Archive for category understanding finances
Parts that contribute to overall payday vision
Posted by admin in Save Money, Taxes, revenue, short-term income, understanding finances on May 15th, 2010
Sound like Flash Gordon or Star Wars? It isn’t. It is the synergistic result of a partnership. Each of these partners had separate needs that they could not fulfill themselves. Working together, however, they were now at the point of strategically planning how they wanted to develop the highways and cars of the future. The first thing they did was create a vision reflecting the individual aspirations of the partners.
Each had a part to contribute to the overall vision. Using the Plan–Do–Check–Act cycle, they then planned what they wanted to do and constructed some prototypes. On several of the projects, they’re checking to see if what they designed and tested is working as predicted. This partnership is well on its way to having its vision become a reality—a vision with the potential of saving thousands of lives while improving automobile efficiency and reducing pollution. Partnerships not only add value to business, but sometimes make dreams come true.
Credit and equity prices and volatility
Posted by admin in Real estate, Save Money, Taxes, revenue, short-term income, understanding finances, variable costs on October 30th, 2009
Generally, equity-based models for credits have to be analyzed in the context of the leverage cycle. When the level of debt remains constant, equity as well as credit investors both benefit from rising equity prices, driven, for example, by increasing earnings estimates. When leverage is rising like, for instance, between 1997 and 2000, equities tend to perform well while credit spreads widen at the same time. Conversely, deleveraging through rights issues or asset disposals, cost cutting and dividend cuts provide a favorable environment for credit, but not for equities. As Figure 3.24 shows, there is undoubtedly a relationship between equity prices and credit spreads. Yet, this relationship varies over time, depending on the current and the expected fundamental environment in the future.
Models that only relate credit spreads to equity prices therefore need to be interpreted cautiously. Assume, for example that the management of a company signals its willingness to concentrate on the creation of shareholder value. Then the probability of leveraging increases substantially. If there has been no decoupling, credit investors should take that as a sign to be rather bearish.
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.
The fundamentals of credit valuation
Posted by admin in Save Money, performance objectives, profit margin, profit projections, revenue, understanding finances, variable costs on October 24th, 2009
Besides market fundamentals valuation is the major driver of market performance for the longer term. The other two drivers that are commonly mentioned in investment literature, technicals and market sentiment, are more likely to explain short- to medium-term fluctuations of credit spreads.
The subject of valuation arises on every level of the investment process. Generally, it is a question of relative attractiveness of one investment vis-avis another one. In this chapter, we will outline four approaches that may support asset allocation decisions in fixed income portfolios with an aggregate benchmark as well as help to determine the beta of a pure credit portfolio.
Basics of accounting – part 1
Posted by admin in communication, financial information, incentive, liability, market demand, ownership, paperwork, understanding finances on August 3rd, 2009
Credits and debits come into play in double-entry or dual-entry accounting, a method by which each transaction is entered twice—once as a credit and once as a debit—on the balance sheet and/or the income statement. That’s how the financial statement stays in balance.
Credits always appear on the right-hand side of T accounts. They represent an increase in items such as business liability, owners’ equity, and revenue accounts, or a decrease in assets.
Debits are always listed on the left-hand side of T accounts. They represent an increase in asset and expense accounts, or a decrease in liabilities.
Understanding Debits and Credits – part 1
Posted by admin in Business plans, Companies, communication, consulting, understanding finances on August 3rd, 2009
You’ll find in subsequent chapters that the accounting function has many steps and components. Although they may vary in complexity, all bookkeeping and accounting systems are essentially the same.
The concept behind accounting, what makes it more than merely adding and subtracting, revolves around a basic core consisting of debits and credits. This is an accounting system’s soul, and understanding it will help managers better handle their share of responsibility for the firm’s finances.
In some ways, debits and credits are more complex in theory than in practice. Debits and credits form the basis of all accounting functions, including the company’s balance sheet. They are the two types of activity that can affect any financial account of any type— assets, liabilities, equity, income, or expenses.
The balance sheet is one of the primary accounting statements for any company. It’s a list of assets, liabilities, and owners’ equity—ownership value, if you will—in the business as of a specific date, usually the end of the financial month or fiscal year. Its ultimate goal is to keep all accounts in balance.