Payday Loans To Make Ends Meet Until Your Next Payday Cheque

It is easy to tackle with financial emergencies when you have enough money with you even at the end of the month. But, this seems impossible as most of us usually end up spending most of our pay on shopping and satisfying other personal purposes in the very beginning of the month that results in only a handful of money left for the rest of the month.

You can meet a financial urgency if it happens in the beginning of the month as you have the monthly pay as a backup. However, what will you do if you need cash urgently at the middle or end of the month? Why to ask a friend or family member for money and face the embarrassment or become a burden on them, when you can access payday loans tailored specially to meet instant cash needs.

Payday loans are short-term loans designed specifically for the UK residents helping them meet financial urgencies with ease. Payday loans are also known as cash advance loans, cheque advance loan, instant cash loans or post-dated cheque loan.

People usually use payday loans to make ends meet until their next paycheque. Urgent expenses such as medical bills, phone bills or an unexpected expenditure can be easily dealt with a payday loan. Various kinds of payday loans are available in the market with different characteristics to meet diverse needs of the UK residents, some of them namely same day payday loans, military payday loan, no fax payday loans and many more.

Payday loan can work as an important financial source to bridge the cash flow gap between paydays. These loans are usually approved faster as are meant to meet instant cash needs. A payday loan is offered for a short-term that usually ranges from 7 to 14 days that can be extended up to 18 days. With a payday loan you can borrow any amount ranging from £200 to £1500. You need to submit a signed post-dated cheque in favour of the lender that will pose as a security against the loan.

In the past, there were only few traditional lenders who used to charge high fees and interest rate. Borrowers had no other option but to avail loans at the terms and conditions offered by lenders just to meet financial contingencies. The loan process was really time taking and costly.

Entry of online lenders in the loan market has marked an end to the monopoly practiced by traditional lenders. Now, it has become simple and easy to borrow payday loans. You just need to submit a loan application form online and the lenders will get back to you with the instant loan decision. The online loan process helps in saving your valuable time and money.

You need not to go to the lender to access the cash granted as a loan. It will get deposited into your bank account automatically and on the due date it will be withdrawn from your account, keeping you away from all the troubles and hassles present in other types of loans.

One of the significant advantages of borrowing a payday loan is that it does not involve a credit check. So, whatever may be your credit score – good or bad. A payday loan can be an instant solution to your urgent cash need.

A financial urgency can happen anytime and to anyone. A payday loan in such situations can work as a lifesaver helping you in maintaining your creditability in the market. But, make sure to make a thorough research and analysis before you take the final decision regarding the loan deal that will help you save good sum of money in the future.

All You Need To Understand About Payday Loans

A payday loan indeed has many names. Some call it a cash advance loan. A few think of it as a check advance loan. One another name is often a post-dated check loan. A few others call it a deferred-deposit check loan. The Federal Trade Commission in the U.S. calls it “costly cash”. Regardless of what you call it, it is really the same thing: a smallish (generally $50 to $500) short-term loan having considerable interest rate.

Why would you obtain a payday loan?

Payday loans are preferred for many reasons. To those who are actually in the position of requiring one, its benefits outnumber the disadvantages. And there really are shortcomings; nevertheless we will analyze those aspects subsequently.

To start with, place yourself in the shoes of the individual who requires some quick money. Perhaps you have just been placed in the unenviable situation of suddenly requiring some cash and being taken by surprise. You might have had a totally unexpected health care bill or perhaps automobile repair bill, or you may really need to take a trip unexpectedly, like in the case of demise in the family. Some people who want swift funds utilize it to fork out their every day expenditures, such as rent, groceries, utilities, and so on… Whatever the reason will be, you desperately require that money and you simply do not now have it.

Is really a payday loan your last option? Do you have other different solutions you could check out first? Well, what are often the merits of payday loans? Let us find out:

1. You would not really have to undergo the hassle of a credit check.

2. You will be able to fill out an application in person, on the phone or on the internet.

3. The procedure normally takes under 20 minutes.

4. The loan proceeds are conveniently deposited into your bank account in less than a day.

5. It is very affordable, at least to start with – you really do not have any up-front expenses.

6. It is very discreet – nobody else is involved in the process.

7. It is secure – your financial details are not discussed with others.

Alright, that makes sense. These are adequate reasons to get rid of the stress of remaining short of money. It is really a “quick fix”. You will be able to cover the shortage, and move on with your life. And you will be able to repay the next payday, correct? So you have settled your situation.

Just where would you be able to get a payday loan?

Payday loan firms are pretty much all over the place. There are over 10,000 payday loan outlets in operation in the U.S. And they are spread out in identical fashion all over the globe. If there is not a payday loan outlet near you, you can search the internet and uncover plenty of online payday loans out there.

These providers are in business to “help” people in dire financial need. They give these kinds of loans to individuals that cannot obtain the money they need at any other place. Let us now profile one firm who furnishes payday loans as part of their basically financial services business – Money Mart.

Money Mart was basically promoted as an alternate to banks. Their hours would extend past banking hours, and they would situate themselves in lot more accessible locations than banks. They can cash checks even when banks were closed, and people would not really have to travel very far for their services. They should have been on the correct course since today, they have 1,700 locations in Canada, the U.S. and the U.K.

A common Money Mart customer actually is an average working individual, 32 years old (82% of clientele are less than 45 years) and currently employed, having an annual earnings of approximately the national average. These clients go to Money Mart because of their fast service, their easy venues, and their prolonged functioning hours. The entrepreneurs of Money Mart had been right – their primary ideas nonetheless hold true these days.

Ever since including payday cash advances to their monetary services, they have carved themselves a very nice niche in the market. But they are certainly not the sole choice. You can today find a minimum of one, and typically several, payday loan facilities in almost every community.

Why precisely would you choose not to obtain a payday loan?

Now that we have researched the convenience of payday loans, let us now have a fair take a look at the disadvantages. All over the United States of America, governments on virtually every level are looking at payday loan channels with mounting worry. Plenty of individuals feel that they make the most of low-income people in financial difficulties. Some go as far as to express they “prey” on them. Their argument to that is that they are filling up a requirement and they are not carrying out anything illegal. So the debate goes on – let us examine why.

Do you remember when you believed you had sorted out your difficulty and you could move on with your routines? Well, what if perhaps your following paycheck, after your planned expenses, was not good enough to pay off the obligation?

If perhaps you came up short once again, you need not be troubled – payday loans are extendable, or renewable. This procedure is termed “rollover” and, when you do the same far too many times, it can end up costing you a whole lot of money. Let us study an illustration: Say that you borrowed $100 for 2 weeks (till your following payday). You give a check to the loan provider for $115 (including your $15 fee). The annual percentage rate of that loan is actually 391%! If perhaps you cannot pay off the $115 at the due date, you can rollover the loan for another couple of weeks. If perhaps you rollover the loan 3 times, the lending fee will reach $60 for a $100 loan. That is quite substantial interest, do not you suppose?

These are details you need to give consideration to when you are deciding if a cash advance payday loan is the ideal solution in your particular circumstance. For sure, the loan cost is substantial, yet it gives you the funds you require, whenever you need it, thus avoiding a whole lot of tension and trouble. It is really pretty true in consumerism nowadays that convenience will cost you money. Nevertheless is it worth that much? That is a question you will really have to answer for on your own.

Payday loans tend to be controversial – however they do fill a necessity

At this point we have evidently presented both sides of the discussion – and it is really a big debate in recent times. Hence which party will you go with? That depends upon your current situation. In case you truly simply have to have it, and you do not really possess some other choice, then a payday loan is probably the prudent thing for you. At the very least you will be in a position to keep your peace of mind, even when it does cost you some money.

When you end up in this scenario, use it as a chance to learn. Keep in mind, there are hardly any mistakes – simply lessons. When it is essential to get hold of a payday loan, ensure that you do not really roll it over a lot of times – that is really when it will become a trouble. Also in the interim, try to create a crisis fund so you would be able to cover those unforeseen expenditures. Become a good financial manager. Then you would possess an alternative, and also you would not have to depend on a payday loan as being “your last resort”.

How to Get Payday Loans Online – Get a Loan Right Now!

The ability to obtain instant payday loans online has become quite popular. It is quite easy to fill out the online form. Normally, it takes less than an hour for approval and approval is gained without a credit check. It is important to check each payday loans company for verification with the Better Business Bureau in one’s local area. If the company one has chosen is not registered, it is a good idea to continue his or her search till he or she has found a registered company in good standing.

Reputable companies understand that there is a need for financial services for those who cannot borrow traditional loans. However, many individuals seek out payday loans online in Ontario without first checking the background of the lending company. It is important to do a thorough search before settling on the company with which to do business.

The concept of payday loans is that an individual can obtain much-needed cash deposited instantly into his or her bank account that will enter repayment on his or her next payday. The interest rates will rise as the length of time till repayment is extended, that is why it is important to pay back these short-term loans as soon as possible. The application process is very simple and streamlined and states all terms and conditions in plain English.

For those individuals that do not know what a cash advance loan is, it is a short-term loan that is also known as a cash advance loan. These are great ways to borrow for those that cannot or do not want to borrow with a traditional lender, such as a bank or credit union. There are higher interest rates due to the convenience of this type of loan and a shorter repayment period. The term of the loan is normally seven to twenty-one days after receiving the funds.

If an individual has had credit problems in the past, there is also a payday loan just for them. For those who simply need help arranging their finances, credit counseling services could be just what they need.

Applying for payday loans online has never been simpler, with shorter forms and more online lenders to choose from. If one believes that this may be the right road for him or her to take, simply research the company before giving out any personal information.

The world is experiencing economic hardship right now. No jobs, housing market at a standstill and no end in sight makes it difficult to hold out hope for the future. North America seems to be worse off for those that live there, even is feeling the strain. With no end in sight to the economic plight, where does one go for extra funds when they are needed? For citizens, extra cash for unexpected expenditures comes in the form of payday loans online.

When a person’s paycheck is weeks away, but car repairs or emergency medical treatment is needed, having cash on hand really helps. If a person does not have extra cash for such items, then it can be disastrous. That is when a payday loan can pull a person through a rough time.

All a person has to do is go online and provide information like, citizenship, employment, checking account with bank, drivers’ license, and contact numbers. Once the information is verified, a person can have a loan in a matter of hours.

There are no hidden fees to worry about once a person accepts the loan. That can be frustrating to think that everything is all taken care of and then are slammed with another fee. Payday loans online is up front about fees when a person applies so there are no surprises later.

Some establishments may charge processing fees, not so with a cash advance loan. Applying is free and takes only a few minutes of a person’s time in the comfort of his or her home.

A person does not have to worry that unscrupulous people may get a hold of his or her personal information either. Payday loans online keeps a person’s information strictly confidential. They understand a person’s nervousness about giving out personal information and make sure it is much safeguarded.

One of the best parts about applying online is how simple and fast the approval process works. Once approved, the money is wired directly to a person’s account and ready to be used. Repayment works the same way, it is electronically deducted from a person’s account; no muss, no fuss. Payday loans online makes getting needed extra cash hassle-free. When a person needs cash, he or she should apply online with a payday loan facility in your town.

It used to be quite difficult to obtain a payday loan, but now, with the advent of the internet and payday loans, this is something that more and more people are checking into. This is not to say that more are experiencing financial troubles, even with the global economic crisis; it simply means that now that these loans are easier to obtain, more people are qualified to receive them.

Experts are saying that more individuals than ever before are choosing payday loans for the ease of the application process. This was not so even just a few years ago because of the length of time it took for approval, and many times, properly qualified people were still turned down. Also, back then, your credit had a lot to do with your acceptance, as well; but, all that has changed, and no longer do payday loan centers require a background or credit check.

Also, thanks to the internet’s ability to put people in instant contact with various businesses, it is easier than ever before to obtain payday loans. In fact, the entire application procedure has been lessened to just a couple of hours. Imagine, in a little over two hours, you could have the money you need in hand. This is why obtaining payday loans online has become the new way to obtain the funding needed for your emergency.

Of course, there are still the skeptics out there who believe that payday loans may not be for them. Rightly so, as it does sound as if the lending agencies are just handing out free money; however, there are qualifications that one still has to possess and it is certainly not free money. Not only must it be paid back in a much shorter time frame than a traditional loan, but it also has loan fees attached to it for the right to borrow the money. These loans are quite efficient for those finding themselves in a financial debacle, but they do come with a certain price.

The greatest thing about payday loans is the fact that you do not have to suffer through a financial setback any longer. You do not have to look at life as though you need to worry what will happen with your next monetary emergency. Payday loans can help you get rid of your financial problems efficiently.

Top 10 Myths For Payday Loans

1. Payday loans trap consumers in “cycle of debt”
Although the phrase “cycle of debt” is a favourite among industry critics, it is not based on the truth. Researchers and American state regulators consistently report that 70-80% of customers use payday cash advances between once a year and once a month.

It is important to understand that a payday advance is not meant to be a long term loan. What a payday loan has done is assist millions of families with emergency needs. This means that a payday advance is given only under the agreement that it will be paid off on the applicant’s next payday (hence the term, payday advance). Short-term loan providers also operate a rollover service to help keep the payday advance applicant from being stuck in a long term, high interest rate loan.

2. All operate as loan sharks
A payday loan provided by a reputable payday loan or cash advance company does not take advantage of people. It is meant to be used only for a short term emergency situation by employed persons who need a little bit of help between paydays for emergencies. This is a very common occurrence when most families live pay check to pay check and may not be financially prepared for emergency repairs, travel or medical expenses. In reality, quick payday loans fill a necessary component in the economic world.

3. Rude employees
Payday loan companies do not compete on the price of their loan, therefore it is important for them to compete on other aspects of the service to create a competitive advantage. One of these ways is through customer service and to ensure all employees are financially knowledgeable and are fully qualified for the job to certify their customers are given an excellent customer service. This is further enhanced through the recording and monitoring of telephone calls in and out of the company.

4. Target vulnerable people, the poor etc
Payday advances are marketed toward subprime clients without a distinction in employment or culture. In fact, payday loans are marketed toward those people earning between £10 000 and £25 000 per year. Most payday advance members are under 45 years old and all applicants are currently employed with a steady income and have an active checking account. In reality, payday advances are meant for working adults with an immediate emergency need that cannot be satisfied through bank and union loans.

5. Hide fees and have high interest rates
The payday cash loan facility is required by law to disclose any application fees, interest rates and other fees. In accordance with OFT guidelines, it is a legal requirement that all fees and rates must be clearly outlined and disclosed to the customer.

A payday loan does have high interest rates. This is not because the lender is trying to take advantage of emergencies, but because they are a short term lender. The payday loans are meant to be short term loans, not long term loans that are constantly refinanced with monthly statements. This means that the payday loan company assumes greater risk at the same profit level as other financial institutions.

6. Threaten customers with coercive collection practices
Short-term loan providers are committed to collecting past due accounts in a professional, fair and lawful manner involving no criminal actions. In accordance with BBCA’s guidelines, companies in the UK may not pursue criminal actions against a customer as a result of the customer not repaying their loan. If absolutely necessary and after all other approaches have been tried, the lender may turn the issue over to a collection agency.

7. Operate outside the OFT guidelines
All short-term loan lenders should follow OFT guidelines and are dedicated to practicing all practices and collections in the best way possible. The company strives to educate the consumer and to make sure that our borrowers clearly understand the payday loan process. This is in accordance within the customer selection criteria in a Responsible Lending policy.

8. Unethical
Many posts have been written on consumer forums about how payday loan lenders are unethical and immoral for taking money from people who need it the most. This is not the objective of payday advances; these short-term loans are meant to tie over consumers until payday and be paid back on time. One loan provider operate a ‘Responsible Lending’ policy, listed in this policy are guidelines stating that the company’s charges are transparent and only lend to customers who can pay the loan back. The company also offers a payment plan option if customers are unable to pay back the loan on time; this allows them to pay back a small amount per week which the customer can afford.

Short-term loan lenders who offer payday advances have also been seen to partner with a charity to match customer donations made through the website. For example, one lender has partnered with Starlight Children’s Foundation to match the 50p donation, customers can choose to make on their interest payment.

9. Adds unauthorised charges to accounts
Payday loan providers only charge customers what they owe, and do not want to charge customers more for their loan. All companies ethical practices and responsible lending policy ensures customers only pay back the interest payments and charges which are relevant to their account.

10. Employees are trained to set hooks
Employees from payday loan providers are trained purely for business purposes, and to help customers as much as they can. Employees from short-term loan providers pride themselves on excellent customer service and helping customers out. To employees from this short-term loan lender happy customers mean increase commission.

Payday Loans – What You Need to Know

There are more payday loan stores in the United States than there are McDonalds restaurants so if you are in desperate need of an emergency infusion of cash you may be one step away from your goal. But if your car is sitting in the driveway leaking vital fluids, you may not even have to leave home to get a payday loan as many purveyors of the service are now online.

How a payday loan works

Before you rush to do a search for “payday loan online” there are a few things you should know about how these types of loans work and what alternatives are available. A payday loan is a short term small-balance loan that is intended to tide you over till your next payday arrives. They can be conveniently obtained as payday loans do not require a credit check. If all you have are a checking account and two recent paychecks, you may be a customer. But there’s a price.

Payday or payroll advance loans are offered by companies that usually fly under the radar of state and local government consumer protection laws. In some sates such as Georgia, which has the stiffest regulations in the country, payday lenders have been accused of predatory practice and have sometimes been run out of town on rails. In their defense, payday lenders say they provide a much-needed solution to consumers with less than perfect credit and who must have a quick infusion of cash to tide them over till their next pay day.

In exchange for these high risk loans, payday lenders charge a fixed fee for a fixed period, usually fourteen days and if you happen to miss the fourteen day deadline, there’s a penalty fee that is added to your charges along with another set of fees to roll over the loan through another period.

Rapid escalation

In short order, if you borrowed $500 for an emergency situation, you could end up owing as much as $700 if you miscalculated your cash flow and were forced to take a payday loan for a month. That equates to 480% or so per year and on the face of it, looks like a dreadfully large price to pay for a small amount of money. So payday loans are usually a good idea only when you have run out of options entirely.

Whether you are applying online or in person, you must at least have a checking account. Payday lenders will require you to write them a postdated check for the loan amount plus the finance charges. They will be more than happy to extend the life of the loan if your needs are pressing. And the sheer convenience of payday loans online is difficult to resist. These sophisticated sites require your routing and account numbers from your check book and will routinely deposit money in your checking account almost instantly.

What can go wrong?

You run the risk of miscalculating your budget and getting into a cycle of using one payday loan to pay the other. The Center for Responsible Lending, a Durham, North Carolina non-profit, reports that the vast majority of payday loan borrowers do five transactions a year, while more than half of all borrowers take twelve or more loans per year. If you get into a cycle of dependency on payday loans, it may be hard to wean yourself from the habit.

Several states led by Georgia recognize this and have banned payday loans at one time or another, including Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. But you should take heart if you live in those states, or if you have had all you can take of onerous interest rates.

The alternatives

You may be surprised to learn there are alternatives to payday lending and certainly to the beguiling online payday lending sites. If your credit rating is in the cellar you may find the following suggestions just short of annoying but I’ll make them anyway:

Use your credit card for which you’ll pay a much lower rate than a payday loan.

Ask your payroll department for a salary advance.

Ask a friend or family member for a loan.

Offer your supplier or service person a post-dated check.

Ask for an extension on your car loan that defers one month’s payment and frees up some cash.

The other alternatives

Realistically speaking, if you had good credit or a reasonably well-off family member, you would probably not be in the market for a payday loan. So your only reasonable alternative may be to minimize the damage. Searching for a payday loan online may be your best option for finding a reasonably low interest rate. But you must brace yourself for prompt repayment in order to avoid getting on the lender’s treadmill. Once you have lined up a reasonable rate and obtained your cash, you should start planning how to avoid becoming repeat business.

Breaking the cycle

A great place to start would be to learn how to make a simple personal budget so you can put aside small amounts of cash each payday for an emergency fund. If budgeting does not work for you, consider joining a credit union before your next crisis occurs. Credit unions now offer a nifty device called a Salary Advance Loan Program. State Employees Credit union in North Carolina has one of those. They will lend you up to $500.00 at 18% and with no fees attached and they allow borrowers to set up a loan by phone. They require that you have a direct deposit account with the credit union, into which your paycheck goes.

But what if you don’t work for the state of North Carolina? Or what if you don’t belong to a credit union or have a family member who does? All is not lost. The National Credit Union Administration has a nifty web page accessible from their “Resources” page where you can search for credit unions by type and state. This is pretty useful because some credit unions will allow you membership just because you live in a particular city or county. Take ACCESS Federal Credit Union in New York state for instance. According to their web site, “if you live, work, worship, or go to school anywhere in Oneida County or the City of Oneida, you are now eligible to join.”

Otherwise

If you absolutely, positively cannot find a credit union near you that offers salary advance loan programs, try to minimize the damage by shopping around for the best possible rate, before you run into an emergency. With a little luck, payday lenders online and off may realize a little restraint can go a long way. Any day now congress may decide to take up legislation to cap payday loan rates at lower levels, much as they have done for military personnel, whose rates have been capped at 36%.

How to Choose Relevant Financial Literacy Plans

Record debt, skyrocketing foreclosures and a large number of people suffering from financial stress…sound familiar? Many of the problems people face today could have been avoided if they had received a practical financial education.

Teens and young adults tend to learn more from practical financial literacy lesson plans. Having a practical financial literacy curriculum as support will help you teach important guidelines to your child. This allows them to be more financially responsible in the way they deal with everyday finances as well as long-term expenses. It is essential that you instill your spending habits in your children in order to get the ready for their financial independence.

Many schools have started offering a financial literacy curriculum to their students, either in the form of economics classes or classes geared specifically towards preparing students financial responsibility in college or independent living.

In light of the current financial situation it is vital that we arm our young people with the financial information they need to be successful in the financial real world. If you want to make a lifelong difference in a child’s quality of life then choose an engaging and relevant financial literacy course. But, how do you choose a financial literacy curriculum that students will actually implement? That is the question that will be answered in this article.

Studies indicate that less than adequate financial training has a negative effect on students. They report boredom and confusion which in turn turns them off to learning more about money matters. The instructors had good intentions when they begin implementing the financial education course; regrettably, the financial lesson plans had a negative effect instead.

To ensure your financial education class makes a lasting difference in students lives it is important you choose a financial literacy curriculum that are designed to keep the students engaged and motivated to learn more. The following are seven ways to help you choose the most effective financial literacy lesson plans in order to help your students live a life of financial freedom.

1) Review the Curriculum Designers Background. Most financial literacy curriculum is written by people who have not had significant money or business experience. Make sure the financial education lesson plans you choose have been designed by a team of experienced professionals. Look for curriculum that is developed by a team of financially successful entrepreneurs and teachers that have a track record of curriculum development experience. Finding a curriculum that combines top teachers with business leaders will put you immediately on the right track.

2) Find Curriculum that Motivates & Educates. Having reviewed hundreds of financial literacy lesson plans and talked to thousands of youth many of them have been turned off ‘learning about money’. Many students have complained about past financial literacy classes being boring and confusing. A well designed financial literacy curriculum, taught properly, can be a rewarding and entertaining experience. A good test is to review the curriculum late at night and see if it passes the snooze test.

3) Find Lesson Plans that Grow with Students. In a perfect world financial lessons would be taught over time and your students would build their money skills over time. Since this is a luxury most educators will not receive, it is important to choose curriculum that builds on the prior lessons and covers the key principles that make up the foundation knowledge of their education.

4) Lesson Plans Cover the Mental Game of Money. Talk to any financially successful person out there and the majority will agree that the mental game of money serves as a foundation for our financial decisions. It is also well documented that the average person makes most of their financial decisions because of emotional responses, not logic. That is why it is critical that the financial literacy curriculum you choose covers the mental game of money.

5) Financial Success Training Curriculum. The ultimate goal of financial literacy lesson plans is to help our youth reach the level of financial success they desire. Implementing curriculum that focused on providing real world money lessons will not only keep students interested but will also put them on track to achieving financial security.

6) Practical Education before Theory Based Memorization. While the more advanced financial theories should be taught it is important to emphasize practical financial lessons that translate to the real world for students. The advanced theories will can be taught once the practical financial curriculum has been mastered. Considering the fact that over 40 million Americans do not have bank accounts, locate curriculum that walks students step-by-step through basic account structure and includes activities that helps to build their financial foundation.

7) Teach with Entertaining & Engaging Curriculum. By the time a student graduates high school many have sat through more than 10,000 classes. There is not much time to teach financial literacy, so it is exceptionally important that it stands out from the thousands of other lectures students must sit through. Choose curriculum that engages the students with activities, multi-media, celebrities, movement, props and other tools to help our students internalize financial literacy lesson plans so they benefit from this knowledge throughout their life.

Maximize the effectiveness of your time and financial literacy class by getting financial literacy curriculum designed to get students excited to learn about money. The confidence that a practical financial education can bring to students will have long-term positive benefits that affect many area of your student’s life.

Not Knowing This About Your Financial Advisor Will Cost You

As an In-House Tax Strategist for a “Wealth Management” office, I had the unique perspective of watching and observing the gyrations a wealth advisory team will go through in order to “land a client”. My job, of course, was to bring value added services to the existing and potential clientele. Well, not exactly. I had the mindset of that purpose but in truth, it was just one more way for the “financial advisor” to get in front of another new prospect. In fact, that one purpose “get in front of another prospect” was the driving force in every decision. Think about it this way. A Financial Advisory Firm will make tens of thousands of dollars for each new client “they land” versus a few hundred dollars more for doing a better job with their existing clientele. You see, depending on how a financial advisory firm is built, will dictate what is most important to them and how it will greatly affect you as the client. This is one of the many reasons why Congress passed the new DOL fiduciary law this past spring, but more about that in a latter article.

When a financial advisory firm concentrates all of their resources in prospecting, I can assure you that the advice you are receiving is not entirely to your benefit. Running a successful wealth management office takes a lot of money, especially one that has to prospect. Seminars, workshops, mailers, advertising along with support staff, rent and the latest sales training can cost any size firm hundreds of thousands of dollars. So, as you are sitting across the glossy conference table from your advisor, just know that they are thinking of the dollar amount they need from the procurement of your assets and they will be allocating that into their own budget. Maybe that’s why they get a little ‘huffy’ when you let them know “you have to think about it”?

Focusing on closing the sale instead of allowing for a natural progression would be like running a doctor’s office where they spend all of their resources how to bring in prospective patients; how to show potential patients just how wonderful they are; and the best way for the doctor’s office staff to close the deal. Can you imagine it? I bet there would be less of wait! Oh, I can just smell the freshly baked muffins, hear the sound of the Keurig in the corner and grabbing a cold beverage out of the refrigerator. Fortunately or unfortunately, we don’t experience that when we walk into a doctor’s office. In fact, it’s quite the opposite. The wait is long, the room is just above uncomfortable and a friendly staff is not the norm. That is because Health Care Providers spend all of their time and resources into knowing how to take care of you as you are walking out the door instead of in it.

As you are searching for financial advice, there are a hundred things to think about when growing and protecting your wealth, especially risk. There are risks in getting the wrong advice, there are risks in getting the right advice but not asking enough of the right questions, but most importantly, there are risks of not knowing the true measure of wealth management. The most common overlooked risk is not understanding the net return on the cost of receiving good financial advice. Some financial advisors believe that if they have a nice office with a pleasant staff and a working coffee maker they are providing great value to their clients. Those same financial advisors also spend their resources of time and money to put their prospective clients through the ‘pain funnel’ to create the sense of urgency that they must act now while preaching building wealth takes time. In order to minimize the risk of bad advice is to quantify in real terms. One of the ways to know if you are receiving value for your financial advice is to measure your return backwards.

Normally, when you come to an agreement with a financial advisor there is a ‘management fee’ usually somewhere between 1% and 2%. In fact, this management fee can be found in every mutual fund and insurance product that has investments or links to indexes. The trouble I observed over and over again as I sat through this carnival act, was that management fees, although mentioned, were merely an after-thought. When presenting their thorough portfolio audit and sound recommendations, the sentence used to the unsuspecting client was that the market has historically provided an average of 8% (but we’re going to use 6% because we want to be ‘conservative’) and we’re only going to charge you 1.5% as a management fee. No big deal, right?

Let’s discover why understanding this management fee ‘math’ is so important, and how it could actually save your retirement. This could actually keep you from going broke using a financial advisor simply by measuring your financial advice in reverse. Let’s look at an example to best demonstrate a better way to look at how good your financial advisor is doing.

Now, before we begin, I have always understood that whoever gets paid first wins. We only have to look at our paycheck to see who gets paid before we do to understand that perspective. It is equally important to know that management fees are taken out first, unless you are lucky enough to have the income, the assets and a willing financial advisor to only get paid when they make you money. Funny though, this is exactly how you should review your own historical performance with your financial advisor and if they should be fired. Let’s say you have investable assets of $250,000 as you sit down with a wealth management team. They have just provided you with PowerPoint presentations, marketing materials and a slideshow on their 50″ HD Computer Screen in their freshly redecorated conference room showing that you can make 8% and they’re only going to charge you 1.5% annually (quick math $3,750 every year). You see in their presentation your investable assets appreciating over the next 10 years all the way up to $540,000. Sweet!

Now, this is not the article on why using the “Average Rate of Return” is absolutely the wrong measurement to use because it uses linear math when it is more appropriate to use geometric math in Compound Annual Growth Rate which incorporates time… But let’s look at how fees have a depreciating element to your investments.

After consideration, you agree to a 1.5% annual management fee to be paid quarterly. The financial advisor needs to get paid first so your portfolio’s management fees come out first. Consequently, your $250,000 becomes $249,000 and at 8% average annual rate of return, your assets after the first quarter are now $254,000. After the first year? Your assets are now worth $266,572 after fees of $3,852.

Financial Advisor Portfolio or Self-Managing ETF Portfolio

Self-Management Portfolio

I’d like to take this time to explore the differences in doing your own portfolio built on buying two ETFs (SPY and AGG). For the purposes of this illustration we will be allocating 80% to the S&P 500 (SPY) and 20% Barclay’s US Bond Aggregate (AGG). This is the time to say, I am not recommending any specific investments: this is for illustrative purposes only. The actual average rate of return for this allocation for the past 10 years is 4.24%, so without considering fees, an initial investment balance accumulates to $381,292. These ETFs have an embedded annual management fee of.15% (SPY) and.08% (AGG) with an aggregate of.14% for this allocation producing $4,178 in total ‘out of pocket’ fees over the 10 years. If we understand that our portfolio appreciated $130,319 and it cost you $4,178 for a Net Gain in your portfolio, then your NET COST of FEES is 3.21%. But it doesn’t end there, to truly quantify how fees eat away at your portfolio we must take this process a step further. The TRUE COST of FEES is calculating the difference of your portfolio with and without fees, in this case is $5,151 and comparing that to the Net Gain in your portfolio or 4.1%. In other words, over a ten year period, the cost of having these investments was 4.1%, $381,292 (without fees) versus $376,141 (Ending Balance with fees).

Financial Advisor Portfolio

For the sake of this illustration we are going to assume the financial advisor does better over the same 10 year period, about 6% annual average rate of return. You agree to let them take a 1.5% annual management, paid quarterly. Your $250,000 portfolio accumulates to $392,308 over 10 years with ‘out of pocket’ fees of $47,108, or $4711 per year. Your portfolio’s NET COST, or the fees of $47,108 to gain $189,416 in your portfolio, is almost 25%. More than that, your TRUE COST of Financial Advice is 44.7%. Plainly, your Financial Advisor’s portfolio is $63,617 less than if you had no fees and it accumulated to $455,926. As expected, your portfolio realized an average rate of return of 5.69%. In this illustration, the financial advisor portfolio did ‘out-perform’ the DIY portfolio of ETFs by $16,167 by outpacing the average rate of return by.61% annually.

Utilizing our proprietary software and a hundred test cases, we wanted to see how much better does a financial advisor need to realize to bring value to the client advisor relationship? This number is dependent on a number of factors: amount of investable assets, length of time, management fees charged and of course, the rate of return. What we did experience, is that the range went from its lowest to 1.25% to as high as 4%. In other words, in order to ‘break-even’ on bringing value to the client-advisor relationship, the financial advisor must realize at least a 1.25% higher net gain in average rate of return.

Please know, that we are not trying to dissuade anyone from utilizing the services of a financial advisor. We would be making our own clientele pretty unhappy. Instead, we want to present more transparency on how to measure the competency level of your financial advice. Heaven knows an experienced, knowledgeable advisor brings much more to the relationship than can be quantified by a number, but we do want the ability to truly measure the cost of this financial legacy. Just like most things in life, the line between success and failure is razor thin. In the above illustration, if the financial advisor portfolio’s ending balance was lowered by just $25,000 that would mean the annual average rate of return lowers.5% resulting in a lower ending balance than the self-managed account by $6,527. What if we changed the allocation to 70/30 allocation split? The Financial Advisor’s portfolio underperforms by $12,144 while still costing the client almost $60,000 in fees over the 10 years.

One final thought as we wrap things up here. You may be interviewing for a new advisor now or possibly in the near future. One of the most important questions you would want to ask and most of them do not want to answer or know how to answer is, “How good is your historical performance?” Now, this is usually where you get the song and dance from the wealth management team. They will extol the virtues of “every portfolio is different” or “all circumstances and risk tolerances inhibit us from ‘projecting’ rates of return” or, my favorite, “It’s about the plan! Your dreams and goals will be much different than anyone else, even if they have the same amount assets, income and risk assessment.” These of course are all true statements, but it does not preclude a wealth management team from the ability to show past performance of how they manage money. Going out on a limb, isn’t that why you are interviewing advisors? To see if they can do better than what you are currently doing either on your own or with your soon-to-be-ex financial advisor?

A Look Behind the Curtain

What most financial advisors won’t tell you is just how similar the construction of each client portfolio really is. I can’t tell you how many multi-million dollar firms have every client’s portfolio look pretty identical from one another. It’s usually made up of “3 Buckets”. Now these have different meanings for different advisors such as “Soon – Not so Soon – Long Term Money” or the “Safe – Moderately Safe – Risky” purposes for your investable assets. Believe me when I say this, most advisors pay a lot of money and spend a lot of their time on how to tell this story, to get the client to change their mindset of what they have been taught all along since childhood from their parents. It is not necessary for financial planning to be this complicated, unless of course, there is salesmanship going on. We learned from an early age and then proactively budgeted our entire adult lives to make more than we spend, save as much as we can so we can live off of what we have accumulated. But somehow, wealth advisors have created this sales system to get people to worry (“The Pain Funnel”) that they will outlive their money or worse, not be able to keep the lifestyle clients so richly deserve. You see, in sales, you create pain, step on it and then provide a solution. I believe we can be a lot more honest here and focus our advice transparently without resorting to ‘scare tactics’. Building an investment portfolio, retirement income strategy or legacy plan should be as comfortable as they are obvious.

Most wealth management teams will start with the same basic “financial plan” for your assets: short-term money that has no volatility (this is where you have your emergency/vacation/play money); then you will have near-short term money (usually about 3 – 7 years of very little volatility; and then the last division of your assets is long term money (10 years or more) with a lot of volatility (managed money). Please be aware that this is the exact moment where financial advisors practice in order to “land the prospect”. They will have you write in the percentage of how much your assets you want in the first, second and third ‘buckets’ according to your “Risk Tolerance”. I’ll explain in a later article why this entire methodology is mathematically inhibitive to long term financial success. In lieu of writing in percentages, you’ll better served to focus on two facets: the fees for the first two ‘buckets’ (your rate of interest is generally very low so any fees will have a higher detrimental effect) and the entrance and exit strategy for your managed money held in the last bucket. They will tell you that “long term growth is omnipotent to the success throughout your retirement years. So, if that’s the case they had better ‘show you the money’!

Bottom line: There is a historical performance of your wealth management team that can be shown… so ask for it. Oh, another hint, make sure it is actual performance and not ‘back tested” performance. The financial industry now has software programs that allow us to take a computer-based allocation model and utilize financial data of domestic stocks and bonds for the past 20 years to show a simulated historical performance within a 3% margin of error. I don’t know about you, but I would want my money manager to have more than a couple of years of experience no matter how pretty their brochures are or wonderful their office smells.

So, how are We Really Doing?

Earlier, we compared what an average financial advisor (giving them the benefit of the doubt that they indeed performed better over a 10 year period) did compared to a Do-It-Yourself portfolio made up of S&P 500 and Barclays US Bond Aggregate ETFs. But how did the same portfolio do against the Nasdaq (QQQ) over the same time period? Given the same 80/20 allocation, the QQQ Portfolio gained an average of 12.73% annually versus the 6.05% for the Financial Advisor. The Nasdaq (QQQ) plus Bonds (AGG) gained over $471,000 more in assets over that same time period, or roughly $47,000 per year. Now, I need to point out that if we looked at QQQ returns of 2000-2009 then the portfolio would have lost an accumulated 9.12% of value in assets. The QQQ ETF Net Average Annual Rate of Return since 2000 is 2.38%. Our focus in putting together client portfolios is to minimize inhibitors like fees, taxes and risk since those are in our control (can’t control the market). When viewing portfolios and net worth statements of our clients through this prism and then bringing it through our proprietary software, we can grade ourselves as well as our portfolio managers with real, audited data. For example, one of our money managers has a computer-based, moderate growth portfolio (70/30 allocation split) that has a 12.68% average rate of return over the same time period as all 3 portfolios. Loosely translated, this Moderate Growth Portfolio outperformed the S&P 500 ETF Portfolio by $342,000. When it comes to the accumulation portion of our client’s financial plan, we can ascertain what is working and what isn’t by quantifying the NET performance.

With so many choices, it is difficult to ascertain subjectively who you should trust as a financial advisor, if you should trust one at all! As a consumer, when we purchase just about anything, we constantly compare the price versus the benefit of ownership with an understanding the sliding scale of risk associated with owning whatever we are buying whether it’s buying a gallon of milk, a haircut or a piece of furniture. The higher the price, usually higher the risk, the more we want to weigh the attributes of doing something or doing nothing; measure the value of hiring it done or doing it yourself. The legacy of ownership greatly effects the amount of risk involved in getting the right information in order to act on the right advice for results that are satisfactory to your needs and expectations. Our purpose for creating this proprietary software was to come up with a simple ‘report card’ to measure between advisors and to affirm the decision to have someone else manage your investable assets and your financial future. We believe that as financial advisors, we should be held to a measurable account definitive to always doing what is best for the client’s interest. The largest service we provide is inherently, producing a higher net rate of return on the overall net worth of our clients than if they simply could manage their own financial assets. In today’s financial environment, we cannot afford to make any mistakes no matter how minuscule. This is why having the ability to simply, clearly quantify the value of your advice is truly omnipotent to your financial success.

Financial Statement Analysis for Sales and Marketing Executives

While it is not necessary to be a qualified accountant to design a Strategy for Sales Perfection, a basic understanding of what is involved in financial analysis is essential for anyone in sales and marketing. It is too enticing, and often too easy, to use “blue skies” thinking in planning sales and marketing activities. It is even easier to spend money without fully realizing the return one is getting for it. It is critical that sales and marketing executives be more disciplined and analytical in the way they go about planning, executing and evaluating the sales and marketing plans and strategy. One way of introducing more discipline into the process is by having a basic understanding of the financial implications of decision making, and how financial measures can be used to monitor and control marketing operations. The purpose of this text is to provide exactly that, and the first chapter deals basically with an introduction to the activities involved in financial analysis.

The Income Statement

The P&L (profit and loss) statement otherwise known as the income statement is illustrated below. This is an abbreviated version as most income statements contain much more detail, for example, expenses are typically listed based on their individual.

G/L ledger account:

The income statement measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. The income statement is also known as the “profit and loss statement” or “statement of revenue and expense.”

Sales – These are defined as total sales (revenues) during the accounting period. Remember these sales are net of returns, allowances and discounts.

Discounts – these are discounts earned by customers for paying their bills on tie to your company.

Cost of Goods Sold (COGS) – These are all the direct costs that are related to the product or rendered service sold and recorded during the accounting period.

Operating expenses – These include all other expenses that are not included in COGS but are related to the operation of the business during the specified accounting period. This account is most commonly referred to as “SG&A” (sales general and administrative) and includes expenses such as sales salaries, payroll taxes, administrative salaries, support salaries, and insurance. Material handling expenses are commonly warehousing costs, maintenance, administrative office expenses (rent, computers, accounting fees, legal fees). It is also common practice to designate a separation of expense allocation for marketing and variable selling (travel and entertainment).

EBITDA – earnings before income tax, depreciation and amortization. This is reported as income from operations.

Other revenues & expenses – These are all non-operating expenses such as interest earned on cash or interest paid on loans.

Income taxes – This account is a provision for income taxes for reporting purposes.

The Components of Net Income:

Operating income from continuing operations – This comprises all revenues net of returns, allowances and discounts, less the cost and expenses related to the generation of these revenues. The costs deducted from revenues are typically the COGS and SG&A expenses.

Recurring income before interest and taxes from continuing operations – In addition to operating income from continuing operations, this component includes all other income, such as investment income from unconsolidated subsidiaries and/or other investments and gains (or losses) from the sale of assets. To be included in this category, these items must be recurring in nature. This component is generally considered to be the best predictor of future earnings. However, non-cash expenses such as depreciation and amortization are not assumed to be good indicators of future capital expenditures. Since this component does not take into account the capital structure of the company (use of debt), it is also used to value similar companies.

Recurring (pre-tax) income from continuing operations – This component takes the company’s financial structure into consideration as it deducts interest expenses.

Pre-tax earnings from continuing operations – Included in this category are items that are either unusual or infrequent in nature but cannot be both. Examples are an employee-separation cost, plant shutdown, impairments, write-offs, write-downs, integration expenses, etc.

Net income from continuing operations – This component takes into account the impact of taxes from continuing operations.

Non-Recurring Items:

Discontinued operations, extraordinary items and accounting changes are all reported as separate items in the income statement. They are all reported net of taxes and below the tax line, and are not included in income from continuing operations. In some cases, earlier income statements and balance sheets have to be adjusted to reflect changes.

Income (or expense) from discontinued operations – This component is related to income (or expense) generated due to the shutdown of one or more divisions or operations (plants). These events need to be isolated so they do not inflate or deflate the company’s future earning potential. This type of nonrecurring occurrence also has a nonrecurring tax implication and, as a result of the tax implication, should not be included in the income tax expense used to calculate net income from continuing operations. That is why this income (or expense) is always reported net of taxes. The same is true for extraordinary items and cumulative effect of accounting changes (see below).

Extraordinary items – This component relates to items that are both unusual and infrequent in nature. That means it is a one-time gain or loss that is not expected to occur in the future. An example is environmental remediation.

The Balance Sheet

The balance sheet provides information on what the company owns (its assets), what it owes (its liabilities) and the value of the business to its stockholders (the shareholders’ equity) as of a specific date. It is called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders’ equity).

Assets are economic resources that are expected to produce economic benefits for their owner.

Liabilities are obligations the company has to outside parties. Liabilities represent others’ rights to the company’s money or services. Examples include bank loans, debts to suppliers and debts to employees.

Shareholders’ equity is the value of a business to its owners after all of its obligations have been met. This net worth belongs to the owners. Shareholders’ equity generally reflects the amount of capital the owners have invested, plus any profits generated that were subsequently reinvested in the company.

The balance sheet must follow the following formula:

Total Assets = Total Liabilities + Shareholders’ Equity

Each of the three segments of the balance sheet will have many accounts within it that document the value of each segment. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates the differences between varying types of businesses.

Current Assets – These are assets that may be converted into cash, sold or consumed within a year or less. These usually include:

Cash – This is what the company has in cash in the bank. Cash is reported at its market value at the reporting date in the respective currency in which the financials are prepared. Different cash denominations are converted at the market conversion rate.

Marketable securities (short-term investments) – These can be both equity and/or debt securities for which a ready market exists. Furthermore, management expects to sell these investments within one year’s time. These short-term investments are reported at their market value.

Accounts receivable – This represents the money that is owed to the company for the goods and services it has provided to customers on credit. Every business has customers that will not pay for the products or services the company has provided. Management must estimate which customers are unlikely to pay and create an account called allowance for doubtful accounts. Variations in this account will impact the reported sales on the income statement. Accounts receivable reported on the balance sheet are net of their realizable value (reduced by allowance for doubtful accounts).

Notes receivable – This account is similar in nature to accounts receivable but it is supported by more formal agreements such as a “promissory notes” (usually a short-term loan that carries interest). Furthermore, the maturity of notes receivable is generally longer than accounts receivable but less than a year. Notes receivable is reported at its net realizable value (the amount that will be collected).

Inventory – This represents raw materials and items that are available for sale or are in the process of being made ready for sale. These items can be valued individually by several different means, including at cost or current market value, and collectively by FIFO (first in, first out), LIFO (last in, first out) or average-cost method. Inventory is valued at the lower of the cost or market price to preclude overstating earnings and assets.

Prepaid expenses – These are payments that have been made for services that the company expects to receive in the near future. Typical prepaid expenses include rent, insurance premiums and taxes. These expenses are valued at their original (or historical) cost.

Long-Term assets – These are assets that may not be converted into cash, sold or consumed within a year or less. The heading “Long-Term Assets” is usually not displayed on a company’s consolidated balance sheet. However, all items that are not included in current assets are considered long-term assets. These are:

Investments – These are investments that management does not expect to sell within the year. These investments can include bonds, common stock, long-term notes, investments in tangible fixed assets not currently used in operations (such as land held for speculation) and investments set aside in special funds, such as sinking funds, pension funds and plan-expansion funds. These long-term investments are reported at their historical cost or market value on the balance sheet.

Fixed assets – These are durable physical properties used in operations that have a useful life longer than one year.

This includes: Machinery and equipment – This category represents the total machinery, equipment and furniture used in the company’s operations. These assets are reported at their historical cost less accumulated depreciation.

Buildings or Plants – These are buildings that the company uses for its operations. These assets are depreciated and are reported at historical cost less accumulated depreciation.

Land – The land owned by the company on which the company’s buildings or plants are sitting on. Land is valued at historical cost and is not depreciable under U.S. GAAP (generally accepted accounting principles).

Other assets – This is a special classification for unusual items that cannot be included in one of the other asset categories. Examples include deferred charges (long-term prepaid expenses), non-current receivables and advances to subsidiaries.

Intangible assets – These are assets that lack physical substance but provide economic rights and advantages: patents, franchises, copyrights, goodwill, trademarks and organization costs. These assets have a high degree of uncertainty in regard to whether future benefits will be realized. They are reported at historical cost net of accumulated depreciation.

Current liabilities – These are debts that are due to be paid within one year or the operating cycle, whichever is longer. Such obligations will typically involve the use of current assets, the creation of another current liability or the providing of some service.

Bank indebtedness – This amount is owed to the bank in the short term, such as a bank line of credit.

Accounts payable – This amount is owed to suppliers for products and services that are delivered but not paid for.

Wages payable (salaries), rent, tax and utilities – This amount is payable to employees, landlords, government and others.

Accrued liabilities (accrued expenses) – These liabilities arise because an expense occurs in a period prior to the related cash payment. This accounting term is usually used as an all-encompassing term that includes customer prepayments, dividends payables and wages payables, among others.

Notes payable (short-term loans) – This is an amount that the company owes to a creditor, and it usually carries an interest expense.

Unearned revenues (customer prepayments) – These are payments received by customers for products and services the company has not delivered or for which the company has not yet started to incur any cost for delivery.

Dividends payable – This occurs as a company declares a dividend but has not yet paid it out to its owners.

Current portion of long-term debt – The currently maturing portion of the long-term debt is classified as a current liability. Theoretically, any related premium or discount should also be reclassified as a current liability.

Current portion of capital-lease obligation – This is the portion of a long-term capital lease that is due within the next year.

Long-term Liabilities – These are obligations that are reasonably expected to be liquidated at some date beyond one year or one operating cycle. Long-term obligations are reported as the present value of all future cash payments. Usually included are:

Notes payables – This is an amount the company owes to a creditor, which usually carries an interest expense.

Long-term debt (bonds payable) – This is long-term debt net of current portion.

Deferred income tax liability – GAAP (generally accepted accounting principles) allows management to use different accounting principles and/or methods for reporting purposes than it uses for corporate tax fillings to the IRS. Deferred tax liabilities are taxes due in the future (future cash outflow for taxes payable) on income that has already been recognized for the books. In effect, although the company has already recognized the income on its books, the IRS lets it pay the taxes later due to the timing difference. If a company’s tax expense is greater than its tax payable, then the company has created a future tax liability (the inverse would be accounted for as a deferred tax asset).

Pension fund liability – This is a company’s obligation to pay its past and current employees’ post-retirement benefits; they are expected to materialize when the employees take their retirement for structures like a defined-benefit plan. This amount is valued by actuaries and represents the estimated present value of future pension expense, compared to the current value of the pension fund. The pension fund liability represents the additional amount the company will have to contribute to the current pension fund to meet future obligations.

Long-term capital-lease obligation – This is a written agreement under which a property owner allows a tenant to use and rent the property for a specified period of time. Long-term capital-lease obligations are net of current portion.

Statement of Cash Flow

The statement of cash flow reports the impact of a firm’s operating, investing and financial activities on cash flows over an accounting period.

The cash flow statement shows the following:

How the company obtains and spends cash

Why there may be differences between net income and cash flows

If the company generates enough cash from operation to sustain the business

If the company generates enough cash to pay off existing debts as they mature

If the company has enough cash to take advantage of new investment opportunities

Segregation of Cash Flows

The statement of cash flows is segregated into three sections: Operations, investing, and financing.

Cash Flow from Operating Activities (CFO) – CFO is cash flow that arises from normal operations such as revenues and cash operating expenses net of taxes. These include:

Cash inflow: is the positive influx of funds from (1) positive revenue from sale of goods or services (2) interest from indebtedness and (3) dividends from investments.

Cash outflow: is the negative (payments) most commonly categorized as (1) Payments to suppliers (2) payments to employees (3) payments to the government (4) payment to lenders (5) payment for other expenses.

Cash Flow from Investing Activities (CFI) – CFI is cash flow that arises from investment activities such as the acquisition or disposition of current and fixed assets. These include:

Cash inflow is the receipt of cash from (1) the sale or disposition of property, plant or equipment (2) the sale of debt or equity securities or (3) lending income to other entities.

Cash outflow is the payment of (1) the purchase of property plant and equipment, (2) purchase of debt or other equity securities, or (3) lending to other entities,

Cash flow from financing activities (CFF) – CFF is cash flow that arises from raising (or decreasing) cash through the issuance (or retraction) of additional shares, or through short-term or long-term debt for the company’s operations.

Financial Statement Analysis

Vertical Analysis

Analyzing a single period financial statement works well with vertical analysis. On the income statement, percentages represent the correlation of each separate account to net sales. Express all accounts other than net sales as a percentage of net sales. Net income represents the percentage of net sales not used on expenses. For example, if expenses total 69 percent of net sales, net income represents the remaining 31 percent. Vertical analysis performed on balance sheets uses total assets and total liabilities for comparison of individual balance sheet accounts.

Horizontal Analysis

Horizontal analysis is the comparison of data sets for two periods. Financial statements users review the change in data much like an indicator. Optimistic analysts look for growth in revenue, net income and assets in addition to reductions in expenses and liabilities. Calculating absolute dollar changes requires the user to subtract the base figure from the current figure. Expressing changes with percentages requires the user to divide the base figure by the current figure, and multiply by 100.

Trend Analysis

Review of three or more financial statement periods typically represents trend analysis, a continuation of horizontal analysis. The base year represents the earliest year in the data set. Although dollars can represent subsequent periods, analysts commonly use percentages for comparability purposes. Users review statements for patterns of incremental change representing changes in the business in questions. Financial statement improvements include increased income and decreased expenses.

Ratio Analysis

Ratios express a relationship between two more financial statement totals, and compare to budgets and industry benchmarks. Five common categories of ratios exist: liquidity, asset turnover, leverage, profitability and solvency. Reviewing ratios for performance compared with prior periods or industry specific benchmarks provides financial statements users with recognition of strengths and weaknesses.

Limitations

Analyzing financial statements presents an opportunity for reviewing past data and possibly budgets. However, the data used is historical in nature, indicating it may not be a good representation of the future due to unforeseeable circumstances. Market value of assets and liabilities can be under or overstated significantly leaving statement users unaware of the real value of a balance sheet. Pro forma statements, or forward-looking financial statements, provide estimates at best resulting in speculation.

Cost-Volume-Profit

Cost-volume-profit analysis provides owners and managers with an understanding of the relationship between fixed and variable costs, volume of products manufactured or sold and the profit resulting from sales. The financial relationship includes contribution margin analysis, break-even analysis and operational leverage. Financial statements provide the data to perform cost-volume-profit analysis.

Contribution Margin

Contribution margin analysis allows managers to look at the percentage of each sales dollar remaining after payment of variable costs, including cost of goods, commissions and delivery charges. Managers and owners use this analysis to help determine the pricing, mix, introduction and removal of products. Contribution margin analysis also aids managers with determining how much incentive to use for sales commissions and bonuses. Comparing each product offered affords the opportunity to look at product profitability and product mix.

Break-even

Break-even analysis considers the sales volume at which fixed and variable costs are even. Owners and managers must consider two primary figures when calculating the break-even. First, gross profit margin, which is the percentage of sales remaining after payment of variable costs. And fixed costs, including administration, office and marketing. Financial statements provide both sets of data necessary to calculate the break-even volume.

Operational Leverage

Every business model contains slightly different operating leverage, which compares the amount of fixed costs to sales. Businesses with higher fixed costs will experience a larger multiplier in their operating leverage, indicating less sales growth results in more profit. However, the same is true for losses, where small reductions in sales exponentially increase net losses. Less operating leverage results in less growth of net income.

Financial Ratios

A financial ratio expresses a mathematical relationship between two or more sets of financial statement data and commonly exhibits the relationship as a percentage. Profitability, solvency, leverage, asset turnover and liquidity comprise the five standard ratio categories. Managers and owners should review the ratios period over period, determining where unfavorable trends exist. After reviewing trends, benchmark ratios against industry standards, which managers can acquire from a variety of sources including industry-specific organizations.

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise’s financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm’s creditors.

Ratios can be used to judge the organization’s “liquidity”, i.e. can it pay its bills, its “leverage”, i.e. how is it financed and its “activities”, i.e. the productivity and efficiency of the organization. Taking liquidity analysis only, this has a bearing on new product planning, marketing budgets and the marketing decisions.

Financial Planning Helps You Make Your Money Count For The People You Love

One of the biggest mistakes I’ve seen people make when it comes to financial planning is to ignore it completely or put it off for so long that the big benefits of financial planning expire worthless. The earlier you start planning the more bang you’ll get for your buck, however, financial planning is valuable at any age.

Most people put off thinking about planning because of misconceptions about what the process involves or how it can benefit them. As part of its public education efforts, Certified Financial Planner Board of Standards Inc. (CFP Board) surveyed CFP® professionals about mistakes people make when approaching financial planning. The survey showed the public’s most frequent mistakes included:

· Failing to set measurable financial goals.

· Making a financial decision without understanding its effect on other financial issues.

· Confusing financial planning with investing.

· Neglecting to re-evaluate their plan periodically.

· Thinking that planning is only for the wealthy.

· Thinking that planning is for when they get older.

· Thinking that financial planning is the same as retirement planning.

· Waiting until a money crisis to begin planning.

· Expecting unrealistic returns on investments.

· Thinking that using a planner means losing control.

· Believing that financial planning is primarily tax planning.

Make Your Money Count with A Plan

To avoid making the mistakes listed above, realize that what matters most to you is the focus of your planning. The results you get from working with a planner are as much your responsibility as they are those of the planner. To achieve the best ROI from your financial planning engagement, consider the following advice.

Start planning as soon as you can: Don’t delay your financial planning. People who save or invest small amounts of money early, and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits, such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.

Be realistic in your expectations:Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control, such as inflation or changes in the stock market or interest rates, will affect your financial planning results.

Set measurable financial goals: Set specific targets of the results you want to achieve and when you want to achieve them. For example, instead of saying you want to be “comfortable” when you retire or that you want your children or grandchildren to attend “good” schools, quantify what “comfortable” and “good” mean so that you’ll know when you’ve reached your goals.

Realize that you are in charge:When working with a financial planner, be sure you understand the financial planning process and what the planner should be doing to help you make your money count. The planner needs all relevant information on your financial situation and your purpose (what matters most to you). Always ask questions about the recommendations offered to you and play an active role in decision-making. Being in charge means your financial planner doesn’t take all the responsibility for every decision.

Understand the effect of each financial decision and the big picture: Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child’s education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are will impact the big picture of your overall plan. This is where the skills of a professional financial planner can make a big difference.

Re-evaluate your financial situation periodically: Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you can stay on track with your long-term goals.

Successful planning offers many rewards in addition to helping you Make Your Money Count and achieving what matters most to you. When CFP® professionals were surveyed about the most significant benefit of financial planning in their own lives, the top answer was “peace of mind.” Over my career, many clients have told me that their purpose for financial planning is the same – peace of mind. When you invest the time and money to work with a competent and trustworthy planner, you are far more likely to go to bed at night knowing you did everything possible to make your money count for the people you love.

How to Sharpen Financial Competence for Directors and Executives

Financial competence is not a static variable, in that it is something that is ever-changing, and the skills associated with being financially competent must be sharpened consistently. The fact is that failure to have financially competent decision makers can be highly destructive to an organization. What is meant by “financially competent” goes well beyond being able to identify credits or debits or being able to properly read financial reports. Being financially competent should focus on one’s ability to break down the financial information provided in those reports and analyze how they should be used to determine the financial path of the organization going forward.

Furthermore, a person must be able to understand how risk factors into the financial decision making matrix and how that risk should affect the courses of action taken by the company. These are the things that separate competent financial management from incompetent financial management. This is likely a major reason why roughly 21% of all CEOs serve in a financial oversight position prior to becoming a CEO and why almost a third of CEOs have served in a financial capacity at some point in their careers. It is also important to realize that the outcome of certain situations has no bearing on the competence of the decisions that have been made. The fact is that poor financial leadership can still yield success from a periodic standpoint. In the same manner that an unskilled Poker player can have a run of “good luck” and win big in a night of gambling, so to can incompetent financial managers “GET LUCKY”.

The problem with depending on luck to manage the financial infrastructure of an organization is two-fold:

1. Luck does; and will always run out at some point in time
2. Financial management isn’t gambling; especially when considering what’s at stake whether it is the shareholders, the market, the employees, or the customers; there is simply too much at stake to make financial management a “Coin Flip.”

To ensure that the key decision-makers are financially competent it is incumbent upon management to analyze the knowledge of these individuals and provide opportunities for them to update and hone their skills as it relates to financial management. The good news is that most organizations generally select the financial decision-makers within their organization by doing a thorough search; this generally allows them the opportunity to select the person that they feel best can handle the position.

Furthermore, most organizations that utilize committees to help manage operations have a financial management committee (as it is considered to be the most common among companies with three or more committees). The problem is that many companies don’t understand the position enough to fully handle this search, so they end up hiring people that have had past success without determining whether the source of that success was luck or skill.

If the current global economic calamity has taught us anything; it has taught us this: When the economic climate is advantageous to organizations it is much easier to seem competent than when things go bad. In a good economic climate decision-makers can take huge risks and if they win they are superstars; if they lose there are generally opportunities to mitigate that loss (either by acquiring debt capital; increasing sales, or raising equity funds just to name a few).

In a bad market we have discovered that THE SAFETY NETS ARE GONE; and risky decisions have real consequences. In this market we are finally paying the price to learn that there is a real difference between corporate sponsored gambling and effective financial management. What we need to do now is train current and future financial decision-makers about what makes an executive financially competent, and what does not. This will produce more effective financial decision-makers and more importantly it will provide a future asset for companies that will assist them in diverse market situations; NOT JUST WHEN TIMES ARE GOOD.

The solution: The following are some of the steps that key decision-makers need to take in order to assist the company in building a more competent and more effective financial management infrastructure.

1) Your executive Finance team: To have a financially competent executive team; YOU NEED A TEAM; there is ALWAYS an inherent danger in leaving major financial decisions to a few individuals. The fact is that we are talking about money; and when that is the subject then many times self interest replaces corporate interest in the decision making hierarchy. Furthermore a company that has a properly chosen team of individuals to make decisions provides a system of checks and balances which mitigate the risks associated with these decisions.

2) Training Courses in Finance: Another conduit would be to get a day or two day workshop in financial training where current decision makers receive tutelage in financial decision making from an application standpoint instead of an academic or theoretical standpoint. Bringing in people that have a history of being competent financial managers will be helpful. But also teaching examples of how poor decisions have destroyed companies would be helpful as well. Many course offer sound coverage of financial topics of importance. However, it is important to check background, experience and credentials of the trainer before embarking on a course.

3) Get a Coach or Corporate Consultant: Coaching at executive level has proven to be popular in many parts of the world. Experts believe that the value an executive coach (whether it is a successful consultant, former executive, or entrepreneur) adds, significantly impacts progression and drives performance to a higher level. There are many coaches available but you need to ensure you get a coach who will listen to your concerns at the same time offer the right and relevant professional advice. With the advent of the internet, organizations also offer virtual coaching support.

4) Have self-analysis meetings: At least once a year all organizations should seek to have a meeting with all people involved in the financial decision making process (executives, senior financial/accounting personnel, board members, etc.) and simply have a brain-storming session that focuses on the direction of the organization; future financial needs, current financial position, etc. These meetings have a way of bringing issues to light that otherwise would stay in the dark; and furthermore you want all of these people to work well with each other, and this is a good platform to start from.

While most organizations believe that the decision making aspect of their financial infrastructure is at least competent; the fact is that many organizations aren’t aware of what constitutes competence as it relates to financial decision making. The fact is that, no matter where your organization is located, the WORLD HAS CHANGED for companies; to stay prosperous companies must focus on sustainability and not luck; they must focus on consistency and not major peaks. Financial competence has little to do with an education in finance, it has everything to do with how your executives can use that information and analyze the health and the future of the organization. Those that understand this are in an advantageous position; those that don’t are playing with fire.

CAUTION: While all the above (and others) may prove useful, the idea is not to micromanage and get bogged in deep financials. Keeping it simple is the message. I believe if boards can set criteria through Executive Policy Development from the onset, keeping it simple yet covering all financials of your organization is the way forward. Subsequent monitoring of the financial health at appropriate intervals will help you shape your organisation’s financial strength further. After all, it is all about accountability at board level.