Signs to Avoid a Customer

Unless we deal with them on cash, here are some signs of customers that you would like to avoid in your business:

• Check put on hold or being replaced
• Building contractors who immediately buy luxury cars after receiving downpayment
• Paying partial for every statement of account or choosing to pay smaller amount of invoices to be paid in a statment
• Transferring from one supplier to another
• Asking for immediate terms mode of payment for their first purchase
• Banks with over draft issuance of checks
• Business in existence for a long time, but bank account reference is still new

Do you have something to add? Or do you agree or not? Please share to us your experience.

A Better Understanding on the Ponzi Scheme

Ponzi Scheme is defined to as an investment strategy where investors are being paid for the investment of others. I had created a diagram to get people have a better feel on what is it. The diagram explains why as more investor comes in more and more people will be left unpaid.

Please comment.

The Rule of 72

Over the past few months, I had gone over some finance articles that I read. And here's one that I particularly like on computing when your money doubles, its called the rule of 72. Making 72 as a constant divisor, you then divide it by the annual interest rate assuming that it is constant in the next five years or so.

Ergo, if the annual interest interest rate is 8% that makes it 72/8. The result is 9 which stands for the number of years your money will double at that constant rate. This rule works best for nominal interest rates ranging from 4 to 15 percent.

In doubt? do it manually through a spreadsheet. My result shows a 99.95 percent accuracy.

Converting Discounts to Income

One strategy for everyone to earn money more quickly is to take advantage of discounts which give you higher yields normally at a range from 5% to as high as 30%. Isn't it superbly high than putting it on bank? That gives you only a yield of about 1.8 to 3 percent. More and more, companies are looking for staggered payment scheme when purchasing from their principals because this can help them cope up capital and cash requirement in the short term. In effect, if companies do this, principal (usually referred to as the supplier) usually charges the regular undiscounted price which is higher of course compared to purchasing it on cash basis where they usually give huge discounts.

So to earn on the discounts, you have to add a "financial intermediary" usually yourself in the diagram referred to as "ME". The role of this intermediary if having enough funds is to pay the principal cash at discounted price. And the company to pay the intermediary on terms basis (60 days) at regular price which gives them a breather space to cope up financial requirements in the short term.

In the case of the diagram, principal give out 30% discount if paid on cash, financial intermediary pays it since company cannot afford to pay cash. And company pays the regular price to financial intermediary including the discount. That way your 7,000 gets a face value of 10,000 pesos after 60 days. High isn't it? We are doing it right now, try it!

How Much Credit Have You Turned Down?

The Digeratilife has a great article about how much credit have you turned down. After reading his article it sought me to also looked as to how much credit I have turned down. Day by day working as a human resources officer, credit card comapanies' marketing arm always looks for you asking whether you would like to avail of a free credit card, but I have to politely turn them down.

Summing all up, my credit line could I have accepted this tempting offer could have reached 100,000 pesos Philippine currency. No thanks, I always say as I already have one. One credit card is enough for me to use. Paying them on time is one thing I always made sure each time I get my bill. My finance principle in life is simple:

"Do not exceed fixed and variable expenses of 40% of your net monthly income"

What does that mean, it simply means that if you are earning a net monthly income of 18,000 pesos your monthly expenses should not go beyond 7,200 pesos. I am thinking of what could have happened to me if I accepted all those offers? I would probably in big trouble I must say. Use your credit card wisely. Pay your bills on time as once blacklisted, banks talk and might have a hard time asking for a credit line in case you will be needing it.

Bootstrap Financing

Before I start talking about 'bootstrap financing', allow me to say this that blogger has been great. While many bloggers are having problems that their blog has been the subject of attack of unwanted and spam comments, blogger has an optional word verification feature where the author will no longer be moderating comments but instead the one who comments should write in the given 6-letter/number in a space provided to ensure that the one commenting is a human being not a program that just automatically sends in unwanted spam comments.

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Bootstrap financing is actually and entrepreneurial term used for start-ups. Where there are many people are being hounded that whether you need capital to start business, i am not. I am bootstrap financing that literally means making use of the available resources you have and how you make it grow through the difficult times. In an article from Harvard Business Review, bootstrapping is defined to as "a form of start-up financing where founders or entrepreneurs rely on their own personal financial resources to launch a business".

For aspiring entrepreneurs, do not let the financing bugged you but instead bootstrap should be the rule be creative, make it grow, and eventually scale up.

The Z-Score Model

Ever since before, one of the topic I find really enthusiastic about is Finance. And after scanning through some books, its good to see me back on track with finance, my favorite subject where my professor has to exempt me in the final exam. (I hope I don't sound bragging) I actually want my blog to be some sort of informative to help out students in their feasibility studies, and business plans as well. So I had thought of sharing this article.

One disappointment of every business owners is financial failure, much more if a company doing good initially has to be shut down unanticipated.

So how do we anticipate? Through the z-score model formulated by Edward Altman. Where one calculates a score combining all the significant financial ratios for a firm. Some insignificant ratios may just be excluded from the calculation. What are these standard significant ratios? The current solvency ratio (a) of course is important, it determines what is the percentage of your company’s assets to your liabilities. Next is the inventory turnover (b) and asset turnover (c), the figure used to determine how well your inventory and sales is moving. Another is the debt ratio (d), the portion of debts over your company’s assets. And lastly the net profit margin (e), the percentage of income less all operating expenses.

So here the model goes: z = 1.0a + 0.1b + 0.5c + 3.0d + 10.0e. The figures multiplied to by the ratios are all constants.

All companies having a score of 2 or more are considered to be healthy while those who scored lower are considered to be in the danger zone. But the significance of the model is not that, but to forecast so if ever given 3 years forecast period, and found out that on the 2nd and 3rd year you have a score of 2 or lower, company can revise its operating plans and to something to improve its financial conditions.

However, take not that this has it limitations, if in an industry there are only a few healthy and strong firms that exhibited .9 to 2.0 range of score, this cannot discriminate and determine whether it really is healthy or not.

Managing Finances

I just had finished reading a book by Colayco, president of The Proffessional Group. The book entitled "Pera Mo, Palaguin Mo" which inEnglish, literally means "Making your finances grow". Why I blog this? I had just thought that this would be a good article to write when during a dinner with my colleagues in college, they move from one job to another, making it on average transferring 3 jobs in less than 6 months. Primary reason includes not well compensated, no proprer job description, bad management, among others. And I believe that they have a valid point in this, but where they have a valid point, moving on or abandonement of job will never be the right solution (at least for me... gee). I had just remembered, one manager told me, "conflicting of ideas doesn't mean that both people involve doesn't have to work together" or "doesn't mean working relationship ends".

I think this is the time the basic understanding of managing finances comes in and also shows its importance, they have to understand this that thereare 4 stages in life to achieving financial independence, that probably somehow would help them solve their work turnover ratio.

First stage is what I call the active stage, (referred in the book as 'start-up stage) this is actually the stage where you earn active income, an income that comes purely from your time, talent, and skills. This includes your salary, commissions, overtime pay, benefits, sidelines, etc.

Second is the build-up stage, that means 30% of your income must consist the passive income, income coming from earning assets and investments.

Third is the asset allocation stage, that means 60% of passive income consist of your total income.

And lastly, the retirement stage, where your source of income is only your earning assets and investments.

Though, I do not totally agree with book, this is somehow to provide you an idea on how to achieve financial independence.