Working Capital Advances
Working capital advances are funding tools designed to aid and support small businesses in their quest to keep the cash flowing in and eventually maintain a successful standing even in the most volatile conditions of the markets and economy. In the life of any business, from giant enterprises to modest home businesses, there would always be unforeseen costs and emergency expenses that will need ample funds to keep its cyclical operations running smoothly.
Working capital advances are important in the accounting equation of the business where the amount of cash flow or operating liquidity should be enough even after the liabilities has been taken from current business assets. With enough working capital at hand, the business is able to continually run their operations to generate sufficient cash to answer to upcoming costs as well as short-term debts. Running short of this form of funding will require a quick source of money.
No matter how well plans and budgets have been laid-out, entrepreneurs are sure to find themselves facing issues where the need for extra funds will be evident. Working capital advances are great in supplying the needed cash to keep the business thriving and even help it climb back to normalcy from the brink of bankruptcy.
At times of financial crisis where your business needs ready cash, working capital advances is an option that is worth looking into. Accessibility is never an issue as the number of new lending companies that accommodates this service is continually growing. Some of the more traditional financial institutions have even extended their range of services to include this as they have seen the rising need in the part of the business owners.
The modern days and more technologically savvy consumers have even paved the way to the companies providing working capital advances to have their very own websites. Aside from quicker application, information about financial services and the company can easily be accessed making the choosing process or comparison of companies be a breeze. In just minutes of filling up the online application form and submission, you will get a very quick response no matter where you are accessing the site. Thus, emergency costs can be attended to in the fastest and most convenient way saving the business from any customer relationship issues or credit score damage.
Compared with applying for traditional loans, working capital advances poses to be a much more attractive option because of the speed and ease at which business owners are granted the funds. With this, you will not be making the same mistake that the failed entrepreneurs have made. And that is not attending to urgent financial crisis in the fastest way possible which could have saved the business.
By: Todd Lehman
Financial Spread Betting in Ireland
Spread betting in Ireland enjoys many of the same advantages that it does in the UK. As a result, financial spread betting in Ireland has been on the increase over the past decade. This article looks at the benefits of spread trading in Ireland and who the main spread betting companies are.
Advantages of financial spread betting in Ireland
The benefits of spread trading in Ireland are much the same as those in the UK:
- Your profits are free from Capital Gains Tax.
- Your transactions are commission free and do not attract Stamp Duty. The only price you pay for each bet is cost of the spread.
- From one account you can trade a staggering variety of markets and instruments. You can bet on equities, forex, indices, bonds, commodities and interest rates.
- You are not exposed to any currency risk when you bet on the different markets around the world. All your bets are based in Euros.
- You do not own the underlying instrument, you are merely betting on its future price movement. As a result you only need deposit a fraction of the funds that you would need to own the instrument. This means that your capital is highly leveraged and you can make higher value trades with the same capital than you could with standard share dealing.
Main Irish Spread Betting Companies
There are a number of spread betting companies that specifically focus on Ireland. The following companies allow you to trade markets around the world using your base currency of Euros. Note that other companies will accept customers from Ireland, but you may need to trade in dollars or sterling for some markets, thus exposing yourself to currency risk.
WorldSpreads were the first Irish company to offer financial spread betting. Founded in 2000, they have been offering a wide range of markets and tight spreads for nearly a decade. They offer a EUR10,000 demo account and plenty of new trader education resources (including a free one to one tutorial).
Delta Index were founded in 2001. Featuring a good range of markets and tight spreads, they offer controlled risk accounts, a trading simulator account and also publish a weekly trading strategies and opinions newsletter.
Paddy Power, Ireland’s leading book maker, has been a latecomer to the world of financial spread betting, but they have entered the arena with some force. They offer good tools and educational materials for the new spread better and have no minimum deposit on their accounts. They insist that all trades use a stop loss to limit your risk, but they do not offer guaranteed stop losses at this moment in time.
CMC Markets Ireland have been operating since 1989, but the office in Dublin has only been in existence since 2008. They offer a wide variety of markets and have a great execution platform. You can open an account with as little as EUR300.
Conclusion
If you live in Ireland and are interested in financial markets, then spread betting represents a tax efficient, highly leveraged way to profit from movements in the markets. As with all leveraged instruments, you can stand to make large gains but are also exposed to potentially large losses. Ensure that you fully understand the risks inherent in each and every bet you place.
By: Andy Richardson
Get on Financial Track With Fast Track Cash and Generate Great Capital
Since there are just now a plethora of differing marketing courses that you can purchase from the many and varied web sites, it is often necessary to read a few reviews about those particular products so that you can spend your business money on the right program for you and your company’s needs. One of the most popular of these courses for marketing almost any product or service that you would like to is of course, the Fast Track Cash program.
The creator of the Fast Track Cash course teaches you how to begin marketing and making a profit without the necessity of a web site. He also gives you tidbits and insight about side stepping profit thieves, how to re-purpose your info, as well as how you can locate all of those markets on the net that will definitely give you a return on your time and money investment. You do not even actually have to have a product to launch your business endeavor with this system. With modest investments in the beginning stages of your net business, you can launch yourself into a lucrative Internet career that will start paying off in a fraction of the time.
The easy to understand Fast Track Cash course is not burdensome to learn and grasp the concepts, and you will be able to glean results from your efforts by absorbing info through the step by step process featured in the course videos. With a time investment of only a few hours each day in your spare time, you can set up a rewarding web based business that will give you real returns in your account.
For a very modest one time fee you can gain immediate access to the Fast Track Cash manual and videos for a no-risk trial for an entire sixty days! If you are not satisfied with the effectiveness of the techniques and your earnings, you can enjoy a one hundred percent money back guarantee that will protect your interests and business investment money. Do get on the web to learn more and sign up for the program- you have nothing to lose, and financial freedom to gain!
By: Charlie Brenson
World’s Financial System in Limbo – What to Expect!
In my recent article about investor protection and financial market size, I emphasized the world’s financial system being made up of a cluster of market-based and bank-based financial systems. I reiterated that whilst the U.S. and U.K. financial systems are predominantly market-based, that of Germany and some other European countries are bank-based. Now, whatever system is dominant in a country, market-based and bank-based systems form the main source of financial capital for investors, governments and individuals.
In other words, the interaction and integration of the two systems is what constitutes the financial systems of countries. The extent of their integration has promoted the situation where any failures or setbacks in one system permeate the other system. During the recent economic downturn, the world witnessed initially the failure of the market-based financial system of U.S. which had a spillover into the bank-based and market-based financial systems of the rest of the world. This confirmed the inseparability of market-based and bank-based financial systems and the global nature of the financial system.
Quite recently, there has been much talk about the urgent need to protect investors, customers, markets and banks with regards to both types of financial systems through government intervention. Government intervention is primarily to deal with what is called “agency” problems in finance and economics. Unfortunately, even as immaculate protection of these entities is impossible and unfeasible, inordinate protection can lead to inefficiency of the financial system, or what is called “deadweight” in economics.
Agency problems are inherent of financial system and it is not possible to completely eradicate them. Government regulations may improve transparency in the financial system and help also restore confidence in a country’s global competitiveness, but it cannot abate completely the agency problems which emanates from the discrepancy between the management’s self-interest and investors or stakeholders interest. Now, the federal government’s expansion of power through regulations into the management of a country’s financial system in order to deal with agency problems has its ramifications. The regulations may be towards the avoidance of the repeat of the financial meltdown and the rooting of potential “Madoffs”; however, care should be taken to avoid the production of “mechanical” managers and curtailing of “innovative” managers. For the proper functioning and sustainability of the world financial systems, there is the need for strong ethical moral innovative managers and not ethical moral mechanical managers. Ethical moral innovative managers are endowed with unlimited power and they would act in the interest of majority of stakeholders in the presence of external stimuli influence.
Contrarily, mechanical managers are those with limited discretion and who take decisions in response to problems based on an external stimuli or influence. As a matter of fact, mechanical managers do not have the freedom to make decisions that are in conformity with their own interests and that of the investors or stakeholders. Thus, an action plan by governments in the form of regulations should avoid providing a stringent documentation of regulations encompassing what managers, CEOs and those in higher authority should do or not do. This is because it would impede the existing deregulation in the world’s financial system.
Most importantly, the regulations should avoid telling the managers what they should do. Such an action plan has the potential proclivity towards the production of mechanical managers. Meanwhile, any government pursuit of extra transparency which is very important in a market-based bank-based systems should be applauded and commended as it would offer an appreciable level of protection for investors, markets, banks and stakeholders in general. The regulations should seek to prevent scandalous activities, promote compensation of managers tied to earnings and stock price methodology whilst preventing socialistic tendencies of government’s ultimate interest and control of the systems. Judiciously, the trajectory of government’s intervention should be towards transparency, accountability (that is better accounting disclosures) and probity to ensure sound financial practices in an atmosphere of flexibility in financial operations. Anything more than this, infringes on economic or financial freedom of the system.
The days when companies in the financial system paid huge sums to managers, CEOs without regards to earnings and stock prices are over. The future demands ethical moral innovative managers to promote transparency, accountability and probity in the financial system and to prevent a repeat of the meltdown. Now, too much legitimate power from the government can exacerbate the situation by turning innovative managers into mechanical managers. This is prevalent in most socialist and communist countries. These managers can be effective and efficient if they can collaborate with the government on the regulations whilst both parties make conscious effort to avoid the production of mechanical managers. Technically, efficiency and effectiveness is what distinguishes an innovative manager from a mechanical manager. For it is possible to be efficient without being effective and vice versa. By definition, efficiency is a measure of how well or productively resources are used to achieve a goal.
Effectiveness is a measure of the appropriateness of the goals an organizational entity is pursuing and of the degree to which the entity achieves those goals. Mechanical managers may have effectiveness because of complete subjection to governmental control but lack efficiency due to absence of creativity and innovativeness. They may operate under too much of government control and so lack the freedom to be innovative or creative. Such managers cannot reconcile organizational goals with government regulations for efficiency. Consequently, they are not able to use the resources productively to achieve organizational goals. Production of mechanical managers has often resulted in wastage of human or intellectual capital over the years in several countries.
In spite of the efficacy of ethical moral innovative manager’s positive impact on a financial system, there are associated negative dimensions. First, the setback in the government’s regulations with respect to innovative manager’s production is creation of utilitarianism-oriented systems — a system with principles that advocates for the greatest good of stakeholders — in that it supports the option that provides the highest degree of satisfaction to stakeholders. Secondly, this principle focuses on the results of our actions and not on how we achieve those results. The fact is that stakeholders have wide ranging needs and values and it is almost impossible to satisfy all these needs and values. If utilitarianism is to hold in this case then these innovative managers may be compelled to engage in unethical behaviors and decisions to attain results that seem ethical to some stakeholders (for example the government and some people of higher authority).
Thus, what is ethical is relative with regards to stakeholders. This is also analogous to a contravention of the “public choice” theory in that the government’s interest may not be the interest of the majority of stake holders. If the government seeks to regulate the financial market it would have to enact policies that are not totalitarianism-oriented but somewhere in-between egalitarianism and utilitarianism.
Egalitarianism principles advocate equality among all peoples socially, politically, economically and civil rightly. There are various forms of egalitarianism which includes gender, racial, political, economic, religious and asset-based. However, economic and asset-based egalitarianism would be of prime importance in the financial system. Egalitarianism is hard to achieve now because the economic inequality gap based on Gini coefficient analysis worldwide continues to widen due to the recession. This is also precursory that economic inequality is insurmountable in future. Though utilitarianism is dominant now, the best shot of government intervention is to produce policies that are in between the two principles. Why? Because utilitarianism has failed the system and there is the need for modification. Indeed, the recent financial meltdown is the result of utilitarian principles that have prevailed in the financial system. That is to say governments were focused on the results or positive outcome in the financial system and not on how the results were achieved. Consequently, the “smart” guys in the room took advantage of the situation and produced the worldwide financial mess.
Another underrated defect of government regulations is curtailing of financial innovation. Unfortunately, any unreasonable regulation may also create an incentive for banks or financial sectors or “gurus” to get around the regulation if it is unfavorable for business. They argue that it is financial innovation that has brought products like credit cards, debit cards, CDs, ATMs, internet billing, automatic banking transfers and determination of variable rates for transactions (mortgages, loans e.t.c). Thus, there is the tendency that government regulation that seeks to put a cap on how banks or financial institutions do business with clients would create an incentive for these institutions to act otherwise. These institutions would look for ways to get around it indirectly producing unpleasant financial innovations such as uncalled for penalties, unjustified fee charges and interest rates, bonuses and the likes whilst maintaining or declaring the needed profits. For example, one should not be exasperated if rates on ATM transactions increases as a result of a government regulated financial system.
Another example could be the conversion of fixed rates into variable rates on loans, credit cards, unjustified declaration of bonuses for managers, CEOs based on market oriented explanations. All these are forms of unpleasant financial innovations which is possible under a regulated system. The fact is that the financial institutions are constantly seeking for ways to improve services as well as earn larger profits by lowering the cost of doing business and increasing the returns from their transactions. These institutions assert that they need financial capital to support their huge investments and assets and would try to get around these regulations in order to stay in business and do that.
These developments lead to two questions. Is the world to be worried about regulations? No. Is the world to be worried about the repercussions? Yes. The world is not to be worried about regulations because it would seek to promote transparency, accountability and probity. However, the world is to be worried about the repercussions because of the response of the financial system to the government regulations if the regulations are unfavorable and most importantly infringes immensely on financial freedom and innovation of the system.
In conclusion, the government regulations should seek for transparency, accountability and probity and not an imposition of stringent measures on the financial system. The government should redefine these terms of transparency, accountability and probity for the sector without inhibiting favorable financial innovation or creating an incentive for unpleasant financial innovations. Redefining transparency, accountability and probity should produce a documentation of guidelines and regulations established by consensus. Such redefinition would cause the financial sector to be cautious in their transactions knowing that at the end of the day transparency, accountability and probity would have to be met. There is the tendency for collusion with contention resulting in a situation that forces the two parties into what is called “Nash equilibrium” in economics where there is an incentive for one party to default. In this wise, the documentation should include a frame work that prohibits contention and promotes collusion besides any unwanted spillovers to stakeholders. Let’s not forget the proverbial saying that “when two elephants fight, it is the grass and the ground that suffers.”
By: Charles Ampong
Working Capital Financing – Why Asset Based Lines of Credit Work
How can Canadian business owners and financial mangers secure working capital financing and cash flow financing for their business at a time when it seems that access to business financing provides significant challenges?
The answer is that a potential solid solution exists by the name of an ‘asset based line of credit ‘otherwise what we call a ‘working capital facility’. What is this type of financing is it new to Canada, and more importantly – how does it work and what are the benefits and risks?
Although asset based lenders tend to be specialized independent finance firms many business people are surprised to find that deep in the bowels of a few Canadian bank there exists small, somewhat boutique, divisions who specialize in asset based lending. Ironically they are many times competing with their peers down the hall in more traditional commercial corporate banking.
The most active assets these firms finance tend to be ongoing receivables and inventory, but in many cases, utilizing an expert advisor or partner you can structure a facility that also includes a component of equipment and real estate.
Generally speaking a good way to think of an asset based line of credit is one that for a temporary period, typically a year or so in our experience, allows you to margin up and get higher advances on receivables and inventory. That translates into more cash flow and working capital.
One of the main attractions of an asset based lending facility (insiders call it an ABL facility) is that your firms overall credit quality doesn’t play the largest role in determining if you can get approved for this type of financing. As its name suggest, financing is on your ‘assets ‘! And doesn’t really focus on debt to equity ratios, cash flow coverage, loan covenants, and outside collateral. Business owners who borrow from Canadian chartered banks on an operating or term loan basis are of course very familiar with those terms – in some ways we could call them ‘ restrictions ‘
Most lawyers and accountants will tell you that any type of business borrowing should in fact be entertained only with a respected, trusted and credible business financing advisor who can guide you thru the roadblocks and pitfalls of any commercial financing arrangement. Missteps in business financing can lead to long term negative effects around such issues as being locked into a facility, giving up too much collateral, or being locked into pricing that isn’t commensurate with your overall asset and credit quality.
What are the key issues you should consider when considering such a financing facility? Primarily they are:
-Advances rates on each asset category (A/R, inventory/equipment)
- How is pricing defined (asset based lines of credit and ABL lending is general is more generous in overall facility size, but you should ensure you are only paying for what you use
- Contractual obligation – in a perfect world (we know its not!) you should be focusing on the ability to pay out at any time, or at a minimum with some form of nominal breakage fee
- Ensure that the asset based lending facility, which generally costs more, will allow to you remain or focus on profitability; we spend a significant amount of time with clients on how that can defer the additional costs of Abl facilities by several different strategies
So whats the bottom line. As always it’s simple – consider asset based lending and an ABL facility as a solid alternative for financing your business. Work with a trusted advisor as this type of financing is generally either mi understood or not too well known in Canada. Be selective in structuring your facility around issues that work best for your firm re benefits derived.That’s solid business financing sense.
By: Stan Prokop
Working Capital Management
What is working Capital?
In a business it can be defined as its current assets less its current liabilities. Current assets comprise cash, stocks of raw materials, work in progress & finished goods, marketable securities such as Treasury bills & amounts receivable from from debtors. Current liabilities comprise creditors falling due within one year, & may include amounts owned to trade creditors, taxation payable, dividend payments due, short term loans, long term debts maturing within one year & so on.
Every business needs adequate liquid resources to maintain day to day cash flow. It needs enough to pay wages & salaries as they fall due & enough to pay creditors if it is to keep its workforce & ensure its supplies. Maintaining adequate working working capital is not just important in the short term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long term as well. Even a profitable company may fail if it does not have adequate cash flow to meet its liabilities as they fall due.
What is Working Capital Management?
Ensure that sufficient liquid resources are maintained is a matter of capital management. This involves achieving a balance between the requirement to minimize the risk of insolvency and the requirement to maximize the return on assets .An excessively conservative approach resulting in high levels of cash holding will harm profits because the opportunity to make a return on the assets tide up as cash will have been missed.
The volume of Current Assets Required.
The volume of current assets required will depend on the nature of the company business.
For example, a manufacturing company may require more stocks than company in a service industry. As the volume of output by a company increases, the volume of current assets required will also increase.
Even assuming efficient stock holdings, debt collection procedures & cash management, there is still a certain degree of choice in the total volume of current assets required to meet output requirement. Policies of low stock-holding levels, tight credit & minimum cash holding may be contrasted with policies of high stock (To allow for safety or buffer stocks) easier credit & sizable cash holding (For precautionary reasons).
Over-Capitalization
If there are excessive stocks debtors & cash & very few creditors there will an over investment by the company in current assets. It will be excessive & the company will be in this respect over-capitalized. The return on the investment will be lower than it should be, & long term funds will be unnecessarily tide up when they could be invested elsewhere to earn profits.
Over capitalization with respect to working capital should not exist if there is good management but the warning since excessive working capital is poor accounting ratios. The ratios which can assist in judging whether the investment in working capital is reasonable include the following.
o Sales /working capital. The volume of sales as a multiple of the working capital investment should indicate weather, in comparison with previous year or with similar companies, the total value of working capital is too high.
o Liquidity ratios. A current ratio in excess of 2:1 or a quick ratio in excess of 1:1 may indicate over-investment in working capital.
o Turnover periods. Excessive turnover periods for stocks & debtors, or a short period of credit taken from supplies, might indicate that the volume of stocks of debtors is unnecessarily high or the volume of creditors too low.
By: Randika Lalith Abeysinghe
Operating Vs Capital Leases (What’s the Difference)
When an organization wants to purchase assets they sometimes choose to lease assets rather than buy them out right. This type of financing offers many advantages to an organization, but they should keep in mind how the proposed lease will affect their overall financial position. The two kinds of leases that an organization can choose from is an operating lease or a capital lease. Both of these leases will in effect provide financing in order to acquire an asset, but the effects of each are accounted for differently and are reflected differently in organization’s financial statements.
An operating lease is the straightest forward of the two. The lessee (the organization) makes an agreement with the lessor (seller of the asset) for the use of an asset. Basically the organization is renting the asset with an installment payment (which usually includes interest) with intentions to return the asset when the lease ends. An example of an asset that would be commonly financed with an operating lease is new technology. Because technology is going to change, it is often better to lease the asset rather than commit large sums of an origination’s capital to an asset that is going to need to be upgraded every couple of years. The accounting for operating leases is quite simple. Because an organization does not own the asset, it is not recorded on the firm’s balance sheet. The only effect that an operating lease has on organization’s financial statements is the lease payments will appear as an operating expense on the entity’s income statement. Since an operating lease is not recorded on the balance sheet, it is sometimes referred to as off balance sheet financing. The main advantage of an operating lease is that the organization can use the asset without the usual attributes of ownership (i.e. the liability that would come with financing an asset and the depreciation expense that would come with an owned asset). Another advantage of an operating lease is that since it is not treated as a liability the organization will maintain their current access to capital. That is because the lease payments are not treated as debt and this helps the organization to maintain their current debt capacity. Thus the organization is able to use the asset to produce revenue, and is able to maintain its current access to the capital markets through debt.
When leasing an asset, most originations would like to keep any leases off their balance sheet, and not show an asset or a liability for the financing of assets (with would occur in ownership of an asset that is traditionally financed). With this in mind the Financial Accounting Standards Board (FASB) in 1976 issued Statement of Financial Accounting Standards No. 13 which basically stated that a lease agreement would be considered a capital lease if it meets any one of the following criteria:
1) If the lease life exceeds 75% of the life of an asset
2) If the lessee is to purchase the asset for a bargain price at the end of the lease (usually $1)
3) If there is a transfer of the ownership of the asset at the end of the lease
4) If the present value of the lease payments exceeds 90% of the fair market value of the asset
If the lease is considered a capital lease then the asset being leased will show up on the entity’s balance sheet. The leased asset will be represented as if the organization owned the asset, and all of the lease payments over the life of the lease would be accounted for as if they were a liability of the organization (by an amount equal to the present value of the minimum lease payments). Basically the asset financed as a capital lease would show up on the organizations balance sheet as if they had borrowed the money to purchase the asset; thus negating any advantages of the operating lease which keeps the asset and the liability off the organization’s balance sheet. The asset would also be depreciated like any other asset that the organization owned out right. The lease payment would have have two components. One of the components of the lease payment would be the interest portion which would be shown as an expense on the organizations income statement. The Second component is the principal payment which would reduce the liablity originally set up for the capital lease.
As you can see both of these lease types are accounted for in very different ways which each in turn will affect an organization’s financial statements in different ways. These effects need to be considered when an organization makes its decision to use a lease as its vehicle to finance assets. Investors and Creditors of an organization must also take into account what kind of leases a firm is engaged in. If you were to look at an organization’s balance sheet in deciding if you should invest money or loan money to an entity, the firm could have several operating leases that would not show up on this statement. If the firm is over loaded with operating leases this could change the mind of an individual/institution that might want to invest money in the organization or loan money to the organization. This also comes into play when firms are being rated by the different rating agencies. Even though the firm’s balance sheet shows that they have very little debt it becomes more important to know how much the firm has financed assets using operating leases; which in essence could take a company that looks very credit worthy based on their balance sheet but in reality they have more debt than they can handle. Given this problem it could be a very short time until the benefits of an operating lease are taken away, and all leases are treated as capital leases.
By: Derek Russell
Financial Statements – The External Users Roadmap
An entity must be accountable to their shareholders. In order to achieve this necessary goal, an entity is required to disclose specific financial material to individuals that have an interest in the company. There are four central financial components involved when reporting on financial activity of an entity: the balance sheet, income statement, statement of cash flows, and statement of changes in owner’s equity. The interplay between these documents constitutes the seamless reconciliation of all economic activity within an entity. This information is externally oriented and is invaluable to shareholders. It provides them with a snapshot of the financial position of a company, the profits or losses over a certain period of time, the source and allocation of incoming and outgoing monies over the same period, and the changes that occur within the owner’s equity during this period. This accessibility to critical economic information creates the link between external users and an entity. It allows for the tracking of historical performance, financial changes of an entity, and keeps shareholders informed. There is nothing more notably valuable to a shareholder or interested investor than being informed; these documents allow for this and begin by disclosing a picture of the entity’s financial position.
The balance sheet or statement of financial position offers the investors information on the financial position of an entity in a point of time. It is a statement that represents the entity’s assets, liabilities, and owner’s equity. The balance or accounting equation (A = L + OE) denotes a balance between both sides of the equation (i.e., the dollar amount of the assets should be equal to the liabilities less the owners equity). This summation of the entity’s financial position can be prepared at anytime but is usually disclosed at the end of the fiscal reporting period. The balance sheet works in concert with the income statement and the statement of changes in the owner’s equity.
The income statements provide critical information to an interested investor or shareholder. It represents the profits or losses of an entity over a period of time. Moreover, it calculates and denotes the net income of an entity and is the first link to the balance sheet.
The link from the income statement is expanded in the statement of changes in the owner’s equity. This statement is comprised of two central components: paid-in-capital and retained earnings. The net income is a component of retained earnings and is added to this section from the income statement. The link between the balance sheet and the income statement is thus derived from the retained earnings component of the statement of changes in the owner’s equity. On a time-line representation of two balance sheets separated by one fiscal year, an external user will see the change in the income statement reflected in the retained earnings component of the statement of changes in the owner’s equity, thus leading to an increase or decrease to the owner’s equity on the new balance sheet. Armed with this information, a reasonably astute user will be able to discern profits or losses, recognize changes in the owner’s equity, and make comparisons between balance sheets.
Lastly, the statement of cash flows identifies the sources and allocation of monies throughout a period of time. It is comprised of three main components: cash flows from operating activities, investing activities, and financing activities. The end balance in the cash flows statement is thus reflected in the cash section of the new balance sheet under current assets. The statement of cash flows provides information on an entity’s liquidity and solvency and can be helpful in identifying whether it can support its financial obligations. Additionally, it helps to assess any changes that may occur in assets, liabilities and owner’s equity.
The important interplay between these documents, working in conjunction, is an invaluable asset to the external user. These components of financial reporting are designed to convey the critical financial information of an entity to the external users. Since most stakeholders of an entity are not privy to or involved in the decisions of daily managerial activities, these financial documents provide a clear summation of an entity’s economic activity. They provide an entity’s financial position at a point in time, the profits or losses over a period of time, changes in owner’s equity over that period, and a representation of cash flows during that period. This combination of financial information provides external users with the financial roadmap needed to make informed decisions about an entity. They guide the decision making process of an investor or potential investor and are indispensable in this regard.
By: Burton Jensen
Banner Exchanges – More Traffic For Free
Many people are just now realizing that it is possible to start and run an internet based business for a lot less start-up capital than it takes to create a brick and mortar business. Not only does it take a lot less financial capital but you can also often work from the comfort of your own home, which is always an attractive benefit. Once you’ve decided that you would indeed like to try your hand at doing business online, you should realize that for all the benefits that an internet business offers, it comes with its own set of difficulties and things that must be worked at constantly in order for it to be successful. One of these tasks it marketing and generating traffic, or hits, to your website, and one way to do this easily is through banner exchanges.
If you look around the internet for ideas about how to generate traffic to a website, getting listed in a prominent position on popular search engines will be one of the most important suggestions you’ll find.
Now, if you don’t have the money to pay for a sponsored, front page listing in a Google search, that you’ll have to find other creative ways to achieve that ranking. One of the things that enter into page ranking is how many other sites are linking to your site, otherwise known as incoming links. While you can go out one by one and ask site owners to link to you, banner exchanges can be a much more efficient way to create incoming links.
You are probably very familiar with banner ads; they are the long, rectangular advertisement spaces that are often positioned at the very top of web site pages, often the home page. While some banner ads can be very flashy and annoying to site visitors, tasteful, relevant banner exchanges can be a great way to generate some extra traffic to your site.
Investigate the free banner exchanges that are offered through a variety of online advertising services. The best of these services will allow you to enter your banner ad into a pool of other member ads that are organized by category and content type. This way, if you have a site that’s dedicated to holiday decorations, you won’t have your ad placed on a bunch of automotive websites, or vice versa. Keep in mind that they best quality ads and most relevant placement will probably be offered by services that cost a little bit of money.
By: Sameep Shah
Working Capital: Financial Options For Small Businesses
Introduction
Large companies have always had a number of options that they could depend on to raise capital for their businesses. The have always had access to a number of alternatives such as selling stock, issuing bonds, bank loans and accounts receivable financing among others. Looking at the other side of the coin, smaller companies, those that have between $20,000 and $500,000 of yearly revenues, have always had a challenge trying to find capital to operate their businesses.
The lack of access to capital has prevented many small businesses from growing and capitalizing on the many opportunities that are available to them. It is not uncommon for small companies to reject large deals or opportunities because they do not have the necessary capital to obtain the resources to service the account. However, even when small businesses do take on large contracts, they find that they are never paid immediately upon delivery of services. Most contract terms demand that the supplier provide 30 to 60 days for the customer to pay their invoice – in effect, forcing them to extend them with supplier credit. The lack of adequate capital resources, along with the necessity to offer commercial credit to clients, creates a “perfect storm” that prevents small businesses from growing and that is very difficult to avoid.
A number of these issues could be sidestepped if the company had immediate access to working capital. Working capital could enable the business to add employees and resources to serve new clients and larger contracts. It also enhances a company’s ability to extend 30 to 60 day payment terms to their customers.
This paper outlines the most common sources for working capital and provides an evaluation of each source. Each source has also been assigned a score, which summarizes the availability and flexibility of the source.
Scoring System
Each working capital source that has been evaluated has been given a score from 1 to 10. The following features where considered when assigning a score:
Accessibility to small businesses Requirement complexity (e.g. do they require significant financial reporting?) Flexibility Payment terms
A higher score indicates that the source of capital has a positive outlook on a number of these criteria and is available to small businesses. A lower score indicates that a particular source of capital may not be best suited for most small businesses.
Financial Options
Venture Capital – Score: 1
Many books and publications tout the benefits of obtaining venture capital to finance a new or ongoing operation. Venture capital is an option for small companies that have a seasoned management team and very aggressive growth plans, however, venture capitalists will rarely invest in small businesses that have no intention of going public. The venture capitalist objective is to invest in a company for a short period of time – say 5 years – and then cash out of the business while making a significant return on their investment.
Angel Investors – Score: 2
An Angel investor is a wealthy individual or group of individuals that typically invest in pre-venture capital companies. That is, companies that don’t meet the current requirements of a venture capitalist but that could meet their requirements with a capital and management influx. However, you should not rule out angel investors completely since there are angel investment groups who focus on the growth of certain communities and will invest in small businesses. The best way to find an angel investment group near to you is to search them on the Internet using a search engine such as Google (www.google.com).
Banking Institutions – Score: 4.5
Most small businesses owners will first approach their bank to try and obtain a loan or line of working capital. However, unless the business has been in operation for a number of years, has substantial assets and all the appropriate financial records, their chances of obtaining any financing are minimal. Banks, however, can provide lines of credit if the business owner personally guarantees them. This means that the business owner will be personally liable for the repayment of these loans. These lines of credit can provide the business with the needed working capital; however they can be very risky, especially if the business does not produce the expected results and the owner is unable to repay the bank. Business owners should use this method of financing very cautiously.
Credit Cards – Score: 5
Much like bank lines of credit, many business owners use their credit cards to fund their businesses. Credit cards offer the ability to make purchases or obtain cash advances and pay them at a later time. It should be noted that credit cards can be a very expensive source of funding. Although most credit cards have reasonably low interest rates for purchases, their cash advance rates can be as high as 17% to 19% due to greater delinquency rates. Furthermore, most credit cards will charge you 2% to 4% of the face value of a cash advance as a “fee”. Much like bank lines of credit, the business owner personally guarantees payment of a credit card. Thus, this method of financing can be very risky if the business does not produce the expected results and the business owner cannot repay the credit card company. Business owners should use this method of financing very cautiously.
Home Equity Lines of Credit- Score: 5.5
Business owners who are also homeowners have the option of tapping into their home equity to finance their ongoing business operations. Home equity loans and lines of credit have many advantages, such as low interest rates and the possibility of having some portion of it deducted from taxes . This method of financing gained a lot of momentum between the years 2000 and 2004 when interest rates where at their lowest point in decades and real estate was appreciating in value. A major disadvantage if this financing method is that it directly places the business owner’s home at risk. In fact, the business owner is placing a bet – with their home as the potential wager – that the business will succeed and will be able to repay the loan. Much like lines of credit, business owners should use this method of financing very cautiously.
Small Business Administration – Score: 7.5
The US Small Business Administration (www.sba.gov) provides a number of very viable options to finance business operations. Although the whole scope of SBA services is beyond the scope of this paper, the SBA provides a “Microloan” program. The program objective is to stimulate micro-enterprises and provides loans of up to $30,000 to small businesses. These loans are usually provided through a financial institution or a bank. They have higher interest rates than traditional loans, but their requirements are more flexible, making them more accessible to small business owners.
Founders, Friends and Family – Score: 7
Friends and family are one of the most conventional ways of financing small businesses. Many entrepreneurs have been able to leverage existing relationships and obtain funding, either as a loan or as a capital investment, for their businesses. Although this source of funding can be easier to obtain that others, it does have some inherent problems. First, the business owner runs the risk of placing the relationship in jeopardy if things do not go as expected and the business defaults. Furthermore, these transactions are usually done with little formality and without written agreements, further complicating matters. If you elect to use this funding option, you should consult an attorney and draw some formal documents that describe the intent and responsibilities of each party.
Accounts Receivable factoring- Score: 8
Accounts receivable factoring, also known as invoice factoring, has been a source of working capital for large companies for many decades. It is now becoming mainstream and available to mid-size and small businesses. Factoring enables a company to sell their slow paying accounts receivable to a financial company, who in turn pays for the invoices within a day or two. After the sale, the financial company waits to be paid for the invoices. A key feature of factoring is that the factor will take the credit strength of the business’ customers, as it’s main consideration. Until recently, accounts receivable financing was out of the reach of the small business owner. However, enhancements in technology have now turned this method of financing into a viable alternative for small businesses. This means that a small company with little or no credit can leverage a strong roster of clients, sell their invoices and get funding very quickly. Factoring should be considered as an option for businesses that sell products or services to other businesses, rather than to consumers.
Conclusion
Obtaining working capital for their businesses is one of the most important decisions that a business owner can make. Like all important decisions, it should be carefully thought out and deliberately executed. The old adage that “the best time to look for capital is when you don’t need it” is still true. You should spend some time researching the all available options for your business ahead of time, so that you can be ready to “tap” your war chest when the right opportunity arrives.
DISCLAIMER
This paper is written to provide small business owners with an overview of the financial options that are available for their businesses. However, this paper does not intend to provide financial or legal advice as only qualified professionals can do so. The author and Commercial Capital LLC disclaim all liabilities arising from the use of the information on this paper. Please consult a professional before making an important decision about your personal or business finances.
By: Marco Terry
