Archive for category market forecasts
The ratio of sales to loans and assets
Posted by admin in Business plans, Companies, Money Tips, Taxes, communication, market demand, market forecasts, profit margin, understanding finances on October 28th, 2009
The ratio of sales to assets is an asset turnover ratio that measures the sales-generating capacity of a given asset base. Taking the nominal GDP of the nonfinancial corporate sector as a measure for sales. The ratio has started to turn up at the beginning of 2001. This pattern is normally consistent with periods of recovery. However, it should be noted that this ratio is near its historical low. The z-score for the nonfinancial corporate sector has collapsed dramatically since 2000, resting well below the critical level of 1.8 since the second quarter of 2002. For an individual firm this signals that the company is likely to fail within 2 years. On the macro level it indicates a high probability of rising default rates and widening credit spreads. Three points stand out:
- based on macroeconomic data the z-score has never been in the safe zone;
- the average score since 1952 is about 2;
- in the 1970s and 1980s, the z-score was permanently in the distress zone implying that corporate America should have gone bankrupt, but clearly it survived.
This leads to the conclusion that the weighting scheme is no longer appropriate to capture the vulnerability of the corporate sector. The relative importance of the individual factors changes over time. Therefore, it is necessary to adjust the weighting scheme on a regular basis, for example by using a regression methodology.
Innumerable financial and accounting schemes
Posted by admin in consulting, fixed costs, market forecasts, profit margin on October 5th, 2009
Innumerable financial and accounting schemes, all legal, also dilute your share of profits. Accounting tricks include non-deducted stock options, accruing unearned sales and commissions, classifying big losses as nondeducted special items, and counting pension gains as income. All tricks make earnings appear higher than they really are. Creating huge reserves in a bad year is common as well. This allows the company to then post high earnings in succeeding years. Many companies also use cash flow to speculate in the stock of hot companies. This boosts profits quickly, though it turns a solid business into a volatile investment fund. Companies also finance purchases by shaky customers. This boosts sales and profits in the shortterm but leads to huge write-offs later when the shaky customers fail.
All these accounting tricks inflate profits short-term. Higher profits justify higher salaries, bonuses, and grants of stock options. When these tricks are discovered and set right, earnings are restated and your stock price collapses. However, bonuses and salaries are long gone and stock options cashed. A series of legal accounting schemes can siphon off all earnings and leave the company bankrupt and you holding a worthless stock certificate.
Enron is a recent example. Enron used off balance sheet entities to inflate profits and enrich management. When the tricks were discovered, the stock price collapsed; outside shareholders ended up with penny stocks.
The Management Function in Budgeting – part 1
Posted by admin in budget, effective budgeting, equity, market demand, market forecasts on August 2nd, 2009
A budget is not a budget until it has been carefully scrutinized by management. Even if the numbers add up correctly, they may not have been estimated properly. It’s middle-management’s job to assemble the budget, but it’s upper-management’s job to question the budget. They do this because the budget is the financial tool that will guide the organization in the coming year. Not only does it need to be accurate, it needs to be well-considered and realistic.
In our example, the company missed the mark rather dramatically, showing a profit margin 22 percent less than the one projected in the budget. What questions should management ask?
Why is the projected actual so far off from the budgeted amount? Perhaps it was the fault of the budgetingprocess being too optimistic or of a budget based on considerations unrealistic to the current situation. Perhaps there was a significant change in market conditions or materials costs. In any of these scenarios, management needs to understand why before it can accurately assess the new year’s budget.
Production costs for Units A, B, and C do not match their profit scenario. What gives? It may be that the unit production varies and standardization needs to be applied. If a more costly unit is not earning more exponentially, it may mean that (a) the unit is improperly priced, or (b) demand has slacked off and there’s too much inventory left in the warehouse. In either case, management must look at production standards and market demand before budgeting unit-production figures for the new year.
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 2
Posted by admin in effective budgeting, equity, expenditures, manufacturing, market forecasts on July 31st, 2009
The revenue section’s real job is to measure revenue projections—what the company thinks its going to earn through all its sources throughout the cycle of the budget—so that it may balance expenses against them. Unless there is a sound strategic reason for it, a business without a positive bottom line won’t likely be a business very long. Expenses may be higher than revenues in certain months, but the goal is always to make sure revenues exceed expenses by the end of the year.
When it comes to the expense side of a budget, the more detail that can be included within reason, the more accurate a view the budget will provide of the firm’s financial condition. More important, managers will be able to control cash flow better when they have a deeper level of information at their fingertips.
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.
Other roles of the budget
Posted by admin in effective budgeting, financial growth, market forecasts, revenue on July 31st, 2009
A budget has many uses beyond charting the company’s financial goals.
It can assist in measuring the feasibility of technology development— both its likelihood and its application—and can help provide marketplace forecasts. It also may help measure the impact of new legislation affecting the market and may reflect new regulations—both internal and external—that touch the company. It’s all there if you know where to look.
If your company makes ball bearings, the tactics for creating better bearings may be to define consistent settings on the milling equipment and monitor those settings as a way to reduce inconsistencies, thus reduce costs due to production problems. The procedure for doing so might involve a worker performing an inspection every half hour, noting the settings in a log, and reporting to the supervisor any variations beyond allowable limits. Or if your concern is with sales, the tactics may be to identify territory penetration for a sales force right down to the number of new contacts made per week with revenue computed on the number of sales per call made each week. The procedure would likely involve logging all new contacts and tracking the results. These are budget concerns and can be measured by the financial impact on your company of both revenues and costs generated.