Capital Ratios: Regulatory
March 4th, 2010
Copyright © 2010 Integrated Profitability TM
For some companies, there are special ratios related to capital. Government regulators specify certain minimum levels of capital for corporations in particular industries. The regulators are also very specific as to what may be included when calculating these ratios. The most visible industry is financial institutions where regulators require a certain amount of capital be maintained at all times to protect customers (e.g., consumers depositing their savings in a bank).
The intent is to ensure that there is always a certain level of capital to protect against financial difficulties. These ratios are a kind of forced financial prudence. The main one for financial institutions is the “Capital Adequacy Ratio” (CAR). It’s calculated generically as follows:
Certain types of Capital / Risk-weighted Assets
Both the numerator and the denominator use specific categories of capital and assets respectively because neither is created equal. Assets can become impaired in completely different ways, under different circumstances, and with completely different speeds. Therefore, assets are weighted by the amount of risk they bear. These assessments quickly become complicated. Suffice to say, the capital ratios are specified with the intent of maximizing the ability of the bank to stay in business.
Here are a few pertinent websites:
● Bank for International Settlements and the Basle Committee
● Article on Capital Ratios from the Motley Fool
● Capital Ratio from Answers.com
At the end of the day, regulatory ratios are just another requirement of doing business. If you are in a regulated industry with mandated capital ratios, this is one more environmental aspect you must meet. It is the same as any business that sells a product or service subject to sales (and other) taxes: you must be aware of them and you must abide by them.
If you don’t, your resources will be commandeered to deal with the non-compliance. Your time and effort will be directed toward responding to regulators, defending your position (if you have one), and rectifying the issue to the satisfaction of the regulators.
Bottomline: You may think capital ratio requirements are onerous, but they have been put into law for solid economic reasons. The driving force may not be to specifically protect you (the owner), but if the margins give you a bigger financial cushion, thereby making your business safer, then they do, in fact, help you.
If you are in a business that requires regulatory margins, know what they are and make sure your business model and profit dynamics include them.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 56
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Integration Challenges for Small Businesses: Part Deux
February 25th, 2010
Copyright © 2010 Integrated Profitability TM
Continuing from last week, integration is a good approach for small businesses, although their size makes it difficult to achieve. Here are some other challenges:
● Outsourcing to multiple vendors
For excellent economic reasons, many small businesses either don’t have some of the functions that can be integrated (e.g., formal performance evaluations) or have outsourced them to companies that specialize in particular functions (e.g., bookkeeping, payroll). If components don’t exist or they are run by another company, it’s very difficult to integrate them so that they seamlessly complement each other.
● Little leverage
Again, small businesses are small. Even if they have a clear, realistic way to integrate all of their business functions to increase efficiency, they have little or no leverage with the huge companies providing the (outsourced) services. In addition, most of the large companies providing these services must standardize their service offerings if they want to make money on massive numbers of very small accounts. Rigorous adherence to standard product/service offerings is the way they are able to turn a profit on small accounts.
Bottomline: for small businesses, keep “integration” in the back of your mind as your company grows. At the right time, and size, you will be able to benefit from increased efficiency, lower costs, and profitable strategic growth.
Bill
William A. Stong
Email: william.a.stong@gmail.com
Telephone: 925-202-6244
Integrated Profitability Consulting TM
Blog # 4-00-0055 © 2010
“Insight knowledge for Profit Maximization”
Integration Challenges for Small Businesses
February 18th, 2010
Copyright © 2010 Integrated Profitability TM
Let me introduce “Integrated Profitability.” It is a companion blog to the “Small Business Finance & Profitability” blog devoted to profitability reporting and related MIS. It is designed for large, complex corporations with deep and broad business models, and diverse profit dynamics. As such, many of the topics are beyond the typical small business. Note that the underlying business challenges and opportunities are the same. It’s just a matter of magnitude.
This week, Integrated Profitability introduced the seminal concept of “integration” as something that can yield tremendous bottomline benefit to large, sprawling, complex, disjointed corporations and conglomerates.
Integration is also a good approach for small businesses, although size makes it much more difficult to achieve. Here are some of the challenges:
● Less need
Small businesses, as the name implies, are small. There are fewer moving parts. The business model is less complex, the profit dynamics simpler. The range, depth, and breadth of the business are all less. Product and service lines are shorter. Customer bases are smaller.
● Scarce resources
If daily cash flow is a business’s number one issue, whether one has integration or not is hardly a concern. Achieving integration requires thought, time, and action. For small businesses, these resources are better spent on sales, acquiring new customers, managing expenses, and being acutely aware of what competition is doing.
These add up to much less that can be integrated. And, even if it were, there’s less benefit in terms of cost savings and future flexibility.
However, a small business that keeps integration in mind as the company grows might well avoid the mistakes of much larger companies who need to retrofit integration to their expanded, wide-spread operations.
Next week: Part Deux
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 54
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Capital Ratios: Operating/Liquidity
February 11th, 2010
Copyright © 2010 Integrated Profitability TM
Capital ratios that concentrate on operating/liquidity relationships are primarily focused on the immediate and short-term operation of the business. Operating ratios help owners track their ability to meet short-term obligations. These (balance sheet) ratios are complementary to the following, income statement, items:
● Cash flow
● Daily and/or ongoing liquidity
The purpose of these particular ratios is to monitor the company’s ability to keep the business afloat in the short-run. Depending on how fast cash is being spent and received, operating ratios can also help forecast how long before running into operating (solvency) problems.
The major operating ratios are*1:
1. Current Ratio
Current ratio = current assets / current liabilities
Measures whether current liabilities will be paid from current assets. A ratio of 1.0 is breakeven; higher is better.
2. Quick Ratio (Acid Test)
Quick Ratio = (current assets – inventory) / current liabilities
Measures whether the most liquid assets will be sufficient to pay current liabilities
(Note:
Current assets include cash, marketable securities, accounts receivables and inventory
Current liabilities include accounts payable, short-term notes payable, current maturities of long-term debt, and accrued expenses & income taxes)
Here is a useful website:
If your business is small enough, you probably carry these ratios around in your head. And deal with them every day. Still, when all goes well and your business grows, you will have much more important things to work on. Regularly reported operating ratios will be an ongoing connection to how well your expanding business is doing in this critical area.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 53
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
*1: Eugene F. Brigham, Fundamentals of Financial Management (Illinois: Dryden Press, 1978) p. 125.
Who are you Being?
February 6th, 2010
I was recently approached by someone in a networking group I was visiting who wanted advice for handling a somewhat delicate situation. He had overheard something that disturbed him which was said by another member of this group.
In this person’s zeal and passion for solving the problem she solved, she was using language that could potentially offend the very people who need her help the most!
What’s worse is, she was overheard by others, who might have potentially been clients, but now will not because they felt what was said was offensive.
“Nobody wants to do business with Lazy People, that’s why they need me.” is what was said.
<<ouch>>
I am not going to get into a long discussion about how other people can’t make anyone feel a certain way, but I will say this. On of the gold nuggets I’ve picked up along the way is that your reaction comes from inside. I’ll prove it. If you are a thin person who is completely satisfied with your weight and someone walked up to you and said, “wow, you’re fat” you would think they were wrong (or jealous) and blow off the comment. That same comment said to someone who believes they are fat (whether or not they actually are) would most likely create a response of hurt and shame in the person who is trying to lose weight. Same comment, different results.
That being said (and setting that totally aside for a moment) Language is so important.
Had our original “anti lazy person’s” goal been to weed out lazy people from her client base, that would have been one thing. But instead it was her perception of the demographic of her target market – The very people she wanted to reach.
Lest you think this was a “bad person,” she was passionate about her craft. She felt being lazy was a life and death situation because her experience of it was that this was true. In fact her mother was a “lazy person” and as a result had a horribly messy house which resulted in her isolation as an older person and eventual death because no one ever visited, she injured herself and no one was there to help.
So her motivation was very noble. The language, not so much.
Nor was this person an unsaavy marketer. At every networking event during the introductions she did a good job of describing what she did.
Most likely, the problem came from not really understanding what her target market is thinking and only seeing the problem she solved for them from her point of view.
Who she was being was not aligned with who would attract her perfect client. And that explained perfectly why she was struggling to find business.
Remember, that marketing and networking is more than just the problem you solve, who your niche may be and the words that come out of your mouth. To be of most service to your target market is to develop the kind of “beside manner” that they would appreciate most. Remember platinum beats gold every time The platinum rule is treat your clients how THEY would like to be treated – NOT as you would want to be treated.
Learn who your ideal clients are. Learn to describe them as just a single person. You might even want to give your niche a proper name like Betty, or Michael.
Once you understand how they think, feel and talk and what motivates them – and also what de-motivates them, you’ll be well on your way to finding more of your ideal client.
And the advice I gave the observer? Straight out of our local BNI culture. Ask that person – “If you were doing something that might make it more difficult to refer you or do business with you, would you want me to tell you?” – And then let them decide.
I’ll be curious to find out what happened.
Who’s on your Team?
February 4th, 2010
Copyright © 2010 Integrated Profitability TM
I had an interesting chance encounter, and felt the topic it raised important enough to interrupt the Equity-Capital series this week. I was writing and editing Integrated Profitability papers over breakfast at a newly opened establishment. The owner and a colleague brought me into their conversation. In a nutshell, there was a problem:
The property manager is raising issues regarding the types of goods the new store can sell
The lease, a thick document printed on legal-size paper, is probably mostly standard commercial boilerplate. But it does have a section relating to products and services—which is the crux of the matter between the two parties. Unfortunately, the lease was signed without the review of a lawyer.
To point: have a lawyer who is your legal representative review legal documents related to your business. You can be sure the other parties who are asking you to sign documents have had their lawyers review them. If you are not a lawyer, current with the most recent developments in the relevant law (e.g., commercial leases), get one.
Otherwise, you are at significant disadvantage. Worse, you will end up spending time trying to understand what the other party is saying, responding to the situation and generally taking time away from your main mission:
serving your customers & running your business.
In the worst case, given that the U.S. is one of the most litigious countries on earth, your business and, possibly, your life savings could be sacrificed.
It’s true in health and it was driven home in business law:
Prevention is much, much cheaper than actually having to cure a problem
Bottomline: make sure you have a good lawyer on your team.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 52
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Capital Ratios: Overview
January 28th, 2010
Copyright © 2010 Integrated Profitability TM
Capital is fundamentally critical to a company. Not only does it provide the initial funds to launch your business, it is also the financial resource that helps to:
● Fund growth when times are good
● Cover losses when times are bad
In a sense, it doesn’t matter whether your business is doing well or poorly: capital is there to help you thrive or survive.
Given its importance, the amount of capital a company has is part of several ratios to monitor the health of the business. Capital, and its relationship to other aspects of your profit dynamics, is an important performance measurement.
Here are some useful sites:
● Accounting Ratios for Financial Statement Analysis
http://www.cpaclass.com/fsa/ratio-01a.htm
● Answers.com (Capital Ratio)
http://www.answers.com/topic/capital-ratio
● Wikipedia: Capital Requirement
http://en.wikipedia.org/wiki/Capital_requirement
● FDIC (Federal Deposit Insurance Corporation)
http://www.fdic.gov/bank/analytical/fyi/2003/011403fyi.html
Over the years, several capital ratios have been developed to monitor different aspects of a business. These ratios might be categorized as follows:
● Operating Margins
Margins that focus on the ongoing health of the business and how efficiently capital, from whatever source, is being used
● Regulatory Margins
Margins that are dictated by governmental agencies. Companies subject to such requirements must ensure that they run their businesses, including the amount of capital, in such a way that they meet or exceed these mandates.
● Safety Margin
Margins that focus on ensuring there is sufficient financial cushion in the company to withstand anticipated adverse impacts related to the business the company is in
In the coming weeks, we will look at all three.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 51
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Why Telling People What You Do Too Soon Can Sabotage Your Networking
January 25th, 2010
There are four words that, when strung together, are very dangerous – I already knew that. Most of us know when we’re in a class or workshop it’s best not to be wearing our expert hat, but did you know it applies to talking about what you do?
When you’re out introducing yourself, remember that everyone you meet will be wearing their “expert hat” – their pre-conceived notion – about what your job title means. If you tell some me you are a financial planner for example, most people think they know what that is, decide from past experience whether it applies to something they care about, and walk away from you if it’s not.
If, however you say something like, “I help baby boomer women achieve financial independence” (or something like that), your listeners “expert hat” will come right off because they won’t understand exactly what that is.
Case in point. One of my students is a “holistic healer”. She was at a networking event and someone asked her “what do you do?” Fresh out of the workshop she really wasn’t sure what I taught her would actually work so she said, “I am a holistic healer”. The person who she was talking to said, “Oh my gosh. My mother went to a holistic healer and they said she was going to die within a year!”
OK – End of conversation.
Most of us know that’s not the kind of thing a holistic healer typically does. Her listener had a misconception about the title because of a bad experience. She had her “expert hat” on about what that profession meant, and since she was a bit traumatized by the experience, a further conversation would be problematic.
This same thing will happen to you no matter what your profession is if you introduce yourself and state your profession in the first two or three sentences.
If I told you I was a writer (which I am, by the way) what would you think?
Maybe I write romance novels, maybe newspaper columns or magazine ads. I wouldn’t get to the part about what I actually do (teach people how to write and deliver elevator speeches). You would have already decided that I do what your “expert hat” has told you about what a writer does. You would have stopped listening and being curious because you thought you knew. Have you ever experienced this?
This is normal. We all do it (even me) and doesn’t make you – or anyone else for that matter – a bad person. People are busy and have short attention spans. When we’re at an event it’s easy to be distractible.
Remember, when you introduce yourself. Tell how you help people, who you help and who you are looking for. You’ll meet allot of great people and maybe even get an introduction to your dream client!
Want to use this article in your newsletter or on your website? You can! Just be sure to include the entire article and include this complete “blurb” with it:
Networking Expert, Karen Frank publishes Networking News, a semi-monthly newsletter devoted to helping you avoid marketing disasters and networking faux pas. Get the home study course “The Seven Deadly Sins of Networking and How to Avoid them” Free when you sign up for Networking News at www.misskarensproductions.com
Capital vs. Equity
January 21st, 2010
Copyright © 2009 Integrated Profitability TM
When I started the “Capital” series back in October 2009, I should have taken that critical first step: set definitions.
In the eagerness to get started on something new, and especially on those projects that are really necessary or important, beginnings sometimes get rushed and that can cause rockiness down the way. For example, the series really isn’t about capital, it’s apart a specific portion of capital: the equity, shareholder/owner portion of capital. The series will be re-named “Equity-Capital.”
So, starting at the beginning as we near the end:
Capital Structure:
The percentage of each type of capital used by the firm—debt, preferred stock, and net worth (net worth consists of capital, paid-in capital, and retained earnings).*1
Equity:
The net worth of a business, consisting of capital stock, capital (or paid-in) surplus, earned surplus (or retained earnings), and, occasionally, certain net worth reserves. Common equity is that part of the total net worth belonging to the common stockholders. Total equity would include preferred stockholders. The terms common stock, net worth, and common equity are frequently used interchangeably.*2
Everything perfectly clear now? While doing research for this blog, I came across a passage in a text book under a sub-title of “Definitions of Capital” which I was quite happy to see:
“When accountants refer to capital they mean stockholders’ equity or owners’ equity.”*3
I couldn’t have said it better myself!
Anyway, remember the earlier series on “Numbers People”?
This definitional issue is a perfect example as to why accountants are so critical to the success of a business. They define the transactions, set the standards, and oversee the infrastructure in which the financial booking takes place.
And they keep those finance people in place. Sooner or later.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 50
Telephone: 925-202-6244
Copyright © 2009 Integrated Profitability TM
*1: Eugene F. Brigham, Fundamentals of Financial Management (Illinois: Dryden Press, 1978) p. 568.
*2: Brigham p. 571.
*3: Donald E. Kieso and Jerry J. Weygandt, Intermediate Accounting Second Edition (Santa Barbara: Wiley/Hamilton Publication 1977) p. 602.
The Secret Levels of Networking
January 16th, 2010
When people think of networking, typically they think about people going to chamber mixers and trying to find clients. This fairly narrow definition of networking is, I think, one of the main reasons people get frustrated and give up. This may be your experience too.
Recently something Alexandria Brown (the Ezine Queen) mentioned something in a teleclass that hit me – probably because I was NOT wearing my “expert hat” at the time. She said something like – “If you don’t like your results when networking – change the networking you are doing”
This led to my “discovery” of the secret levels of networking.
Level One: Hanging out where your clients are and looking for new business
This is typically the chamber or another kind of party or mixer.n This gains you visibility and perhaps credibility (if you are a stellar networker). You can connect to people who might know clients for you and you might be able to rustle up a speaking gig if you make the right connection.
Upside – These are typically informal meetings and don’t require a strong commitment on your part. If you have family or a busy unpredictable schedule this can be a great way to get out and meet people.
Downside – Because of its informal structure, these can typically become social only events. You’re more likely to run into the pushy sales guy who hands his card to everyone he meets, people are less likely to have their “business hats” on, and sometimes – just sometimes the raffle takes more time than the time allotted for networking. Fun if you win – not fun if you don’t (and are standing too near the giant amplified speaker- ouch!)
Level Two: Hanging out where clients and people who know your clients are but in a structured environment
This is a business meeting such as the one BNI or LeTip or B2B offers. Here you are expected to try to find business for fellow members, participate in the group and usually in return receive some business.
Upside - If you approach these kinds of meetings with the intention to stay in “for the long haul” – usually at least a year you will become part of the community, establish wonderful relationships with people and become a resource for your clients. I’ve seen businesses get 10 to 90 percent of their annual revenue from such groups depending upon the type of business they have
Downside – It’s a fairly big commitment – typically weekly or at least monthly. It can feel pricey at first because you will be giving much more than you get – trying out other people’s services, paying meeting fees etc. This would not be the kind of group to start with if you need cashflow right now – unless the group has a resource for business loans or a cashflow expert.
Level Three: Hanging out where people who know lots of your clients do
You can actually use the groups in Level Two to accomplish Level Three if you shift your thinking and remember to ASK for strategic alliance partners where you’re networking here. Level three also includes giving talks or workshops to groups of your strategic partners, (and/or offering informational products for sale – for more information about informational products, see the audio recording links below). It would also be why you might join a service organization or participate in an on line group such as yahoo. If you’re going to do the yahoo thing join groups that you are genuinely interested in and participate in the conversations.
Upside – This is much less effort that trying to find clients one at a time and trying to find strategic partners one at a time. This kind of strategy begins to place you in the position of “expert” in your line of work and helps you with your professional image in the community.
Downside – You need to be “on” at all times. Dressing appropriately and behaving appropriately for the situation is key. You’ll destroy your reputation as quickly as you built if if you’re not aware of who you’re “showing up” at these events. Remember – word of mouth marketing is always working – however it may NOT be working in your favor!
Level Four: Hanging out where people who understand the power of a strategic alliance are actively seeking out strategic partners
This is my absolute favorite. This is participating in education and classes with people who do business with the kinds of clients you have and may or not do what you do. For example, I participated in a program that lasted about a year. While I am not longer in the program, I still have relationships with several of the participants. Because we “are on the same page” and understand each others goals very well, it is natural for us to form strategic alliances. Any time you participate in educational situations – whether they are live seminars, teleseminars, workshops or classes you have this opportunity. Remember everything you do is a networking opportunity.
Upside – Everyone is on the “same page” with you and forming alliance with people you’ve been though training with feels effortless. Often times in business seminars, the trainer spends time encouraging strategic alliances, so attendees are actively looking for this kind of opportunity.
Downside – You need to be willing to participate in the training. If you go with the sole intention of networking and making connections, you’ll waste a great opportunity for self growth and it will be obvious why you’re there!
Bottom line – you could apply all four of the “secret levels of networking” to any situation. Just remember when you’re out there doing that, stick to the problems you solve for people and focus on who you’re looking for. You’ll be sure to be a networking ninja in no time!
Want to use this article in your newsletter or on your website? You can! Just be sure to include the entire article and include this complete “blurb” with it:
Networking Expert, Karen Frank publishes Networking News, a semi-monthly newsletter devoted to helping you avoid marketing disasters and networking faux pas. Get the home study course “The Seven Deadly Sins of Networking
and How to Avoid them” Free when you sign up for Networking News at www.7deadlysinsofnetworking.com
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