Posts Tagged expense components
Particularly troubling stock options
Posted by admin in material costs, ownership, performance objectives, production cycles on September 7th, 2009
Stock options are particularly troubling. In theory, employees who own stock will work to make the price of the stock rise. Therefore they are given the right to buy shares at a discount. Unfortunately, when new stock is issued to employees who exercise their stock options, your interest is diluted. In some companies, you will find your interest cut in half in a few years. CEOs of large companies average $4 million a year in stock options.
In addition, studies show that the share prices of companies that issue large amounts of stock options underperform the market. Even worse, employees benefit when the stock price collapses. Stock options are repriced or new stock options issued so employees can dilute your interest at a fraction of the cost. You get no benefit from a stock price collapse.
The grant of stock options also increases the volatility of your shares. Stock options are only valuable if the price of the stock rises above the option price. If the value declines, the options are worthless, and employees will not spend money to exercise them. This gives employees an incentive to bet the company on risky ventures such as mergers, acquisitions, untested products, untested markets, untested technology, and untested corporate structures. Employee stock options are no benefit to you whatsoever.
Do you have any business owning stocks?
Posted by admin in Companies, communication, economy, fixed costs on August 28th, 2009
At the micro level, a stock is an ownership interest in a business. The earnings from the business belong to the stockholders. Theoretically, the employees of the business, including top management, work for the stockholders.
In practice, the employees are self-interested. Every employee, from the CEO to the janitorial crew, wants as large a piece of the earnings as possible, leaving as little for you as can be justified. You may have emotional difficulty with this built-in conflict of interest.
Elaborate schemes are routinely employed to siphon off your interests. In the old days, two-thirds of profits were paid out as dividends, giving you direct control of a large portion of earnings. Today, dividends are cut or eliminated so employees can use profits as they see fit. Fewer than half of today’s stocks pay any dividends at all. Every year the number of dividend payers declines. Even those that pay dividends pay only token amounts. Instead, employees grant themselves raises and bonuses without consulting shareholders. Insider boards of directors grant themselves profit-sharing plans, stock, and stock options, all to your deficit. Board remuneration committees offer excessive pay for executives in exchange for excessive pay for themselves.
The few profits that are left are often squandered on ill-advised acquisitions and other schemes. Hundreds of examples could be cited including the recent debacles at Enron, Lucent, Rite Aid, Millennium, Color Tile, Dow Chemical, Sunbeam, Trump Hotels & Casinos, Reliance Groups, and many Internet, tech, and telecom firms that crashed in 2000-2001.
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.
What’s So Important About Accounting? – part 1
Posted by admin in Global Markets, effective budgeting, incentive, material costs, paperwork on August 2nd, 2009
For accountants, the i proof is in the y paperwork. Accurate, well-organized records are a must. Sloppy bookkeeping is the road to financial failure—or at least to slowing down success, perhaps a lot. As a first step in becoming “accounting literate,” take the time to write down all business activities, and make sure your records are accurate.
Good salespeople know all about the items they’re selling. Really good salespeople know the engineering calibrations, size, velocity coefficients, or other technical data about their product.
Why do salespeople need to know these things? Here are some reasons:
Extensive product knowledge impresses the customer.
Product knowledge gives customers faith in the salesperson’s claims that the product is exactly what they’re looking for.
It gives the salesperson better insight into the product and its uses, which makes him or her better able to help customers believe this product is the solution to their problems.
It makes the salesperson more successful. That means higher income, greater job security, and better opportunities for promotion, besides the obvious benefits for the company.
The same argument holds true when it comes to accounting knowledge for nonfinancial managers. The more a manager knows about how the people who deal in numbers handle department finances and the methodologies they use, the more that manager will be able to intelligently work with them, making everyone’s job a little easier. So, let’s take a few steps into that world of accounting.
The Management Function in Budgeting – part 2
Posted by admin in incentive, market demand, material costs, performance objectives, profit projections on August 2nd, 2009
Shipping/Delivery seems to have climbed precipitously in the last year. Why? Clearly, this is a case where vendor price had exceeded market value. It may be a case of a long-term supplier who has gotten used to raising its prices a certain percentage each year with little incentive to remain competitive. Management should review any contracted relationship with the vendor and check the last three years’ delivery and shipping charges to note the percentage increase. Chances are it’s time to put the service out for competitive bid.
There are dozens of questions that can and should be raised, but the preceding three make the point: Setting up the budget is only half the task. The document must then be put through management scrutiny, not only to check the accuracy of its numbers and suppositions, but also to raise those issues that will enable the company to be more efficient and cost-effective.
If these questions aren’t part of the budget creation, then management is doing only half its job.
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.
Drafting a Budget
Posted by admin in Real estate, production cycles, profit margin, profit projections, short-term income on August 2nd, 2009
So what does a budget look like? There are numerous variations, but the goal of any budget is to clearly communicate revenue and cost centers so that profit statements can be drafted and management of resources, including income, can be better accomplished. To that degree, all budgets tend to look the same.
For the sake of this lesson, let’s assume our unit maker described earlier has been in business several years and is charged with budgeting for next year. That means he will have budgets from previous years from which to draft future business plans. The operational budget, then, likely will break revenue and expense components down to three columns:
1. The current year’s budget, or what he originally projected his income and expenses to be.
2. The current year’s projected year-end actual expenses and revenues. Even if it’s a guess, which it tends to be, it must be as accurate a guess as possible.
3. The next year’s budget, which tends to be a hybrid between the actual budget, the year-end projected actuals, and a best guess for what the new year will bring.