Financial Freedom: Discover The 3 Hidden Destinations on the Road to Financial Freedom

You’ll often hear people mention terms like financial security or financial independence in the course of everyday conversation. Within my own social and business circles, practically everyone I know desires some level of financial independence or freedom. However, I’ve found that financial well-being remains hidden and out of reach as a result of fuzzy concepts and even sketchier numbers people have in their head about what these terms mean. Therefore, the first thing I want to do here is dispel any myths or misunderstandings and reveal the true meaning of financial independence and financial freedom.

The key thing to understand about financial freedom is this – no matter how much money you earn, it’s vital to understand that you can only ever achieve financial independence through the generation of non-earned (passive) income i.e. a return on a capital sum invested. Or to put it another way, making money work for us, rather than us working for money!

Now, what I wanted to do was figure out ‘what’s the number’? In other words, how much capital do you need to achieve: 1. financial protection; 2. financial security, and 3. financial independence? So, over the course of a weekend I decided to have a go at describing and calculating the hypothetical cost of each of these 3 levels of financial well-being. Here goes!

#1. Financial Protection

This is the minimum level of financial wellbeing and first destination on the road to financial freedom – making sure you and your family are protected no matter what short or long-term financial challenge may befall you or the economy. Here’s how you know you and your family have achieved financial protection:

    1. You have enough liquid capital to cover your basic living expenses for a minimum of 3 months and ideally up to 2 years. So, if your basic living expenses came to $3,000/month, you’d need a minimum of $9,000 and ideally $72,000 in liquid capital.
    1. You have a life insurance policy in place that provides income to your family/dependants to maintain their lifestyle if you were to pass away.
  1. You have disability income protection insurance to protect you and your family should you become disabled in any way and prevented from working and earning income.

The amount of disability insurance you should have is directly related to the amount of money you’ve saved. If you have say 3 months liquid capital saved, then you should really consider having disability protection to cover the outstanding 21 months so that ideally you have a combination of savings and/or disability income in place to cover 24 months basic living expenses. As a rule of thumb, insure yourself for 60% of what your income is. Typically the monthly cost of disability insurance can be about $30(if you’re 30 year old) and up to $100 (if you’re 50 years old) per $1,000 protection.

#2. Financial Security

You will have achieved financial security when through your various investments you’ve accumulated a critical mass of capital, that, invested in a secure environment at an 8% rate of return, provides you with enough cash to meet the following living expenses forever without you having to work again should you chose. For the purpose of this illustration we’re gonna assume some numbers.

  1. Mortgage repayments on your private home until it’s paid off e.g. $1,500/month
  2. Family food needs e.g. $500/month
  3. Utilities, gas and electricity e.g. $250/month
  4. Transportation needs e.g. $250/month
  5. Insurance – health, disability, house e.g. $300/month
  6. Taxes – such as property taxes e.g. $200/month

This would bring your total monthly living expenses to $3,000/month or $36,000/annum. Therefore, you would need a critical mass of capital amounting to $450,000 (which invested @ 8% return per annum would generate $36,000) to achieve financial security.

What I like about this calculation is that it removes fuzzy, subjective meanings of financial security; it distils financial security into a finite number…something which I think is enormously helpful for anyone looking to achieve it!

#3. Financial Independence

You will have achieved financial independence when, through your various investments, you’ve accumulated a critical mass of capital that when invested in a secure environment at a 8% rate of return, provides you with enough cash to meet each of the 6 goals of financial security previously mentioned i.e.

  1. Mortgage repayments on your private home until it’s paid off e.g. $1,500/month
  2. Family food needs e.g. $500/month
  3. Utilities, gas and electricity e.g. $250/month
  4. Transportation needs e.g. $250/month
  5. Insurance – health, disability, house e.g. $300/month
  6. Taxes – such as property taxes e.g. $200/month

PLUS the following 3 additional financial goals:

  1. Provision for your children’s education (substantially or completely) e.g. $100,000 until their 18 and then say £50,000 for 3 or 4 years in college/university = $150,000 or an average of c. $7,000/annum over 21 years.
  2. Provision for basic entertainment needs – concerts, dinner out etc (at least 50% of what you enjoy now e.g. $300/month, $3, 600/annum
  3. Provision for the purchase of new clothing, or 1 or 2 reasonable “luxury” items such as plasma screen TV, car etc. e.g. $5,000/annum

When you sum up these 3 provisions it comes to $15,600/annum. Adding the cost of $36,000 per annum then the cost of financial vitality would come to $51,600/annum. Again, using an annual 8% return on investment would mean you’d need a critical mass of capital amounting to $645,000 in order to secure financial independence.

Financial independence is simply what it costs for you to live reasonably comfortably assuming complete autonomy from work/earned income. In one sense, all you’re trying to do is have enough of a capital sum invested to replace your current salary.

Now, if you will want to really nail the annual cost of financial independence, adjust upwards at an average inflation rate of say 3.5% each year and you’ll know exactly what true financial independence will cost you each year into the future.

Finally, if you’re saving or investing a substantial amount of your current income, then the amount of money you need to duplicate your actual current lifestyle is reduced by the same amount. So, if you’re saving 20% of your salary (say $10,000) than the new number you would need to be financially free would be $51,600-$10,000 = $41, 600.

So, there you have it. We’ve defined exactly what Financial Protection, Financial Security and Financial Independence is in terms of a sum of capital required to generate adequate non-earned income. Put your own numbers into the above process to arrive at the exact dollar amount you require to satisfy your own living expenses/lifestyle requirements. Next time someone tells you they want to be financially secure or financially free, now you can say: “Really, cool, I can show you how much capital you’ll need to achieve that!

P.S. Visit and sign-up for FREE insights, tips and exclusives on Financial Freedom – utilizing our powerful financial and wealth building strategies can fast-track your financial freedom and career.

P.P.S. Why not signup NOW for more insider secrets on Financial Freedom at for FREE & download for free the “The 7 Secrets of Wealth Creation” e-book.

Article Source:


Financial Advisors: Top 6 Reasons To Choose Them

Selection of the right person for managing your personal finances is one of the most crucial decisions you will be making. You entrust the job of managing your hard-earned money to an advisor with a hope to make use of his or her financial expertise. So, he or she should help you get solutions and reach your financial goals by preparing the right plan for you and also discovering the suitable investment plan for you. In fact, you are driven to seek the help of financial advisors to get serviced by them, with their professional caliber and integrity.

Desirable Duties A Financial Advisor:

1. The first and foremost desirable duty that a financial advisor (FA) should perform is to help his or her clients to make the appropriate investment choices based on an in-depth review of his or her clients’ financial circumstances.

2. A financial advisor should guide his or her clients to remain steadfast and committed to their financial strategies.

3. A financial advisor should guide his or her clients by caring that they are never carried away by excessive euphoria or pessimism about any financial offer.

4. A financial advisor should monitor and review the portfolio of his or her clients on a regular basis and manage them to keep them seamless.

5. A financial advisor should let his or her clients know the latest changes and developments in the financial world and help to visualize them their possible impacts on their investments.

6. A financial advisor should support his or her clients in documentation and paperwork related to their investments.

When You should approach a Financial Advisor:

You may have the capacity to invest, but you don’t have the idea which financial plans would be more profitable for you. In such circumstances, people like you need to be clear about a few things before they start their search. They are as follows.

1. Make sure if you have proper investment capacity. If yes, you should go to a financial advisor.

2. If you want to secure your investment with right investment planning, you need to seek advice of a financial expert.

3. When you have little bit understanding of the financial market and its products and have no idea how and where to invest, you need to seek advice of a financial expert.

4. Even if you have the capability of making your own investment decisions, you need to select someone who is expert to draw up a financial plan in sync with your financial capacity and goals.

5. As financial experts perform financial documentation and paperwork more professionally, you should seek their advices. However, the execution part of the financial planning should always be left to your discretion.

6. You need to go to a financial expert when a new financial plan is launched or when you need to save you from paying hefty taxes.

Types of Financial Experts:

There are typically three types of financial advisors. They are as follows.

i) Independent Financial Advisors (IFA or Agents)

ii) Relationship & Wealth Management Officers (RWMO)

iii) Qualified Financial Planners (QFP)

IFAs work independently, as the very name signifies. They are keener on maintaining long-term relation with their clients and are also committed to deliver quality services to their clients. Relationship and wealth management officers are associate members of financial institutions like banks or large distributors. RWMOs usually offer a large variety of financial products, but they are choosy about the profiles of their clients. They prefer to deal with HNI (High Networth Individual) clients only. The QFPs help to draw up bespoke financial plans for their clients. They can customize financial plans in accordance with the financial needs and goals of their clients because of their deep understanding of a comprehensive range of financial market. Although the right to execute a plan is absolutely up to the clients only, all these financial experts help in executing the plans.

To choose a financial advisor, clients should meet them and discuss all necessary and relevant points with them. Most importantly, clients should ask them for revealing their point of views regarding current investment opportunities and possible growth of a fund which they may be advising them to choose from many. During discussion, clients should compulsorily seek to identify if the FA is better than other FAs, what advisory process they are following, if they evaluate and monitor investment market regularly, or whether they keep their clients updated about market developments, and if they review the portfolios of their clients meticulously. Bear in mind, the financial market is rich in all aspects itself and that is needless to say, as needless to remind you that you will have hundreds of financial experts available in the market to choose from.

Joy Kumar Das wields genuine command over financial market and investment strategies, business promotion and strategies, and advertisement management, among others. His writings express his thoughts which emanate from thorough analysis. This article is an outcome of his elaborate research.

Article Source:


Can You Trust Your Financial Adviser?

Heroes or villains?

“All industries have a few bad apples. I would say that 80% of financial advisers are either good or very good” or “It’s just 99% of financial advisers who give the rest of us a bad name”

Financial advisers, also called financial consultants, financial planners, retirement planners or wealth advisers, occupy a strange position amongst the ranks of those who would sell to us. With most other sellers, whether they are pushing cars, clothes, condos or condoms, we understand that they’re just doing a job and we accept that the more they sell to us, the more they should earn. But the proposition that financial advisers come with is unique. They claim, or at least intimate, that they can make our money grow by more than if we just shoved it into a long-term, high-interest bank account. If they couldn’t suggest they could find higher returns than a bank account, then there would be no point in us using them. Yet, if they really possessed the mysterious alchemy of getting money to grow, why would they tell us? Why wouldn’t they just keep their secrets to themselves in order to make themselves rich?

The answer, of course, is that most financial advisers are not expert horticulturalists able to grow money nor are they alchemists who can transform our savings into gold. The only way they can earn a crust is by taking a bit of everything we, their clients, save. Sadly for us, most financial advisers are just salespeople whose standard of living depends on how much of our money they can encourage us to put through their not always caring hands. And whatever portion of our money they take for themselves to pay for things like their mortgages, pensions, cars, holidays, golf club fees, restaurant meals and children’s education must inevitably make us poorer.

To make a reasonable living, a financial adviser will probably have costs of about £100,000 to £200,000 ($150,000 to $300,000) a year in salary, office expenses, secretarial support, travel costs, marketing, communications and other bits and pieces. So a financial adviser has to take in between £2,000 ($3,000) and £4,000 ($6,000) a week in fees and commissions, either as an employee or running their own business. I’m guessing that on average financial advisers will have between fifty and eighty clients. Of course, some successful ones will have many more and those who are struggling will have fewer. This means that each client will be losing somewhere between £1,250 ($2,000) and £4,000 ($6,000) a year from their investments and retirement savings either directly in upfront fees or else indirectly in commissions paid to the adviser by financial products suppliers. Advisers would probably claim that their specialist knowledge more than compensates for the amounts they squirrel away for themselves in commissions and fees. But numerous studies around the world, decades of financial products mis-selling scandals and the disappointing returns on many of our investments and pensions savings should serve as an almost deafening warning to any of us tempted to entrust our own and our family’s financial futures to someone trying to make a living by offering us financial advice.

Who gets rich – clients or advisers?

There are six main ways that financial advisers get paid:

1. Pay-Per Trade – The adviser takes a flat fee or a percentage fee every time the client buys, sells or invests. Most stockbrokers use this approach.

2. Fee only – There are a very small number of financial advisers (it varies from around five to ten percent in different countries) who charge an hourly fee for all the time they use advising us and helping to manage our money.

3. Commission-based – The large majority of advisers get paid mainly from commissions by the companies whose products they sell to us.

4. Fee-based – Over the years there has been quite a lot of concern about commission-based advisers pushing clients’ money into savings schemes which pay the biggest commissions and so are wonderful for advisers but may not give the best returns for savers. To overcome clients’ possible mistrust of their motives in making investment recommendations, many advisers now claim to be ‘fee-based’. However, some critics have called this a ‘finessing’ of the reality that they still make most of their money from commissions even if they do charge an often reduced hourly fee for their services.

5. Free! – If your bank finds out that you have money to invest, they will quickly usher you into the office of their in-house financial adviser. Here you will apparently get expert advice about where to put your money completely free of charge. But usually the bank is only offering a limited range of products from just a few financial services companies and the bank’s adviser is a commission-based salesperson. With both the bank and the adviser taking a cut for every product sold to you, that inevitably reduces your savings.

6. Performance-related – There are a few advisers who will accept to work for somewhere between ten and twenty per cent of the annual profits made on their clients’ investments. This is usually only available to wealthier clients with investment portfolios of over a million pounds.

Each of these payment methods has advantages and disadvantages for us.

1. With pay-per-trade we know exactly how much we will pay and we can decide how many or few trades we wish to do. The problem is, of course, that it is in the adviser’s interest that we make as many trades as possible and there may be an almost irresistible temptation for pay-per-trade advisers to encourage us to churn our investments – constantly buying and selling – so they can make money, rather than advising us to leave our money for several years in particular shares, unit trusts or other financial products.

2. Fee-only advisers usually charge about the same as a lawyer or surveyor – in the range of £100 ($150) to £200 ($300)) an hour, though many will have a minimum fee of about £3,000 ($4,500) a year. As with pay-per-trade, the investor should know exactly how much they will be paying. But anyone who has ever dealt with fee-based businesses – lawyers, accountants, surveyors, architects, management consultants, computer repair technicians and even car mechanics – will know that the amount of work supposedly done (and thus the size of the fee) will often inexplicably expand to what the fee-earner thinks can be reasonably extracted from the client almost regardless of the amount of real work actually needed or done.

3. The commission paid to commission-based advisers is generally split into two parts. The ‘upfront commission’ is paid by the financial product manufacturers to the advisers as soon as we invest, then every year after that the adviser will get a ‘trailing commission’. Upfront commissions on stock-market funds can range from three to four per cent, with trailing commissions of up to one per cent. On pension funds, the adviser could get anywhere from twenty to seventy five per cent of our first year’s or two years’ payments in upfront commission. Over the longer term, the trailing commission will fall to about a half a per cent. There are some pension plans which pay less in upfront commission. But for reasons which should need no explanation, these tend to be less popular with too many financial advisers. With commission-based advisers there are several risks for investors. The first is what’s called ‘commission bias’ – that advisers will extol the massive potential returns for us on those products which earn them the most money. So they will tend to encourage us to put our money into things like unit trusts, funds of funds, investment bonds and offshore tax-reduction wrappers – all products which pay generous commissions. They are less likely to mention things like index-tracker unit trusts and exchange traded funds as these pay little or no commissions but may be much better for our financial health. Moreover, by setting different commission levels on different products, it’s effectively the manufacturers who decide which products financial advisers energetically push and which they hold back on. Secondly, the huge difference between upfront and trailing commissions means that it’s massively in the advisers’ interest to keep our money moving into new investments. One very popular trick at the moment is for advisers to contact people who have been saving for many years into a pension fund and suggest we move our money. Pension fund management fees have dropped over the last ten to twenty years, so it’s easy for the adviser to sit a client down, show us the figures and convince us to transfer our pension savings to one of the newer, lower-cost pension products. When doing this, advisers can immediately pocket anywhere from three to over seven per cent of our total pension savings, yet most of us could complete the necessary paperwork ourselves in less than twenty minutes.

4. As many fee-based advisers actually earn most of their money from commissions, like commission-based advisers they can easily fall victim to commission bias when trying to decide which investments to propose to us.

5. Most of us will meet a bank’s apparently ‘free’ in-house adviser if we have a reasonable amount of money in our current account or if we ask about depositing our savings in a longer-term, higher interest account. Typically we’ll be encouraged by the front-desk staff to take a no-cost meeting with a supposed ‘finance and investment specialist’. Their job will be to first point out the excellent and competitively high interest rates offered by the bank, which are in fact rarely either high or competitive. But then they will tell us that we’re likely to get even better returns if we put our money into one of the investment products that they recommend. We will be given a choice of investment options and risk profiles. However, the bank will earn much more from us from the manufacturer’s commission selling us a product which is not guaranteed to return all our capital, than it would if we just chose to put our money in a virtually risk-free deposit account. A £50,000 ($75,000) investment, for example, could give the bank an immediate £1,500 ($2,250) to £2,000 ($3,000) in upfront commission plus at least 1% of your money each year in trailing commission – easy money for little effort.

6. Should you have over one million pounds, euros or dollars to invest, you might find an adviser willing to be paid according to the performance of your investments. One problem is that the adviser will be happy to share the pleasure of your profits in good years, but they’ll be reluctant to join you in the pain of your losses when times are tough. So, most will offer to take a hefty fee when the value of your investments rises and a reduced fee if you lose money. Yet they will generally not ever take a hit however much your investments go down in value. The benefit with performance pay for advisers is that they will be motivated to maximise your returns in order to maximise their earnings. The worry might be that they could take excessive risks, comfortable in the knowledge that even if you make a loss they’ll still get a basic fee.

Am I qualified? I’ve written a book!

One worrying feature with financial advisers is that it doesn’t seem to be terribly difficult to set yourself up as one. Of about 250,000 registered financial advisers in the USA, only about 56,500 have the most commonly-recognised qualification. Some of the others have other diplomas and awards, but the large majority don’t. One source suggested that there may be as many as 165,000 people in Britain calling themselves financial advisers. Of these about 28,000 are registered with the Financial Services Authority as independent financial advisers and will have some qualifications, often a diploma. But only 1,500 are fully qualified to give financial advice. The in-house financial advisers in banks will usually just have been through a few one-day or half-day internal training courses in how to sell the particular products that the bank wants to sell. So they will know a bit about the products recommended by that bank and the main arguments to convince us that putting our money into them is much more sensible than sticking it in a high-interest account. But they will probably not know much about anything else. Or, even if they are knowledgeable, they won’t give us any objective advice as they’ll have strict sales targets to meet to get their bonuses and promotion.

However in the world of financial advisers, not having any real qualifications is not the same as not having any real qualifications. There are quite a few training firms springing up which offer financial advisers two- to three-day training courses which will give attendees an impressive-looking diploma. Or if they can’t be bothered doing the course, advisers can just buy bogus financial-adviser qualifications on the Internet. A few of these on an office wall can do much to reassure a nervous investor that their money will be in safe and experienced hands. Moreover, financial advisers can also pay specialist marketing support companies to provide them with printed versions of learned articles about investing with the financial adviser’s name and photo on them as ostensibly being the author. A further scam, seen in the USA but probably not yet spread to other countries, is for a financial adviser to pay to have themselves featured as the supposed author of a book about investing, which can be given out to potential clients to demonstrate the adviser’s credentials. If we’re impressed by a few certificates on a wall, then we’re likely to be doubly so by apparently published articles and books. In one investigation, journalists found copies of the same book about safe investing for senior citizens ostensibly written by four quite different and unrelated advisers, each of whom would have paid several thousand dollars for the privilege of getting copies of the book they had not written with themselves featured as the author.

Of course, only a very small number of financial advisers would resort to tricks like fake qualifications, false articles and bogus books. But the main point here is that far too many of them may know a lot about a few specific products which they are highly incentivised to sell, but may be insufficiently qualified to offer us genuine financial advice suited to our particular circumstances.

David Craig has spent over 20 years working for some of the world’s best and worst management and IT systems consultancies. He has helped sell consulting and IT systems to over 100 organizations in 15 countries. He is the author of 2 books about consultants – “Rip-Off! The Scandalous Inside Story of the Consulting Money Machine” which exposes how consultants fleece their business customers and “Plundering the Public Sector” which reveals how consultancies extract tens of billions from government departments for work that is usually shoddy and unsuccessful. He has also written several current affairs books including “Squandered: How Gordon Brown is Wasting Over One Trillion Pounds of Our Money” (Constable 2008) “Fleeced! How We’ve been Betrayed by the Politicians, Bureaucrats and Bankers” (Constable 2009) and “Pillaged! How they are looting £413 million a day from your savings and pensions” (Gibson Square 2011). You can find out more about his books, buy them, book him as a speaker on “The great savings and pensions scandal” or contact him through his website

Article Source:


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.


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 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 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 analysis can be used to serve many purposes in an organization but in the area of marketing it has four main functions:

Gauge how well marketing strategy is working (situation analysis)

Evaluate marketing decision alternatives

Develop plans for the future

Control activities on a short term or-day to-day basis.

Understanding a company’s financial performance is critical to developing a solid Strategy for Sales Perfection as well as being an educated and well informed company executive. The purpose of this discussion is to introduce you to the concepts and points of analyzing financial statements and using ratios to develop informed business decisions. The information discussed in this chapter in no way will substitute the job function of your CFO or your CPA.

Financial statements can be quite complex and accounting principles may have significant effect on the way they are reported. Understand that a coordinated dialogue with your accounting staff is critical to obtain clear and concise knowledge of your company financial statements. Financial ratios have limitations and specific uses if interpreted properly. Attention should be given to the following issues when using financial ratios:

A reference point is needed. To be meaningful most ratios must be compared to historical values of the same firm, your company forecasts, or ratios with similar companies.

Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined to draw on a conclusion of the purpose of the analysis.

Take into account seasonal factors and business cycles when using financial ratios. Average values should be used when they are available.

Communicate with your accounting department to understand their philosophy and accounting principles.

Sales and Profit Ratio Model

Several profit models have been introduced over the years to gauge the performance of a company and to build a statistical measure to peak performance. We have developed a very simple model that measures four critical areas of performance: gross profit margin %, net profit margin %, RONA – return on net assets, and GMROI – gross margin return on inventory. Earlier in the chapter, we introduced a set of financial statements of which we will use the data from those as part of our illustration of the Sales and profit model.


COGS – cost of goods sold

Operating expenses – net of depreciation, amortization and interest charges

Fixed assets – property plant and equipment net of depreciation

Current assets

Current liabilities


Net Income – after tax income

This model can be set up in an excel spreadsheet to keep track and measure the company’s progress in attaining peak sales performance; monthly tracking should be supported to insure constant improvements. These four ratios are the best measure of a company’s overall sales performance and should be compared to others in your industry to attain top performance standards.

Gross Margin Return on Inventory (GMROI) is a “turn and earn” metric that measures inventory performance based on both margin and inventory turnover. In essence, GMROI answers the question, “For every dollar carried in inventory, how much is earned in gross profit?” GMROI can be calculated at the organization level and, if the proper data is collected at the item level, all the way down to an individual item.

To set a benchmark for the organization, use either current financial statements or budgets for the future. Calculate the GP %, ITO and compute the existing or target GMROI. Measure every appropriate segment against this target. You will identify groups that are exceeding the targets and also those that are not pulling their own weight. While most organizations have some “loss leaders”, it is important to understand which items/groups that are under-performing. Choices are to live with the performance, improve the margin, improve the turnover or in extreme cases, discontinue the poor performing product.

Break-Even Profit Analysis

In business and economics, break-even analysis is a commonly used practice to set pricing multiples or price indexes. Companies need to use break even analysis to determine many relevant factors when designing a strategy for sales perfection. In the linear “cost-volume profit analysis”, the break-even point in terms of units (X) can be directly computed in terms of total revenue (TR) and total costs (TC) as:

The relationship between gross profit margins and sales revenue is approximately a 3.5 to 1 ratio. Simply stated, if you reduce your margin by 1/2 percentage point (.5%) you will need to raise your revenue by 1.7% to maintain the same amount of gross profit. Look at the table above which clearly illustrates this concept, now compare this illustration to your own company. Let’s assume your company has total revenue of $45,000,000, a reduction in margins of a half percent (0.5%) would require you to raise revenue to $48,375,000 to maintain the same amount of income. Your objective as an executive inside your company is to improve your company’s financial position.

Our website winning sales strategy and our book “Strategies for Sales Perfection: In the New Economy provide detailed analysis and explanations of this information along with a plethora of additional resources to allow your company to succeed during these this new economic recovery period.

Strategies for Sales Perfection: In the new Economy is a book written to help company executives develop a plan to support growth. to learn more visit our website at winning sales

Ted Vinci is the author of business publications devoted to helping companies design effective sales and marketing plans. To learn more about our company and the book, Strategies for Sales Perfection: In the New Economy, visit our website []

Article Source:


Why HR Is Going to Save America’s Financial Future

It’s Up to HR to Save America’s Financial Future

It’s no secret that most Americans are struggling financially, even those with good jobs. The question is, what do we do about it? Obviously the status-quo isn’t the answer, because that’s how we got here.

The American workforce is in trouble financially, and it affects way more than the dream of a comfortable retirement. The current financial tools available to the average American aren’t designed to help with the basic first steps people need to take towards financial health. It’s not that the existing institutions are thoughtless, but it’s difficult to make any money encouraging people to do things that are free (like setting a budget or opening a free checking account).

In order for the problem to be fixed, a Hero needs to be found: a Hero who has it in their interest to help the American workforce, a Hero who has the tools to provide benefits to hardworking Americans, a Hero who has been overlooked in their capacity to help. That Hero is HR.

The Current Financial Crisis

Despite improvements in the economy and a decrease in the unemployment rate, 76% of workers are living paycheck to paycheck.1 Some of this results from stagnant wages against a backdrop of rising cost of living, but overspending also plays an important role. Most of us are programmed to spend up to our means, and with credit card and home equity lines of credit, it’s not hard to spend past your means.

Today’s workers are not putting funds aside for emergencies, which means that they are not prepared for expenses such as unexpected medical bills or car problems (63 percent of Americans say they’re unable to handle a $500 car repair or a $1,000 emergency room bill).2 Financial insecurity leads to significant personal stress, which impacts worker productivity. What’s really telling is this: The individuals who expressed concern about their financial health included those on the higher end of the income spectrum.3 This isn’t just a low-pay problem; it affects those who make larger wages. Remember that thing about people spending up to their means? Even if someone makes more money, they just tend to spend more.

Financial stress extends beyond immediate concerns related to living expenses. Most employees (61 percent) name retirement as a serious financial concern, and in Mercer’s 2015 survey, workers showed significant pessimism when it came to their opinions on how well their savings strategies are working: 39 percent said they expect to work at least part-time after retirement, and 35 percent are considering delaying their retirement due to financial concerns.4

401(k) Plans Aren’t the Answer

But wait, we have 401(k) plans, and they help people save for retirement! Although the 401(k) is a great tool with excellent intentions, the results of their almost 40 years in the workplace have been less than spectacular. Many employees simply aren’t ready or well-enough informed to take advantage of retirement programs. They can’t focus on retirement savings while monthly bills go unpaid. On top of that, the financial advice that comes with many 401(k) plans focuses on stocks, bonds, allocations, and annuities: completely missing the mark.

Many employees lack the personal financial knowledge to determine how much to save, how to properly use credit, how to get out of debt, and how to manage any remaining income. Advice on these topics is not usually offered as part of the 401(k) package, meaning the 401(k) doesn’t get used by many employees (31% of employees have $0 saved for retirement).5 After all, who can have a conversation about bond allocations when they can’t afford their rent or mortgage? The 401(k) plan is not the Hero we need.

We Won’t Be Saved by Standard Financial Services

There are many financial products and services in the marketplace. Unfortunately, because of the small margins that financial institutions make off of their services, people that don’t have large amounts of money to invest aren’t profitable for those institutions to focus on. Because of this, the current financial institutions are not incentivized to invest in creating and marketing solutions geared towards people on the lower end of the income spectrum. In addition, many of the services that people need (free checking accounts, budgeting tools, etc.) are very difficult to get any sort of revenue from. There’s just no profit in encouraging people to do free things.

Unfortunately, most profits derived from serving the under-banked tend to come from predatory products like high-interest pay-day loans and other detrimental products. These aren’t the tools that American workers need to improve their financial situations. In fact, they frequently make money problems worse for people. The existing financial services aren’t the Hero we need.

HR to the Rescue

HR professionals have a special interest in providing financial wellness to workers, because HR’s goals are furthered by the effects of good financial health in the workforce. Personal finances are a major driver of employee engagement. Employees that don’t have money troubles on the brain can focus on efficiency and productivity, while an employee worried about making this month’s rent is far less likely to be giving their all at work. Improving the financial wellness of employees results in lower overall expense to the organization through reduced absenteeism, presenteeism, and turnover.

HR has an extraordinary chance to change how the financial story ends for many Americans. By offering comprehensive, easy-to-use financial wellness programs, HR can help staff members improve their personal finances. Such programs provide guidance through every level of financial need, resulting in a workforce with fewer immediate financial worries, allowing them the ability to improve today as well as look forward to a well-funded retirement. HR and the company providing the financial wellness program stand to benefit from the results of a financially healthier workforce.

HR has frequently been thought of as an office that handles a few essential personnel functions, deals with compliance, and brings in new employees. It wasn’t clear before that HR has the keys to a solution that could impact the entire country. The solution comes through HR’s ability to provide benefits, HR’s need for happy and healthy employees, and HR’s impact on every worker in America.

Finally, we have it! We’ve found our Hero who has it in their direct interest to help the American workforce, our Hero who has the tools at their disposal to provide benefits to hardworking Americans, our Hero who has previously been overlooked! HR is our one great hope to get off the path we’ve been going down. The impact after just a few years of widespread adoption of financial wellness benefits at American corporations can mean the difference between a country that struggles to support its workers and retirees, and one that can boast strong finances for everyone. HR to the rescue!

Creating a Strong Financial Future

If current financial trends continue, the average American worker will continue to struggle with day to day expenses and a comfortable retirement will be more out of reach than ever before. Increased debt, leaner retirements, and continued financial stress are in our future.

An alternative is possible. HR has an opportunity to supply the tools needed to achieve financial security for millions of hard-working Americans. By offering relevant, personalized financial wellness solutions today, HR can create a better future in which employees enjoy less stressful financial situations and look forward to a comfortable retirement, thanks to better saving habits, lower debt, and well-funded retirement accounts.

HR can be our Hero by bringing Financial Wellness into the workplace.


(1) Angela Johnson, 76% of Americans are living paycheck-to-paycheck –

(2) Aimee Picchi, Most Americans can’t handle a $500 surprise bill –

(3) Aimee Picchi, Earning $75,000 and living paycheck to paycheck –

(4) Mercer, Mercer’s 2015 Inside Employees’ Minds Survey

(5) Press Release, August 7, 2014 –

Article Source: