Finance
Finance is the study of how investors allocate their assets over time under conditions of certainty and uncertainty. A key point in finance, which affects decisions, is the time value of money, which states that a unit of currency today is worth more than the same unit of currency tomorrow. Finance measures the risks vs. profits and gives an indication of whether the investment is good or not. Finance can be broken into three different sub categories: public finance, corporate finance and personal finance.Capital, in the financial sense, is the money that gives the business the power to buy goods to be used in the production of other goods or the offering of a service. (The capital has two types of resources Equity and Debt)
The deployment of capital is decided by the budget. This may include the objective of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment.
A budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a vision to the company; short term is an annual budget which is drawn to control and operate in that particular year.
Budgets will include proposed fixed asset requirements and how these expenditures will be financed. Capital budgets are often adjusted annually and should be part of a longer-term Capital Improvements Plan.
A cash budget is also required. The working capital requirements of a business are monitored at all times to ensure that there are sufficient funds available to meet short-term expenses.
The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget has the following six main sections:
- Beginning Cash Balance - contains the last period's closing cash balance.
- Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales)
- Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortization, etc.)
- Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists.
- Financing - discloses the planned borrowings and repayments, including interest.
- Ending Cash balance - simply reveals the planned ending cash balance.
Keys to Financial Success
Although making resolutions to improve your financial situation is a good thing to do at any time of year, many people find it easier at the beginning of a new year. Regardless of when you begin, the basics remain the same. Here are my top ten keys to getting ahead financially.1. Get Paid What You're Worth and Spend Less Than You EarnIt sounds simplistic, but many people struggle with this first basic rule. Make sure you know what your job is worth in the marketplace, by conducting an evaluation of your skills, productivity, job tasks, contribution to the company, and the going rate, both inside and outside the company, for what you do. Being underpaid even a thousand dollars a year can have a significant cumulative effect over the course of your working life. No matter how much or how little you're paid, you'll never get ahead if you spend more than you earn. Often it's easier to spend less than it is to earn more, and a little cost-cutting effort in a number of areas can result in big savings. It doesn't always have to involve making big sacrifices.Related Resources:How to Get a Pay Raise
101 Ways to Save Money Series
Choosing the Best Mortgage
Save Money On Long Distance Calls
Save Money on Your Next Car2. Stick to a BudgetOne of my favorite subjects: budgeting. It's not a four-letter word. How can you know where your money is going if you don't budget? How can you set spending and saving goals if you don't know where your money is going? You need a budget whether you make thousands or hundreds of thousands of dollars a year.Related Resources:3. Pay Off Credit Card DebtCredit card debt is the number one obstacle to getting ahead financially. Those little pieces of plastic are so easy to use, and it's so easy to forget that it's real money we're dealing with when we whip them out to pay for a purchase, large or small. Despite our good resolves to pay the balance off quickly, the reality is that we often don't, and end up paying far more for things than we would have paid if we had used cash.Related Resources:4. Contribute to a Retirement PlanIf your employer has a 401(k) plan and you don't contribute to it, you're walking away from one of the best deals out there. Ask your employer if they have a 401(k) plan (or similar plan), and sign up today. If you're already contributing, try to increase your contribution. If your employer doesn't offer a retirement plan, consider an IRA.Related Resources5. Have a Savings PlanYou've heard it before: Pay yourself first! If you wait until you've met all your other financial obligations before seeing what's left over for saving, chances are you'll never have a healthy savings account or investments. Resolve to set aside a minimum of 5% to 10% of your salary for savings BEFORE you start paying your bills. Better yet, have money automatically deducted from your paycheck and deposited into a separate account.6. Invest!If you're contributing to a retirement plan and a savings account and you can still manage to put some money into other investments, all the better.Related Resources:7. Maximize Your Employment BenefitsEmployment benefits like a 401(k) plan, flexible spending accounts, medical and dental insurance, etc., are worth big bucks. Make sure you're maximizing yours and taking advantage of the ones that can save you money by reducing taxes or out-of-pocket expenses.Related Resources:8. Review Your Insurance CoveragesToo many people are talked into paying too much for life and disability insurance, whether it's by adding these coverages to car loans, buying whole-life insurance policies when term-life makes more sense, or buying life insurance when you have no dependents. On the other hand, it's important that you have enough insurance to protect your dependents and your income in the case of death or disability.Related Resources:9. Update Your Will70% of Americans don't have a will. If you have dependents, no matter how little or how much you own, you need a will. If your situation isn't too complicated you can even do your own with software like WillMaker from Nolo Press. Protect your loved ones. Write a will.Related Resources:10. Keep Good RecordsIf you don't keep good records, you're probably not claiming all your allowable income tax deductions and credits. Set up a system now and use it all year. It's much easier than scrambling to find everything at tax time, only to miss items that might have saved you money.Related Resources:Tax Record Keeping
8 Financial Tips For Young Adults
To help you get started, we'll take a look at eight of the most important things to understand about money if you want to live a comfortable and prosperous life.
- Learn Self Control
- Take Control of Your Own Financial Future
- Know Where Your Money Goes
- Start an Emergency Fund
- Start Saving for Retirement Now
- Get a Grip on Taxes
- Guard Your Health
- Guard Your Wealth
What financial measures can entrepreneurs take to reduce their startup risks?
The number one issue business owners face is limited access to capital. When starting a business, money problems can definitely shut things down. To help you manage your money and reduce the risks associated with starting a business, you can follow these mentioned below for you....
1. Have at least one year’s worth of expenses in the bank before you start your business-period. This cash in the bank acts as a shock absorber when things don’t go according to plan. Golden rule number 2-make sure your spouse/partner knows exactly where you are financially each month during your 1st year in business. You can accomplish this by holding 30 minute financial review meetings. Your spouse/partner need not be an accountant or even understand numbers that well. More importantly, it’s a way of holding yourself accountable. Without this check and balance system, many new entrepreneurs go into denial mode, hide the bad news as long as possible and inevitably this ends in disaster.
2. Learn how to read your financial statements. One of the biggest mistakes that business owners make is spending money chasing customers and sales instead of learning how to read their financials and make their business cash flow positive. The number one thing they need to do is know what their cash flow is at all times and the second is to calculate their breakeven. It is critical to know what day of the month they breakeven, stop paying everyone else and start paying themselves.
3. Nothing is more important than revenue. If you have to make a choice on where to spend money always default to activities that directly relate to an increase in sales. If no one is coming through the front door it does not matter that you repainted the walls. Also, do not spend money until the money is in the bank. No matter how “guaranteed” a deal is, never assume it is closed until the contract is signed and the money has been paid. A lot of things can go wrong between a “yes” until the bill is paid. Although it can be hard, avoid spending the money on upgrades until you are sure that you have received payment.
4. The number one reason for failure is under-capitalization. One must assume that they will need one year’s working capital in addition to one years living expenses. We are constantly reminding our clients that they are not one in the same. Also, if people buy a business because they are overly emotional about the product or the service without understanding the role of the owner, they are in for a rude awakening. Make sure that you can separate the role of the owner from the role of the business. The two are very different.
5. Put together an advisory team…you cannot do it all! Pay them when services are needed. Have a banker, attorney, insurance provider, CPA/bookkeeper and small business consulate –if you cannot pay for one check out the local Small Business Development Center or the Service Corps for Retired Executive (SCORE) in your community that offer free or low cost services. Make sure they understand your business plan and will work together for you!
6. There will always be a surprise. Part of your plan should include your personal life style and spending. Be prepared to cut back significantly if needed. This means the kids might not have cable TV to watch, or new cars are out. Planning and discussing this up front can save a great deal of tension down the road if surprises pop up. Often times a new business hits a tight spot, when the spouse is not on board and the family pressure causes the choice to abandon the dream.
7. Survey your prospects and potential clients. Rather than develop solutions on what you think are your prospects problems, why not just ask them? Then develop programs with different price points that people can choose from.
8. Most importantly, don’t underestimate your own ability. Attempt certain jobs before paying someone else; not only do you save up front money but your passion and vision will end up showing in the project. There is so much information available, you can often teach yourself the basics. Later, when the cash flow is available, you can pay a professional to work on refining those projects.
Let the financial advice above help you minimize your business risks and keep more money in your bank account. If you have any additional financial tips, to help entrepreneurs build a strong foundation for success, please share them below…
Be great!
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