Archive for category management skills
The ratio of credit earnings before tax, interest depreciation
Posted by admin in Companies, Investment Opportunities, budget, fixed costs, management skills, manufacturing, market demand, production cycles, profit margin on October 27th, 2009
A second metric for profitability is the ratio of earnings before tax, interest depreciation and amortization (EBITDA) to total assets. Using data from the national accounts of the United States we define earnings before tax and interest as pre-tax profits with inventory valuation and capital consumption adjustment plus net interest. This metric follows a similar path as the ratio of retained earnings to total assets, although on a higher level and with a higher volatility.
Measuring the extent to which a firm’s value can decline before its book value becomes negative and a firm becomes insolvent, the ratio of market value of equity to total debt represents the inverse of leverage. We have defined the value of equity as the market value of outstanding equities, total debt is defined as total credit market instruments. The tremendous equity bubble of the late 1990s has collapsed, but nevertheless the equity-to-debt ratio stays above the level reached in the 1970s and 1980s. Because of its higher volatility, the ratio is largely driven by the equity performance. As a result the equity-to-debt ratio usually rises at the end of a recession because equity markets already
anticipate stronger economic growth while many companies still deleverage their balance sheets. Here again, the 2001 recession makes an exception.
About one-and-a-half years after the end of the recession in November 2001 equity markets finally marked their lows.
Fundamental models for loans spreads
Posted by admin in Companies, Money Tips, consulting, credit, liability, management skills, manufacturing, material costs on October 25th, 2009
A popular approach to estimate the credit risk of an issuer is the use of z-scores. In this context, Altman’s five components framework has attracted particular interest. On the company level, it is based on the five metrics.
Replacing the company-specific metrics by macroeconomic factors yields a fundamental model for the credit market. Because of the required minimum history and data reliability we will focus on the US market. Data for this procedure is taken from the flow of funds statistics and the national accounts of the United States.
The ratio of working capital to total assets measures the net liquid assets of a firm relative to the sum of financial and tangible assets. We isolated net liquid assets for the US nonfinancial corporate sector from the flow of funds statistics by subtracting mortgages, consumer credit, trade receivables and miscellaneous assets from total assets and subsequently adding inventories, trade and tax receivables.
The large fall in 1974 is due to a significant decline in the value of trade payables. Usually, the ratio of working capital to total assets falls in a recession. But there also seems to be a secular downtrend in this ratio.
What’s So Important About Accounting? – part 2
Posted by admin in communication, incentive, management skills, paperwork, performance objectives, production cycles on August 2nd, 2009
In the dark recesses of their numerical souls, even some accountants may worry that their function is only a necessary evil, an overhead expense that in some organizations is no more than a glorified bookkeeping function. Not so. Sales, manufacturing, research and development, and management all generate raw financial data through their various activities. It’s up to accountants to turn that data into useful information.
A good accounting function—whether in a large company headed by a highly trained chief financial officer (CFO) or a small company with a bookkeeper—produces and communicates information. This information shows department heads how they’re spending the company’s money and whether they’re getting the results they want. Sure, accountants are still number-crunchers and bean-counters, but the true value of what they do is in how they interpret and present the results of all that crunching and counting.
Plain and simple, a company’s accountants, whoever they may be, are guides to its finances. The way this group or this individual organizes figures and turns it into meaningful information provides the measures that help determine the success or failure of the company. Understanding those measures may make all the difference between the manager who’s a well-rounded professional and the manager who’s just another specialist with little sense of the larger financial implications of his or her decisions.
Fixed and Variable Costs in fiction – part 3
Posted by admin in management skills, manufacturing, marketing, material costs, performance objectives on August 1st, 2009
Decisions over semi-variable costs, such as marketing expenses, may be made based on the number of units you need to sell, but they likely are not unit-specific—unless, for example, the marketers decide to give away something free with each purchase. However, if we were to add an additional $5,000 in marketing expense to our 5,000-unit run, we add an additional dollar in semi-variable cost to each item. The same $5,000, spent on the 10,000-unit run, would add an additional 50 cents per piece.
The net cost, then, on the 5,000 unit run jumps to $8 per unit. Costs for the 10,000 unit run jump to $6.50. The net profit margins are $1 and $2.50 per unit, respectively.
Even with these costs applied, it should be evident that the higher this particular production run, the wider the profit margin. That’s all part of the sales income, to be sure. But the profitability per unit is determined primarily by the fixed and semi-variable costs. And that’s influenced by the budgeting procedure.
Word About Costs When Creating a Budget Plan – part 1
Posted by admin in Companies, effective budgeting, fixed costs, management skills, market forecasts, short-term income on August 1st, 2009
When budgeting for labor costs, the distinction to keep in mind is between direct and indirect. Direct labor costs are those incurred in any work on products or services that can be tracked readily, such as wages for assembly line workers. Indirect labor costs are for activities related to products or services that are not readily tracked, such as salaries for supervisors and support personnel. Both direct and indirect labor costs can be either fixed or variable.
Let’s look at the three types of costs that make up the expenses part of a budget.
Fixed costs are perhaps the most important costs to manage. They are the costs that remain constant throughout and are impervious to the cycle of business. The rent you pay from month to month is a fixed cost because it doesn’t vary no matter what your sales pattern might be. To a large degree, salaries also are fixed costs, although they may have variable components in terms of performance bonuses. Utility costs are the same way. Any expense that remains constant no matter what the cycle of business is a fixed cost.
Budget Components – part 1
Posted by admin in consulting, management skills, manufacturing, market forecasts, revenue on July 31st, 2009
Each budget will have two main sections, and a good manager will come to know each of these sections as intimately as his or her own family.
The first section measures company revenues, or income from sales, investments, and any other sources. You need to match up your expected revenues with your expected expenses, the other main part of the budget.
Say you work for a luxury boat manufacturer. Your company itemizes revenue from the sales of a certain type of speedboat. On the expense side, it then has to make sure the costs involved in building this boat will be less than the revenues it will generate. You don’t want to build speedboats that cost more than people pay for them.
Stepping into the Budgeting Process – part 1
Posted by admin in Taxes, consulting, effective budgeting, expenditures, management skills, production cycles on July 30th, 2009
Like any plan, a budget requires more than sitting down, crunching out some numbers that add up to a positive bottom line, and handing it over to the accounting department to plug in. Effective budgeting requires thought, careful planning, and a look at issues beyond the numbers. Consider the following components when you budget:
Be careful how the budget is created. Department managers who are strictly concerned with the bottom line may, just to look good, cut out expenses that are vital for the department to operate effectively. That’s not an effective way to do a budget.
Defining Budget Type – part 3
Posted by admin in Taxes, consulting, expenditures, financial growth, management skills on July 30th, 2009
One of the major facets of budgeting is cost control, and that’s also one of the major responsibilities of company managers. Budgets are the key to cost control, but only when managers have had a hand in developing those budgets. If management doesn’t understand and use the budget, it will do a company no good. Involve all pertinent staff in the budgeting process. That allows them greater ownership of the process and enables them to better stay with the budget they’ve helped develop.
Strategic budgets help a company decide whether to invest in a business venture that may take several years to become profitable. A management consulting firm, for example, might be considering whether to develop a software division. A strategic budget would help it figure out (1) whether over the long haul this made good sense, and (2) how long it will take before the venture pays off.
The Budget: Definition – part 2
Posted by admin in Companies, budget, expenditures, management skills on July 29th, 2009
Although time periods vary, 12 months is the most common
thinking at best. Anything shorter, while useful, may not anticipate all the bumps in the road a business will face.
The budget your family kept when you were young revolved around savings and expenditures, charting the ebb and flow of resources and supplies. When it comes to a company’s budget, things grow a little more complicated, but the
principles are the same. Budgets predict sales and other revenue (income) and production and operating costs (expenses), and the difference between the two (the company’s profit or loss). The budget is the tool for estimating those numbers, and hopefully help managers prevent losses. And, working in tandem or as part of the business plan, it sets goals for either or both.
Budgeting is that simple. And it’s that important.
The Budget: Definition – part 1
Posted by admin in Companies, Investment Opportunities, budget, management skills on July 29th, 2009
Chances are when you were growing up, your family had a budget, it may have included expense categories such as groceries and clothing, a little cash kept in the sugar bowl or a desk drawer, and an envelope of coupons clipped from the newspaper. That was the first experience most of us had with budgets and, in its simplest form, it’s the quintessential definition of budgeting for business.
Like any other strategic direction and business plan, every company requires a financial plan to face the future. The company and departmental budgets are manifestations of that plan, a year-long look at the peaks and valleys of sales and expenses, the projection of cash flow (or lack of same) and the financial direction a company will take over the next 12 months.