it clear that calendar year performance evaluation allows an average of just six months for an equity selection to 'perform'? Is it clear that the change in Market Value of an income security over the course of a year is meaningless? Is it clear that a portfolio containing both types of securities cannot be compared with an average or index that is comprised of just one or the other? It is crystal clear until it's your portfolio that has had the audacity to shrink in Market Value over the course of the year! Human nature is predictable but not necessarily rational. Mother Nature's financial twin's twisted sense of humor, though, is both... and totally unrelated to third rock movements.

If the change in a portfolio's Market Value is really so important (the Working Capital Model would argue that it is not), why not do it over a period of time that recognizes where we happen to be, cyclically? Interest Rates have cycled seven or eight times over the past twenty-five years; the stock market has been nearly twice as volatile. Peak-to-peak analysis, although hindsightful, raises a type of question that can, at least, be portfolio personalized for analysis:

(1) Did my Equity portfolio grow in Market Value between January 2000 and January of 2002, or between January 2002 and either January 2004 or June of 2006? These were cycles on the DJIA, which at its high in June 2006, was still below the ATH established in early 2000. These are meaningful time periods that can be used to study the effectiveness of various equity-only portfolio strategies. S & P 500 cycles were pretty much the same.

(2) Does my Income Portfolio generate more income today than it did the last time interest rates were at these levels is still the most important question that should be raised... regardless of Market Value. Sorry.

But as important as it may be to determine the answers to such questions, it is equally important to understand why the results were what they were. Did I withdraw money from the portfolio, or take losses on investment grade securities for tax reasons? Did I fail to follow the plan, or lose control of my Asset Allocation? Did I change variable expenses into fixed expenses or allow tax considerations to keep me from realizing profits. Were there changes in the investment markets that would make peak-to-peak analysis less meaningful than in the past?

So by taking away the move-your-money, racetrack, mentality that runs today's investment performance evaluation methodologies, we create a calmer, more cerebral, management exercise with which to tweak our investment strategy. We may have gone backwards because we stayed on the sidelines instead of buying when prices were low. It may have been the strategy, it may have been the management, it could have been the diversification formula, or the buy-sell-hold decision-making rules. It may even have been the fear or greed that influenced our judgment. By looking at things cyclically, and analytically, instead of celestially and emotionally, we either allow our strategy to prove itself over a reasonable period of time or obtain the information needed to change it constructively.

The recent popularity of Index ETFs has detracted from the usefulness of both the popular market averages and the most useful market statistics. Issue Breadth, 52-week High and Low, Most Actives, Most Advanced, and Most Declined figures now include thousands of these hybrid and derivative securities. A bigger problem is the artificial demand created for index-included securities, a demand unrelated to corporate financial statement fundamentals. Another problem for Investment Grade Value Stock only investors is the absence of a well-recognized average or index to use for analysis... the IGVSI and related Market Stats should help.

Analyze this: if the strategy makes sense in the long run, why knock yourself out in months, quarters, and years? Where have all the cycles gone.

Author: Steve Selengut

Finance Management Advice 3

Learning The Basics Of The Stock Market

The stock market is a complicated game. In order for you to succeed in this business, learning the basics of the trade would be an important factor for your financial growth.

Before risking your money with the stock market, you should be able to recognize the factors vital in choosing which company to invest in. Here are the basics in learning some facts about the company:

1) Revenue. This refers to the amount of money the company makes. Although some companies that are still in the early development stage have no revenues to offer, many of the companies that have been in the market for years make use of the revenues to cover some losses and other costs.

2) Earnings. This refers to the money the company makes. Aside from revenues, the earnings are the money that would not be used in covering expenses. These are the extra money the company makes. Companies with large earning have an advantage in the stock market because investors examine the earnings made by the company they are about to buy stocks on.

3) Debt. This refers to the money the company owes in many ways. Because the company is in debt, the money they have is for paying up for the debit alone. Buying stocks from these companies would be risky because of the instability of the company.

4) Property. This refers to all the assets (money, stocks, and all businesses they own) of the company. Knowing these assets could give you an understanding of the company's position in the industry. If the companies have significant properties in their hands, you could safely trust their background and immediately buy some of their stocks.

5) Financial responsibility. This refers to the account of the companies that they need to pay out. Meaning, if the value of their financial obligations are low, the company is not in danger of becoming in debt. Examining the company's liabilities and comparing it with its assets could help in determining if you are ready to buy stocks from them. Make sure that the assets of the companies are always higher than the financial responsibilities they need to make.

It's never safe to gamble your money away on some company you don't even know. The basics of the stock market lie on the companies' background. Make sure you research to ensure your money is in the right hands.

Author: Nicky Pilkington

Finance Management Advice 4

Debt Management: Make the Debt Game Easier to Win

Debt management is an art that may not come easily. It involves taking a lot of important decisions that ought to prove to be wise in the long run. This involves a lot of judicious calculation and good knowledge of the market. For a working professional busy with his job and other engagements, this can be a headache, as to tackle with debts. And often, due to lack of time or sufficient market knowledge, it would be rather wise to avail to professional services.

These services available online as well from financial experts can provide a viable solution for your debt situation. These experts, who by virtue of their years of experience of the market help to prevent your financial losses and to help you to repay your debts in a suitably elongated time-period. This may involve not only debt advice, often free, but also negotiation with your lender where you may be charged a small percentage of the amount you would gain thereby, as when the advice you get from the informed people helps you make informed decisions.

You can make your choice of repayment through the ways which, as calculated by the experts, could cater best to you after a careful analysis of your debt situation. Their services are valuable in more ways than one. You benefit by repairing your credit history, which may be dented due to the debt situation and the inability to make repayments at the right time.

And as far as debt management is concerned, debt consolidation is perhaps the best means. It gets you to conveniently merge the debts with a single interest rate which comes about to be much lower. It is like cutting off the edges of numerous debts and have one rounded figure with which you can play ball with a set clear goal, instead of numerous lenders with different interest rates, high and low. It makes the debt-game much easier to win for you.

Author: Garry Marshal

Finance Management Advice 5

What does Financial Management include?

We know what is financial management. It's a personal decision in making wise choices about our cash. Financial management involves a lot of areas. Here, I list out 5 of the most important areas that you should know.

These are the main areas you should concentrate because it is these areas that we either mismanaged our money, or it will enable money to work for us.

The following are the key areas that you should look at:

Cash flow management

This involves assessing your current net financial net worth (what you own minus what you owe). This should generally tell you whether you are on your way to financial freedom or financial disaster.

In short, most financial experts would advise you to keep a high savings and this should be your MAIN PRIORITY in financial planning.

Investment planning

Once you have decided the amount of money you would like to save, you should consider where to put your savings with the aim of getting a higher returns than your normal savings account.

Forget the 2% p.a. interests for saving. You require something more sophisticated than that! At a minimum, you should go for fixed deposits. Otherwise, a good investment program will be nice.

Insurance planning

Insurance planning is required to in ensure that all your properties are protected and that your family members are well protected by having enough insurance coverage.

Tax planning

The topic of tax planning affects everyone who receives income, yet it is an area that is mainly forgotten or forgotten by most individuals. Therefore, this area involves strategies making the most under the local tax regulation in the area of your income, stocks, real estate, and property.

Retirement planning

You are not going to toil your whole life, are you? When old age symptoms begin to kick in or you have reached the mandatory retirement age, you will want to retire. There is no choice.

Therefore, having a retirement plan regardless of of your age is essential! You wouldn't want to be forced to go back to work due to lack of money!

Estate planning

Having an estate plan or a will shall ensure that your wishes for the future are carried out. In addition, an estate plan or a will can supply financial protection for your family, ensure your property is preserved and keep off dispute among family members.

The above are just 5 of the many other financial decisions. It is important to take note of your above 5 because they are mainly responsible for your financial success or failure.

Author: Joseph Then

Finance Management Advice 6

Financial Management For Freelancers

If you are just going into freelancing then perhaps one of your biggest questions (unless you are already a financial management expert) is how you should handle the financial aspects of your freelance business.

Perhaps one of the first things you should consider is getting someone to help you with the bookkeeping and accounting aspects of your business. You may want to get someone you know to help you with this or if you do not know anyone who has the necessary expertise then you can use the same freelance jobs boards you use to get a freelance bookkeeper or accountant.

Start by collecting all your invoices for any purchases you make. As you go into freelancing you will discover that there are many items that you would not have normally worried about in the past but that you can now claim from tax as business-related expenses so keep all invoices you receive.

You should also keep a book where you write down everything you buy, all money expended and all money received. Speak to your bookkeeper about what books you should be keeping and how you should go about filling them in but before you speak to them start now by just writing down every cent that leaves or comes into your hands.

The next aspect is to budget your expenses as far as possible. Although freelancers often find it hard to determine exactly how much money they are going to be receiving on a monthly basis try to budget each amount that comes in so that you know where your money is going.

Another thing you will probably want to do is to set yourself financial goals. How much do you want to make this month? Next month? Six months time? In a year? Write down these goals and then see how you can go about improving your income to meet these financial goals. Also work out how much you want to save and how much you are going to be spending.

If you have not already registered as an independent agent for tax purposes you will also want to do this as soon as possible. You should speak to your accountant about this and ask him what is required and how you should go about doing this if you do not already know. It is important that this is done within the first three months of starting your freelancing business.

In conclusion then, to manage your finances effectively as a freelancer you should begin by finding yourself a reliable bookkeeper or accountant, collect all your invoices and write down all money that comes into or goes out of your hands. Register for tax as early as possible (within the first three months) and set yourself financial goals that you would like to reach to help you manage your money more effectively.

Author: Rob Palmer

Finance Management Advice 7

Working Capital Management

Financial management decisions are divided into the management of assets (investments) and liabilities (sources of financing), in the long-term and the short-term. It is common knowledge that a firm's value cannot be maximized in the long run unless it survives the short run. Firms fail most often because they are unable to meet their working capital needs; consequently, sound working capital management is a requisite for firm survival.

About 60 percent of a financial manager's time is devoted to working capital management, and many of the potential employees in finance-related fields will find out that their first assignment on the job will involve working capital. For these reasons, working capital policy and management is an essential topic of study. In many text books working capital refers to current assets, and net working capital is defined as current assets minus current liabilities. Working capital policy refers to decisions relating to the level of current assets and the way they are financed, while working capital management refers to all those decisions and activities a firm undertakes in order to manage efficiently the elements of current assets.

The term working capital originated with the old Yankee peddler, who would load up his wagon with goods and then go off on his route to peddle his wares. The merchandise was called working capital because it was what he actually sold, or "turned over", to produce his profits. The wagon and horse were his fixed assets. He generally owned the horse and wagon, so they were financed with "equity" capital, but he borrowed the funds to buy the merchandise. These borrowings were called working capital loans, and they had to be repaid after each trip to demonstrate to the bank that the credit was sound. If the peddler was able to repay the loan, then the bank would issue another loan, and these were sound banking practices. The days of the Yankee peddler have long since pasted, but the importance of working capital remains. Current asset management and short-term financing are still the two basic elements of working capital and a daily headache for the financial managers.

Working capital, sometimes called gross working capital, simply refers to the firm's total current assets (the short-term ones), cash, marketable securities, accounts receivable, and inventory. While long-term financial analysis primarily concerns strategic planning, working capital management deals with day-to-day operations. By making sure that production lines do not stop due to lack of raw materials, that inventories do not build up because production continues unchanged when sales dip, that customers pay on time and that enough cash is on hand to make payments when they are due. Obviously without good working capital management, no firm can be efficient and profitable.

Statements about the flexibility, cost, and riskiness of short-term debt versus long-term debt depend, to a large extent, on the type of short-term credit that actually is used. Short-term credit is defined as any liability originally scheduled for payment within one year. There are numerous sources of short-term funds, such as accruals, accounts payable (trade credit), bank loans, and commercial paper. The major elements of current liabilities are trade creditors and bank overdrafts, and these are further analyzed.

Author: Jonathon Hardcastle

Finance Management Advice 8

The Subjectivity and Relativity of Risk Assessments in Investment Decisions

It is a widely accepted belief that risk is an important factor in investment decisions. The income method of investment valuation stipulates that the price an investor is willing to pay for an investment is a function of the future expected cash flow, discounted by a rate that reflects the risk associated with receiving this expected cash flow. The Ibbotson build-up, Black/Green, and Schilt are three widely used methods valuators use to determine a specific discount rate to be applied to projected cash flows in valuing closely held companies.

The Ibbotson method utilizes historic rates of return on publicly traded investments, combined with risks associated with the specific industry and company being valued. The Schilt method derives a discount rate by adding various risk premia to the risk-free bond rate. Ranges of premia are specified according to risk factors, such as earnings stability, depth of management, competitiveness of the industry, and the size of the company being valued. Black/Green takes a similar, but more detailed approach.

Despite differences, all three methods falsely assume that only the inherent risks in operating the business need to be considered in the valuation process. I contend that the unique characteristics of potential investors have profound effects on how risk assessments are made in real world investment decisions. Not all potential investors have the same subjective attitudes towards risk. Not all potential investors have the same depth of financial resources, business experience and management acumen. These subjective and relative aspects of risk have a great bearing on how risk assessments are made. Their variability makes the risk of owning and operating a business a relative, rather than an absolute, quantity.

All three of the standard methods of developing a risk related discount rate assume that that the expert valuator analyzes the inherent risk associated with various operating characteristics of a closely held business. Based upon this analysis, the valuator develops a discount rate that will be used in capitalizing the projected future income stream and developing a fair market value.

However, in trying to model the behavior of potential investors in small closely held businesses, it is the attitudes of those potential investors toward risk and not the attitudes of CPA/CVA valuators that matter. As a group, CPA/CVA valuators do not necessarily have the same attitude toward risk as potential small business investors, who therefore may not make the same quantitative assessment of risk as a CPA/CVA valuator. Based on my experience with small business owners, I would predict that CPA/CVA valuators are more risk averse than most small business investors are.

Of course, not all small business investors have the same attitude toward risk either. Certain investors will largely ignore the risk of an investment if they perceive the potential return to be very high. Furthermore many small business investors have non-monetary motivations for investing in small businesses. For such investors, the inherent risk associated with receiving a future cash flow may not be assessed as it is for a passive investor seeking only a future cash flow.

Some advocates of the income method concede that certain investors do not view the risks of a particular investment as they do. Some proponents of the income method claim that investors who do not pay sufficient attention to the inherent risk of an investment, or who fail to give the same weight to various risk factors as expert valuators, are irrational. This view implies that CPA/CVA valuators are the arbiters of what constitutes rational investment conduct. While as a class we may be more risk averse than other groups of people, who is in a god like position to claim that being more risk averse is equivalent to being more rational?

Let's turn to now to the relative aspects of risk. Everyone would agree that walking across a high wire without a net is a risky proposition compared to walking across a living room floor. Nonetheless, the degree of risk associated with walking across a high wire without a net is not absolute: it depends on who is doing the walking. Clearly, if a trained high wire performer does the walking, the activity is less risky than if an untrained person attempts the feat. In this sense, the risk of walking on a high wire is a relative phenomenon. A similar situation exists in any particular line of business.

Most of us would agree that there is more inherent risk in an industry sensitive to business cycles, like construction, than one where demand for the service is relatively constant, such as tax preparation. However, a buyer who has previous experience operating a construction business faces less risk than a buyer who has never run such a business. Likewise, if a potential buyer has a great deal of capital and access to lenders, that buyer will be able to weather the inevitable cyclic downturns better than a perspective buyer who lacks these assets. The simple point is that different potential investors in closely held businesses are in a position to change the inherent risk of operating a business. Some investors can decrease the inherent risk of operating the business, while others can increase the risk.

This point may be overlooked, because advocates of the income method fail to recognize that the investment contexts of publicly traded and closely held companies are dramatically different. An investor buying a few hundred shares of Microsoft is not going to have an impact on the operational performance of that company. An investor buying a controlling interest and becoming intimately involved in the day-to-day management of a closely held company is going to have a significant impact on the operations of that company.

Another relative aspect of risk involves diversification. As modern portfolio theory points out, the degree of diversification associated with a portfolio of assets has an impact on the risk associated with holding any particular asset. If a potential investment in a closely held company represents nearly 100% of an investor's holdings, that investment is judged as much riskier than if it represents only 5% of the investor's holdings.

Clearly, risk assessments play a role in real world investment decisions, but the nature and extent of that role is vastly more complicated than implied by the risk measurement approaches used in the income method of valuation. In the real world, differences in subjective risk tolerances will effect investor decisions. In the real world, investors have the ability to change the inherent risk of operating specific closely held businesses. In the real world, the risk of investing in a particular closely held business will depend on an investor's ability to diversify his or her total portfolio of holdings. By failing to take into account these relative and subjective aspects of risk all variants of the income method give us a greatly oversimplified and inaccurate account of how investment decisions are actually made.

Author: Michael Sack Elmaleh

Finance Management Advice 9

Right Loans Through Comparative Analysis

Cashing on loans is an easy task now. Today there are number of loan dispensing financial institutions, which offer loans at competitive interest rates. Besides, a whole network of private lenders operates over the Internet offering you best deal on the loans. Lending the money from unscrupulous lenders might be a risky venture, and above all, it costs you more money than normal amount.

By making a comparative analysis of the various loans plans available over the Internet, you are always in a win-win situation. There is cent percent surety that what you will get is a perfect money saving bounty and nothing more. What’s more, you will only pay around 3% to 5% interest rate with longer repayment time frame.

Compare Loans if you are ardent over purchasing a Car, initializing over new business strategies, celebrate festivals with innovative fervor, decorating your home exteriors and interiors, and much more. The online customized and optimized format lets you explore the latest repayment amounts as applicable on different loans. The best thing is that you can compare loans in order to get the bargain interest rates ranging 3% to 5%.

Compare Loans to get first hand information about what percentage amount of LTV is dispensed; whether or not the bank or financial institution offers you low and attractive APRs; large loan amounts viz. £5000 to £100,000 are easily available or not and the cost of your payment protection insurance. Not only this, when you compare loans, you can also apply for the desired loan in minutes by filling the online application form placed by the lender therein.

Compare personal loans and track the one that goes with your desire. Think wisely and make the virtues grow every day and forever. Comparing various loan strategies will surely make you a jack with no losses to incur in your investments.

Author: Amenda Dorothy

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