Benjamin Graham
Born in London in 1894 as Benjamin Grossbaum, Graham emigrated to the United States when he was one year old. Graham graduated from Columbia University in 1914 and was offered a teaching position in three different Columbia departments.
Graham's Security Analysis, published in 1934, was the first book to articulate a framework for the systematic analysis of stocks and bonds. Graham later wrote The Intelligent Investor to bring many of the same concepts to the lay investor. Both books should be at the very top of the required reading list for serious value investors.
One of Graham's most successful investments was in the automobile insurer GEICO, where he served as chairman of the board.
One of Graham's favorite investment techniques was to purchase net-current-asset bargains, or net-nets. Net-net were stocks that traded for less than the value of their current assets minus all liabilities.
Graham's students, such as Warren Buffett and Bill Ruane, are among some of the best investors of the past century.
Philip Fisher
Fisher's career spanned 74 years. After training as an analyst, Fisher started his San Francisco-based investment advisory firm in 1931. His classic book on investing, Common Stocks and Uncommon Profits, was first published in 1958.
Fisher said that, "If the job has been correctly done when a common stock is purchased, the time to sell it is almost never." As an example, Fisher first purchased shares of Motorola in 1955 and held them until his death in 2004.
Fisher put all of his potentital investments through 15 step checklist in order to gauge the quality of a company.
According to Fisher, there are only three reasons to sell a stock:
1) If you have made a serious mistake in your assessment of the company;
2) If the company no longer passes the 15 points as clearly as before;
3) If you could reinvest the money in another, far more attractive company.
Warren Buffett
Buffett uses a discounted cash-flow analysis to estimate the fair value of companies.
Unless analysing a business falls within his circle of competence, Buffett does not try to value the business.
Buffett seeks companies with sustainable competitive advantages. (Companies with economic moats.)
Though Buffett believes it's important to work with competent, honest managers, the economics of a business are the most important factor.
Buffett is not swayed by popular opinion.
Since no discounted cash-flow analysis is perfect, Buffett requires a margin of safety in his purchase price.
Rather than diversify and dilute his potential returns, Buffett conccentrates his investments on his best ideas.
Peter Lynch
Lynch obtained his legendary investor status managing the Fidelity Magellan Fund. Under Lynch's leadership, the Magellan fund grew from $20 million in assets to $13 billion and achieved an average total return of 25% per year.
Despite his success as a professional money manager, Lynch believes that average investors have an edge over Wall Street experts and can outperform the market by looking for investment ideas in their daily lives.
The Lynch investment philosophy has four main components:
1. Invest only in what you understand.
2. Do your homework and research the company thoroughly.
3. Focus only on the company's fundamentals and not the market as a whole.
4. Invest only for the long run and discard short-term market gyrations.
Although he is best known for trend-spotting, Lynch's stock-picking approach mirrors that of Warren Buffett.
Tuesday, 19 January 2010
****Strategies of the Great Investors
Deep value - Benjamin Graham
"An investment operation is one which, upon thorough analysis, promise safety of principal and an adequate return. Operations not meeting these requirements are speculative."
The Principles of Value Investing
1. Thorough analysis
2. Safety of principal
3. Adequate return
Intrinsic Value
To succeed as an investor, you must be able to estimate a business's true worth, or "intrinsic value."
Mr. Market
"Bascially, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market."
Margin of Safety
Graham distilled the secret of sound investing into three words, "margin of safety." Any estimate of intrinsic value is based on numerous assumptions about the future, which are unlikely to be completely accurate.
Think Independently
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." Warren Buffett said the best advice he ever got from Graham was to think independently.
Ben's principles have remained sound- their value often enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures. His counsel of soundness brought unfailing rewards to his followers - even to those with natural abilities inferior to more gifted practitioners who stumbled while following counsels of brilliance or fashion. Investing is most intelligent when it is most businesslike, and investors who follow Graham's principles will continue to reap rewards in the market.
Holding Superior Growth - Philip Fisher
Fisher's Investment Philosophy
"Purchase and hold for the long term a concentrated porfolio of outstanding companies with compelling growth prospects that you understand very well."
Fisher's answer is to purchase the shares of superbly managed growth companies in his book, Common Stocks and Uncommon Profits.
"The young growth stock offers by far the greatest possibility of gain. Sometimes this can mount up to several thousand per cent in a decade."
"All else equal, investors with the time and inclination should concentrate their efforts on uncovering young companies with outstanding growth prospects."
Fisher's 15 Points - What does a growth stocks look like?
To uncover the business insights described by Fisher's 15 points, investors must do their research footwork, or "scuttlebutt." You should ask questions of management, competitors, suppliers, customers, and anyone else who might have useful information.
"Go to five companies in the industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprising detailed and accurate picture of all five will emerge."
1, Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above average sales organisation?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labour and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
14. Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company ahve a management of unquestionable integrity?
Important Don'ts for Investors
1. Don't overstress diversification.
2. Don't follow the crowd.
3. Don't quibble over eighths and quarters.
By applying Fisher's methods, you too, can uncover tomorrow's dominant companies.
Great Companies at Reasonable Prices - Warren Buffett
"In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices." - Warren Buffett
Buffett's central Principles of his Investment Strategy
"We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the busines to be one:
To determine value, he estimates the company's future cash flows and discounts them at an appropriate rate. This discounted cash-flow valuation is used by countless investment professionals, so Buffett's approach to valuation is not a competitive advantage.
However, his ability to estimate future cash flows more accurately than other investors is an advantage.
Buffett succeeds largely because he focuses his efforts on companies with durable competitive advantages that fall within his circle of competence. These are key features of his investing framework.
Understanding Your Circle of Competence
If Buffett cannot understand a company's business, then it lies beyond his circle of competence, and he won't attempt to value it.
Although it might seem obvious that investors should stick to what they know, the temptation to step outside one's circle of competence can be strong.
Buffett has written that he isn't bothered when he misses out on big returns in areas he doesn't understand, because investors can do very well (as he has) by simply avoiding big mistakes.
Buying Companies with Sustainable Competitive Advantages
Even if a business is easy to understand, Buffett won't attempt to value it if its future cash flows are unpredictable. He wants to own simple, stable businesses that possess sustainable competitive advantages. Companies with these characteristics are highly likely to generate materially higher cash flows with the passage of time. Without these characteristics, valuation estimates become very uncertain.
Partnering with Admirable Managers
He has written that good managers are unlikely to triumph over a bad business, but given a business with decent economic characteristics - the only type that interests hime - good managers make a significant difference. He looks for individuals who are more passionate about their work than their compensation and who exhibit energy, intelligence, and integrity. That last quality is especially important to thim. He believes that he has never made a good deal with a bad person.
An Approach to Market Prices
Once Buffetthas decided that he is competent to evaluate a company, that the company has sustainable advantages, and that it is run by commendable managers, then he still has to decide whether or not to buy it. This step is the most crucial part of the process.
The decision process seems simple enough: If the market price is below the discounted cash-flow calculation of fair value, then the security is a candidate for purchase. The available securities that offer the greatest discounts to fair value estimates are the ones to buy.
Buffett credits his late friend and mentor, Benjamin Graham, with teaching him the appropriate attitude toward market prices. The most important thing to remember about "Mr. Market" is that he offers you the potential to make a profit, but he does not offer useful guidance. If an investor can't evaluate his business better than Mr. Market, then the investor doesn't belong in that business. Thus, Buffett invests only in predictable businesses that he understands, and he ignores the judgement of Mr. Market (the daily market price) except to take advantage of Mr. Market's mistakes.
Requiring a Margin of Safety
Although Buffett believes the market is frequently wrong about the fair value of stocks, he doesn't believe himself to be infallible. If he estimates a company's fair value at $80 per share, and the company's stock sells for $77, he will refrain from buying despite the apparent undervaluation. That small discrepancy does not provide an adequate margin of safety, another concept borrowed from Ben Graham. No one can predict cash flows into the distant future with precision, not even for stable businesses with durable competitive advantges. Therefore, any estimate of fair value must include substantial room for error.
For instance, if a stock's estimated value is $80 per share, then a purcahse at $60 allows an investor to be wrong by 25% but still achieve a satisfactory result. The $20 difference between estimated fair value and purchase price is what Graham called the margin of safety. Buffett considers this margin-of-safety principle to be the cornerstone of investment success.
Concentrating on Your Best Ideas
Buffett has difficulty finding understandable businesses with sustainable competitive advantages and excellent managers that also sell at discounts to their estimated fair values. Therefore, his investment portfolio has often been concentrated in relatively few companies. This practice is at odds with the Modern Portfolio Theory taught in business schools, but Buffett rejects the idea that diversification is helpful to informed investors. On the contrary, he thinks the addition of an investor's 20th favorite holding is likely to lower returns and increase risk compared with simply adding the same amount of money to the investor's top choices.
You can greatly boost your investment returns if you invest like Buffett. This means
Know What You Own - Peter Lynch
Lynch's mantra is that average investors have an edge over Wall Street experts. The "Street lag" of large institutions gives average investors many advantages because they can find promising investments largely ahead of the professional investors.
Lynch stated, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighbourhood shopping mall, and long before Wall Street discovers them." Therefore, individual investors can outperform the experts and the market in general by looking around for investment ideas in their everyday lives.
His book, One Up on Wall Street, articulates his investment philosophy. The Lynch stock-picking approach has several key principles:
Stick to What You Know
Investing in what you know about and understand is at the core of Lynch's stock-picking approach. This particular investment principle served Lynch very well in practice.
Lynch has pointed out that you find your best investment ideas close to home. "An amateur investor can pick tomorrow's big winners by paying attention to new developments at the workplace, the mall, the auto showrooms, the restaurants, or anywhere a promising new enterprise makes its debut."
Things Lynch Looks For, and Avoid
Company Characteristics that Might Attract Lynch:
The second key principle in Lynch's investment philosophy is that you should do your homework and research the company thoroughly. "Investing without research is like playing stud poker and never looking at the cards." He recommends reading all prospectuses, quarterly reports (Form 10-Q), and annual reports (Form 10-K) that companies are required to file with the Securities and Exchange Commission.
If any pertinent information is unavailable in the annual report, Lynch says that you will be able to find it by asking your broker, calling the company, visiting the company, or doing some grassroots research, also known as "kicking the tires." After completing the research process, you should be familiar with the company's business and have developed some sense of its future potential.
The third main principle of Lynch's stock-picking approach is to focus only on the company's fundamentals and not the market as a whole. Lynch doesn't believe in predicting markets, but he believes in buying great companies - especially companies that are undervalued and/or underappreciated.
Lynch believes that investors can separate good companies from mediocre ones by sticking to the fundamentals and combing through financial statements. He suggests looking at some of the following famous numbers:
The last key principle of Lynch's investment philosophy is that you should only invest for the long run and discard short-term market gyrations. Lynch has said, "Absent a lot of surprises, stocks are relatively predictable over ten to twenty years. As to whether they're going to be higher or lower int wo or three years, you might as well flip a coin to decide." Nonetheless, Lynch sticks with his philosophy, adding: "When it comes to the market, the important skill here is not listening, it's snoring. The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story has not changed."
Lynch's investment philosophy is very similar to Buffett's stock picking approach. Lynch said, "And Warren Buffett, the greatest ivnestor of them all, looks for the same opportunities I do, except that when he finds them [great businesses at bargain prices], he buys the whole company."
Lynch said, "The basic story remains simple and never-ending. Stocks aren't lottery tickets. There's a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. If you own good companies that continue to increase their earnings, you'll do well."
The Principles of Value Investing
1. Thorough analysis
2. Safety of principal
3. Adequate return
To succeed as an investor, you must be able to estimate a business's true worth, or "intrinsic value."
"Bascially, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market."
Graham distilled the secret of sound investing into three words, "margin of safety." Any estimate of intrinsic value is based on numerous assumptions about the future, which are unlikely to be completely accurate.
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." Warren Buffett said the best advice he ever got from Graham was to think independently.
"Purchase and hold for the long term a concentrated porfolio of outstanding companies with compelling growth prospects that you understand very well."
To uncover the business insights described by Fisher's 15 points, investors must do their research footwork, or "scuttlebutt." You should ask questions of management, competitors, suppliers, customers, and anyone else who might have useful information.
"Go to five companies in the industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprising detailed and accurate picture of all five will emerge."
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above average sales organisation?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labour and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
14. Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company ahve a management of unquestionable integrity?
1. Don't overstress diversification.
2. Don't follow the crowd.
3. Don't quibble over eighths and quarters.
Great Companies at Reasonable Prices - Warren Buffett
"We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the busines to be one:
- that we can understand;
- with favourable long-term prospects;
- operated by honest and competent people; and
- available at a very attractive price."
To determine value, he estimates the company's future cash flows and discounts them at an appropriate rate. This discounted cash-flow valuation is used by countless investment professionals, so Buffett's approach to valuation is not a competitive advantage.
If Buffett cannot understand a company's business, then it lies beyond his circle of competence, and he won't attempt to value it.
Although it might seem obvious that investors should stick to what they know, the temptation to step outside one's circle of competence can be strong.
Buffett has written that he isn't bothered when he misses out on big returns in areas he doesn't understand, because investors can do very well (as he has) by simply avoiding big mistakes.
Even if a business is easy to understand, Buffett won't attempt to value it if its future cash flows are unpredictable. He wants to own simple, stable businesses that possess sustainable competitive advantages. Companies with these characteristics are highly likely to generate materially higher cash flows with the passage of time. Without these characteristics, valuation estimates become very uncertain.
He has written that good managers are unlikely to triumph over a bad business, but given a business with decent economic characteristics - the only type that interests hime - good managers make a significant difference. He looks for individuals who are more passionate about their work than their compensation and who exhibit energy, intelligence, and integrity. That last quality is especially important to thim. He believes that he has never made a good deal with a bad person.
Once Buffetthas decided that he is competent to evaluate a company, that the company has sustainable advantages, and that it is run by commendable managers, then he still has to decide whether or not to buy it. This step is the most crucial part of the process.
The decision process seems simple enough: If the market price is below the discounted cash-flow calculation of fair value, then the security is a candidate for purchase. The available securities that offer the greatest discounts to fair value estimates are the ones to buy.
However, what seems simple in theory is difficult in practice. A company's stock price typically drops when investors shun it because of bad news, so a buyer of cheap securities is constantly swimming against the tide of popular sentiment. Even investments that generate excellent long-term returns can perform poorly for years. In fact, Buffett wrote an article in 1979 explaining that stocks were undervalued, yet the undervaluation only worsened for another three years. Most investors find it difficult to buy when it seems that everyone is selling, and difficult to remain steadfast when returns are poor for several consecutive years.
Although Buffett believes the market is frequently wrong about the fair value of stocks, he doesn't believe himself to be infallible. If he estimates a company's fair value at $80 per share, and the company's stock sells for $77, he will refrain from buying despite the apparent undervaluation. That small discrepancy does not provide an adequate margin of safety, another concept borrowed from Ben Graham. No one can predict cash flows into the distant future with precision, not even for stable businesses with durable competitive advantges. Therefore, any estimate of fair value must include substantial room for error.
Buffett has difficulty finding understandable businesses with sustainable competitive advantages and excellent managers that also sell at discounts to their estimated fair values. Therefore, his investment portfolio has often been concentrated in relatively few companies. This practice is at odds with the Modern Portfolio Theory taught in business schools, but Buffett rejects the idea that diversification is helpful to informed investors. On the contrary, he thinks the addition of an investor's 20th favorite holding is likely to lower returns and increase risk compared with simply adding the same amount of money to the investor's top choices.
You can greatly boost your investment returns if you invest like Buffett. This means
- staying within your circle of competence,
- focusing on companies with wide economic moats,
- paying attention to company valuation and not market prices, and finally,
- requiring a margin of safety before buying.
Lynch's mantra is that average investors have an edge over Wall Street experts. The "Street lag" of large institutions gives average investors many advantages because they can find promising investments largely ahead of the professional investors.
Lynch stated, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighbourhood shopping mall, and long before Wall Street discovers them." Therefore, individual investors can outperform the experts and the market in general by looking around for investment ideas in their everyday lives.
- First, you should invest only in what you understand.
- Second, you should do your homework and research an investment thoroughly.
- Third, you should focus more on a company's fundamentals and not the market as a whole.
- Last, you should invest only for the long run and discard short-term market gyrations.
Investing in what you know about and understand is at the core of Lynch's stock-picking approach. This particular investment principle served Lynch very well in practice.
Company Characteristics that Might Attract Lynch:
- It is boring.
- The industry is not growing.
- The business is specialized and entrenched.
- The business sounds silly.
- There is a lot of controversy surrounding the business.
- It has been spun out of a larger company.
- Wall Street doesn't follow it or care about it.
- The business supplies something people need to continually buy.
- Management is buying shares, or the company is repurchasing its stock.
- It uses technology to cut costs or add value for customers.
- Company or its industry is grabbing a lot of headlines.
- It is the hot topic of conversation at happy hour.
- It is being touted as a revolutionary company that is the next great investment.
- It has a cool, futuristic name.
- It is diversifying too much, diluting its competitive strength.
- It is a middleman and has a limited number of clients.
The second key principle in Lynch's investment philosophy is that you should do your homework and research the company thoroughly. "Investing without research is like playing stud poker and never looking at the cards." He recommends reading all prospectuses, quarterly reports (Form 10-Q), and annual reports (Form 10-K) that companies are required to file with the Securities and Exchange Commission.
If any pertinent information is unavailable in the annual report, Lynch says that you will be able to find it by asking your broker, calling the company, visiting the company, or doing some grassroots research, also known as "kicking the tires." After completing the research process, you should be familiar with the company's business and have developed some sense of its future potential.
Once you have done your research on a company, Lynch believes that it is important to set some realistic expectations about each stock's potential. He usually ranks the companies by size and then places them into one of six categories:
- Slow Growers
- Stalwarts
- Fast Growers
- Cyclicals
- Turnarounds
- Asset Plays
The third main principle of Lynch's stock-picking approach is to focus only on the company's fundamentals and not the market as a whole. Lynch doesn't believe in predicting markets, but he believes in buying great companies - especially companies that are undervalued and/or underappreciated.
Lynch advocates looking at companies one at a time using a "bottom up" approach rather trying to make difficult macroeconomic calls using a "top down" approach.
Lynch believes that investors can separate good companies from mediocre ones by sticking to the fundamentals and combing through financial statements. He suggests looking at some of the following famous numbers:
- Percent of Sales
- Year-Over-Year Earnings
- Earnings Growth
- The P/E Ratio (Lynch's favorite metric)
- The Cash Position
- The Debt Factor
- Dividends
- Book Value
- Cash Flow
- Inventories
- Pension Plans
The last key principle of Lynch's investment philosophy is that you should only invest for the long run and discard short-term market gyrations. Lynch has said, "Absent a lot of surprises, stocks are relatively predictable over ten to twenty years. As to whether they're going to be higher or lower int wo or three years, you might as well flip a coin to decide." Nonetheless, Lynch sticks with his philosophy, adding: "When it comes to the market, the important skill here is not listening, it's snoring. The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story has not changed."
Lynch's investment philosophy is very similar to Buffett's stock picking approach. Lynch said, "And Warren Buffett, the greatest ivnestor of them all, looks for the same opportunities I do, except that when he finds them [great businesses at bargain prices], he buys the whole company."
Lynch said, "The basic story remains simple and never-ending. Stocks aren't lottery tickets. There's a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. If you own good companies that continue to increase their earnings, you'll do well."
Financial Education - Learning the important topics in valuation
Workshop on Equity Valuation & Financial Modeling
Host: Viftech Solutions (Pvt.) Ltd.
Start Time: Wednesday, 20 January 2010 at 09:00
End Time: Thursday, 21 January 2010 at 17:00
Location: PC Hotel, Karachi
Description
This workshop is designed for people who want to learn equity valuation and financial modeling. Participants will be taught to analyze true economic worth of a business, using various valuation techniques. This workshop is ideal for professionals related to corporate finance, investment analysis, risk management, investment banking, corporate banking, brokerage or asset management industries
Pre-requisites
Good understanding of financial statements
Learning Objectives
• Have a clear comprehension of what drives the value of a company
• Make more profitable investment decisions to enhance value
• Understand most widely-practiced and robust valuation techniques
• Know how to critically analyze an investment proposal
• Be better equipped to negotiate terms of an investment transaction
• Be able to choose a valuation method appropriate for your company
Course Outline
Day 1
• Background of company valuation
• Uses of company valuation
• Concept of TVM in financial analysis
• Prepare financial models on Microsoft Excel
• Forecast future earnings/balance sheet/cashflow
• Why accrual accounting can be misleading
• Benefits of cashflow based analysis
• Calculate free cash flow forecasts
• Calculate the enterprise and equity value of a business
• Calculate terminal value of a business
• Explain why WACC is used to discount company free cash flows
• Calculate WACC, cost of debt and cost of equity
• Calculate equity risk premium
• Calculate terminal growth rates
Day 2
• Discuss and apply various cash flow valuation techniques, including dividend discount model, free cash flow to firm and free cash flow to equity
• Discuss Relative Valuations Techniques including P/E, P/S, P/B and EV/EBITDA based valuations
• Discuss other valuation methods including CAPM and Arbitrage Pricing Theory
• Determine the optimal capital structure of a company and its dividend policy
• Work through an example on a listed company
The workshop will include a practical example of equity valuation and financial modeling on a listed company.
Trainer Profile: Mr. Ali Reimoo – National Trainer
Ali Reimoo is an Equity Research Analyst at Habib Bank (Global Treasury). Prior to his current position, Ali has worked as an Equity Analst at Foundation Securities Limited (a Fauji Foundation Company and an affiliate of Macquarie Bank in Pakistan) and BMA Capital. He has been involved in investment analysis industry for over three years, during which he has written and published several analytical reports. His major job responsibilities include; analyzing companies from the perspective of their business risk, growth prospects, investment value and financial wellbeing.
Due to his sound analytical skills, Ali has made a decent reputation for himself. He is also a regular on major TV channels like CNBC Pakistan, Business Plus, GeoTv etc, where he is regularly called as a guest to share his views on the country’s investment climate.
Apart from being an investment analyst, Ali is also a trainer and consultant. His unique skills of understanding client needs and helping them overcome their knowledge gap makes him stand apart from other trainers.
He has successfully helped various professionals develop/improve their financial and analytical skills. Some of the beneficiaries whom he has helped include professionals from reputed organizations like, State Bank of Pakistan, Faysal Bank, HSBC Bank Pakistan, National Bank of Pakistan and Johnson and Johnson Company.
His academic qualifications include; MSc in Finance & Investment from University of Edinburgh, Scotland and BBA/MBA from College of Business Management Karachi. currently he is a CFA level 2 candidate.
Workshop Schedule:
Venue: PC Hotel, Karachi.
Date: 20-21 January, 2010 | 9am to 5pm
Workshop Includes:
Training materials, certificates, tea and snacks, lunch and networking opportunities.
Workshop Investment:
Rs. 11,000/- per participant | Before Due Date
Rs. 12,000/- per participant | After Due Date
10% discount on more than 2 participants from the same organization received before due date.
Participant will bring own Laptop will get Rs. 800/- Off. (Should inform and register before due date)
Other Details
• All the cheques are required be made in favor of ‘Viftech Solutions (Pvt.) Ltd.’
• All nominations shall be confirmed on first–come-first-served basis.
• Limited Seats Available
• Due date for registration is 14 January, 2010
Click this link to Download Registration Form:
http://www.viftech.com.pk/images/Registration%20Form.doc
Further Information & Registrations
Viftech Solutions (Pvt.) Ltd.
Mr. Jahangir Sachwani
Assistant Manager Marketing & Corporate Trainings
Phone: (+92) 332 2109221 | (021) 35055379-80 - 35053480
Email: Jahangir.sachwani@viftech.com.pk
http://pakhr.blogspot.com/2010/01/workshop-on-equity-valuation-financial.html
Host: Viftech Solutions (Pvt.) Ltd.
Start Time: Wednesday, 20 January 2010 at 09:00
End Time: Thursday, 21 January 2010 at 17:00
Location: PC Hotel, Karachi
Description
This workshop is designed for people who want to learn equity valuation and financial modeling. Participants will be taught to analyze true economic worth of a business, using various valuation techniques. This workshop is ideal for professionals related to corporate finance, investment analysis, risk management, investment banking, corporate banking, brokerage or asset management industries
Pre-requisites
Good understanding of financial statements
Learning Objectives
• Have a clear comprehension of what drives the value of a company
• Make more profitable investment decisions to enhance value
• Understand most widely-practiced and robust valuation techniques
• Know how to critically analyze an investment proposal
• Be better equipped to negotiate terms of an investment transaction
• Be able to choose a valuation method appropriate for your company
Course Outline
Day 1
• Background of company valuation
• Uses of company valuation
• Concept of TVM in financial analysis
• Prepare financial models on Microsoft Excel
• Forecast future earnings/balance sheet/cashflow
• Why accrual accounting can be misleading
• Benefits of cashflow based analysis
• Calculate free cash flow forecasts
• Calculate the enterprise and equity value of a business
• Calculate terminal value of a business
• Explain why WACC is used to discount company free cash flows
• Calculate WACC, cost of debt and cost of equity
• Calculate equity risk premium
• Calculate terminal growth rates
Day 2
• Discuss and apply various cash flow valuation techniques, including dividend discount model, free cash flow to firm and free cash flow to equity
• Discuss Relative Valuations Techniques including P/E, P/S, P/B and EV/EBITDA based valuations
• Discuss other valuation methods including CAPM and Arbitrage Pricing Theory
• Determine the optimal capital structure of a company and its dividend policy
• Work through an example on a listed company
The workshop will include a practical example of equity valuation and financial modeling on a listed company.
Trainer Profile: Mr. Ali Reimoo – National Trainer
Ali Reimoo is an Equity Research Analyst at Habib Bank (Global Treasury). Prior to his current position, Ali has worked as an Equity Analst at Foundation Securities Limited (a Fauji Foundation Company and an affiliate of Macquarie Bank in Pakistan) and BMA Capital. He has been involved in investment analysis industry for over three years, during which he has written and published several analytical reports. His major job responsibilities include; analyzing companies from the perspective of their business risk, growth prospects, investment value and financial wellbeing.
Due to his sound analytical skills, Ali has made a decent reputation for himself. He is also a regular on major TV channels like CNBC Pakistan, Business Plus, GeoTv etc, where he is regularly called as a guest to share his views on the country’s investment climate.
Apart from being an investment analyst, Ali is also a trainer and consultant. His unique skills of understanding client needs and helping them overcome their knowledge gap makes him stand apart from other trainers.
He has successfully helped various professionals develop/improve their financial and analytical skills. Some of the beneficiaries whom he has helped include professionals from reputed organizations like, State Bank of Pakistan, Faysal Bank, HSBC Bank Pakistan, National Bank of Pakistan and Johnson and Johnson Company.
His academic qualifications include; MSc in Finance & Investment from University of Edinburgh, Scotland and BBA/MBA from College of Business Management Karachi. currently he is a CFA level 2 candidate.
Workshop Schedule:
Venue: PC Hotel, Karachi.
Date: 20-21 January, 2010 | 9am to 5pm
Workshop Includes:
Training materials, certificates, tea and snacks, lunch and networking opportunities.
Workshop Investment:
Rs. 11,000/- per participant | Before Due Date
Rs. 12,000/- per participant | After Due Date
10% discount on more than 2 participants from the same organization received before due date.
Participant will bring own Laptop will get Rs. 800/- Off. (Should inform and register before due date)
Other Details
• All the cheques are required be made in favor of ‘Viftech Solutions (Pvt.) Ltd.’
• All nominations shall be confirmed on first–come-first-served basis.
• Limited Seats Available
• Due date for registration is 14 January, 2010
Click this link to Download Registration Form:
http://www.viftech.com.pk/images/Registration%20Form.doc
Further Information & Registrations
Viftech Solutions (Pvt.) Ltd.
Mr. Jahangir Sachwani
Assistant Manager Marketing & Corporate Trainings
Phone: (+92) 332 2109221 | (021) 35055379-80 - 35053480
Email: Jahangir.sachwani@viftech.com.pk
http://pakhr.blogspot.com/2010/01/workshop-on-equity-valuation-financial.html
Growth stocks regain favor after value's long run
January 15, 2010
Growth stocks regain favor after value's long run
Mark Jewell
Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
There's no pat definition for growth stocks, but typically they generate revenue and earnings at an above-average rate. Examples are Apple and Google. Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade. Also, value stocks normally do much better coming out of a recession, as more economically sensitive stocks like banks and utilities rebound at the earliest signs that the economy is expanding.
"Typically, the bigger the contraction during a recession, the bigger the snapback when the economy turns," says Stephen Wood, chief market strategist of Russell Investments. "That hasn't happened this time."
This recovery has been tepid. The economy is growing about half as fast as it usually does exiting a recession, says Wood. Though the stock market has climbed 70 percent since last March, unemployment remains at 10 percent.
Still it's clear that growth stocks were hot in 2009. Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
The reality is that certain industries play a pivotal role in driving the performance of growth and value stocks.
Tech stocks are the biggest part of growth, accounting for 30 percent of the value of all that category's stocks in the Russell 3000. Last year those tech stocks finished up an average 59 percent — tops among 11 sectors — boosting growth's overall performance. Two of tech's biggest names put up especially strong results: Shares of Apple and Google more than doubled.
On the value side, financial services stocks are the biggest piece, making up one-quarter of the Russell 3000's value component. While many large banks came back from the brink of failure, their stocks haven't returned to pre-plunge levels. In 2009, financials trailed the broader market despite finishing up 17 percent.
Utility stocks, another value staple, also weighed down the overall performance of the category. They gained just 12 percent last year, less than any other segment of the stock market.
Ultimately, investors trying to forecast whether growth or value will lead the market should closely watch the economy.
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
That's because growth companies' competitive advantages — think of Google's search engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy, or energy companies that see demand from industrial customers shrink.
When the economy began expanding coming out of past recessions, value stocks began rising faster than growth stocks, the study found.
That's not the case now, so the current market is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://www.realclearmarkets.com/news/ap/finance_business/2010/Jan/15/growth_stocks_regain_favor_after_value_s_long_run.html
Growth stocks regain favor after value's long run
Mark Jewell
Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
There's no pat definition for growth stocks, but typically they generate revenue and earnings at an above-average rate. Examples are Apple and Google. Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade. Also, value stocks normally do much better coming out of a recession, as more economically sensitive stocks like banks and utilities rebound at the earliest signs that the economy is expanding.
"Typically, the bigger the contraction during a recession, the bigger the snapback when the economy turns," says Stephen Wood, chief market strategist of Russell Investments. "That hasn't happened this time."
This recovery has been tepid. The economy is growing about half as fast as it usually does exiting a recession, says Wood. Though the stock market has climbed 70 percent since last March, unemployment remains at 10 percent.
Still it's clear that growth stocks were hot in 2009. Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
The reality is that certain industries play a pivotal role in driving the performance of growth and value stocks.
Tech stocks are the biggest part of growth, accounting for 30 percent of the value of all that category's stocks in the Russell 3000. Last year those tech stocks finished up an average 59 percent — tops among 11 sectors — boosting growth's overall performance. Two of tech's biggest names put up especially strong results: Shares of Apple and Google more than doubled.
On the value side, financial services stocks are the biggest piece, making up one-quarter of the Russell 3000's value component. While many large banks came back from the brink of failure, their stocks haven't returned to pre-plunge levels. In 2009, financials trailed the broader market despite finishing up 17 percent.
Utility stocks, another value staple, also weighed down the overall performance of the category. They gained just 12 percent last year, less than any other segment of the stock market.
Ultimately, investors trying to forecast whether growth or value will lead the market should closely watch the economy.
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
That's because growth companies' competitive advantages — think of Google's search engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy, or energy companies that see demand from industrial customers shrink.
When the economy began expanding coming out of past recessions, value stocks began rising faster than growth stocks, the study found.
That's not the case now, so the current market is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://www.realclearmarkets.com/news/ap/finance_business/2010/Jan/15/growth_stocks_regain_favor_after_value_s_long_run.html
Growth stocks regain favor after value's long run
Originally published Saturday, January 16, 2010 at 12:01 PM
Growth stocks regain favor after value's long run
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
The Associated Press
BOSTON — Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
Typically growth stocks generate revenue and earnings at an above-average rate. Examples are Apple and Google.
Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
Historical patterns
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade.
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
Advantage holds up
That's because growth companies' competitive advantages — think of Google's search-engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy.
When the economy began to expand coming out of past recessions, value stocks began to rise faster than growth stocks, the study found.
But the market now is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://seattletimes.nwsource.com/html/businesstechnology/2010797412_investgrowth17.html?syndication=rss
Growth stocks regain favor after value's long run
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
The Associated Press
BOSTON — Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
Typically growth stocks generate revenue and earnings at an above-average rate. Examples are Apple and Google.
Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
Historical patterns
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade.
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
Advantage holds up
That's because growth companies' competitive advantages — think of Google's search-engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy.
When the economy began to expand coming out of past recessions, value stocks began to rise faster than growth stocks, the study found.
But the market now is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://seattletimes.nwsource.com/html/businesstechnology/2010797412_investgrowth17.html?syndication=rss
Interpreting Financial Information
1. WHY INTERPRETE FINANCIAL DATA?
It helps to know your markets, measure growth, and make authoritative decisives.
2. WHAT ARE COMMON BENCHMARKS?
Sales revenues, profits, number of stores, and customers.
3. HOW DO YOU EVALUATE PERFORMANCE?
COST-BENEFIT ANALYSIS
WHAT IS IT? You weigh the expected costs of launching or running a business against the expected benefits. The costs involved are variable (diretly involved with the new activity) and fixed (these remain more or less the same, regardless of the new business).
RETURN ON INVESTMENT
WHAT IS IT? A method used to measure the benefits of the project over the length of time of a project (when this is time specific).
You divide the net profit expected for the first year by the amount of expenditure and express it as a percentage of the outlay.
BREAKEVEN ANALYSIS
WHAT IS IT? It provides a way of finding out how many sales are necessary to recoup the capital spent on the original investment. You need to know your contribution margin (the percentage of each sales dollar left over after variable costs are taken aways from overall profits).
TIME VALUE OF MONEY
WHAT IS IT? It describes the concept that a dollar received today is worth more than a dollar received at some point in the future because the dollar received today can be invested to earn interest. The harsh reality is that future benefits may be worth less dollar for dollar than if the capital outlay was put in an investment fund.
4. WHAT ARE THE WAYS TO VALUE A COMPANY?
HARD NUMBERS. These are based on existing figures and include equity book value (assets minus liabilities) and fair market value (the value established between a willing buyer and a willing seller).
SOFT NUMBERS. These are based on estimates of future benefits and therefore contain an element of subjectivity.
INTANGIBLE ASSETS. These include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, mailing lists, long-term contracts, and franchises.
It helps to know your markets, measure growth, and make authoritative decisives.
2. WHAT ARE COMMON BENCHMARKS?
Sales revenues, profits, number of stores, and customers.
3. HOW DO YOU EVALUATE PERFORMANCE?
COST-BENEFIT ANALYSIS
WHAT IS IT? You weigh the expected costs of launching or running a business against the expected benefits. The costs involved are variable (diretly involved with the new activity) and fixed (these remain more or less the same, regardless of the new business).
RETURN ON INVESTMENT
WHAT IS IT? A method used to measure the benefits of the project over the length of time of a project (when this is time specific).
You divide the net profit expected for the first year by the amount of expenditure and express it as a percentage of the outlay.
BREAKEVEN ANALYSIS
WHAT IS IT? It provides a way of finding out how many sales are necessary to recoup the capital spent on the original investment. You need to know your contribution margin (the percentage of each sales dollar left over after variable costs are taken aways from overall profits).
TIME VALUE OF MONEY
WHAT IS IT? It describes the concept that a dollar received today is worth more than a dollar received at some point in the future because the dollar received today can be invested to earn interest. The harsh reality is that future benefits may be worth less dollar for dollar than if the capital outlay was put in an investment fund.
4. WHAT ARE THE WAYS TO VALUE A COMPANY?
HARD NUMBERS. These are based on existing figures and include equity book value (assets minus liabilities) and fair market value (the value established between a willing buyer and a willing seller).
SOFT NUMBERS. These are based on estimates of future benefits and therefore contain an element of subjectivity.
INTANGIBLE ASSETS. These include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, mailing lists, long-term contracts, and franchises.
Monday, 18 January 2010
Valuing the company
Valuing a business is never an exact sceience with no one right away of determining a company's price. These are the common ways of appraising a business:
A. Hard numbers
B. Soft numbers
C. Intangible assets
D. Market competition
A. HARD NUMBERS
These are based on existing financial figures and include:
1. EQUITY BOOK VALUE
The simple formula is to subtract a company's liabilities from its assets based on historical records.
2. ADJUSTED BOOK VALUE
This is the same formula but takes into account the fair market value of assets and liabilities, which may produce a more accurate picture as historical records may be very out-of-date.
3. LIQUIDATION VALUE
This is another variation on the balance sheet theme that calculates how much money is left when assets are sold quickly and debts are paid off.
4. FAIR MARKET VALUE
This is simply the value established between a willing buyer and a willing seller.
5. MARKET VALUE
This applies to a publicly traded company.
B. SOFT NUMBERS
Soft numbers are based on estimates of future benefits and therefore contain an element of subjectivity.
1. INCOME METHOD
This is a measurement of the future benefits such as sales, profits, or cost savings.
2. DISCOUNTED CASH FLOW APPROACH
This approach brings future anticipated income to present value.
3. INVESTMENT VALUE
This takes into account the special benefits that a buyer accrues from acquiring the new entity.
C. INTANGIBLE ASSETS
Increasingly, prospective buyers are putting a greater onus on a company's intangible assets, which include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, proprietary mailing lists, long-term contracts, and franchises.
Some intangible assets can be priced using traditional approaches such as:
1. COST-BASED VALUATION
How much would it cost you to duplicate some of these assets today?
2. MARKET-BASED VALUATION
What were the sale transactions of brand-named goods in the sector?
3. CUSTOMER-DRIVEN VALUATION
What is the value of a loyal customer? What does the average customer spend per purchase a year? How long has he been a customer?
D. MARKET COMPETITION
Research into the company and its place in its sector are also relevant. Is your business in a growth industry or a declining one?
A. Hard numbers
B. Soft numbers
C. Intangible assets
D. Market competition
A. HARD NUMBERS
These are based on existing financial figures and include:
1. EQUITY BOOK VALUE
The simple formula is to subtract a company's liabilities from its assets based on historical records.
2. ADJUSTED BOOK VALUE
This is the same formula but takes into account the fair market value of assets and liabilities, which may produce a more accurate picture as historical records may be very out-of-date.
3. LIQUIDATION VALUE
This is another variation on the balance sheet theme that calculates how much money is left when assets are sold quickly and debts are paid off.
4. FAIR MARKET VALUE
This is simply the value established between a willing buyer and a willing seller.
5. MARKET VALUE
This applies to a publicly traded company.
B. SOFT NUMBERS
Soft numbers are based on estimates of future benefits and therefore contain an element of subjectivity.
1. INCOME METHOD
This is a measurement of the future benefits such as sales, profits, or cost savings.
2. DISCOUNTED CASH FLOW APPROACH
This approach brings future anticipated income to present value.
3. INVESTMENT VALUE
This takes into account the special benefits that a buyer accrues from acquiring the new entity.
C. INTANGIBLE ASSETS
Increasingly, prospective buyers are putting a greater onus on a company's intangible assets, which include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, proprietary mailing lists, long-term contracts, and franchises.
Some intangible assets can be priced using traditional approaches such as:
1. COST-BASED VALUATION
How much would it cost you to duplicate some of these assets today?
2. MARKET-BASED VALUATION
What were the sale transactions of brand-named goods in the sector?
3. CUSTOMER-DRIVEN VALUATION
What is the value of a loyal customer? What does the average customer spend per purchase a year? How long has he been a customer?
D. MARKET COMPETITION
Research into the company and its place in its sector are also relevant. Is your business in a growth industry or a declining one?
Sources of Finance for financing growth
WHAT CHOICES DO YOU HAVE TO RAISE FUNDS?
1. DEBT FINANCING involves a loan that will accumulate future interest.
2. EQUITY FINANCING involves accepting a lump sum in exchange for selling the future benefits and profits of your business to investors.
WHAT MIX OF DEBT/EQUITY IS USED IN A BUSINESS LIFE CYCLE?
1. SEED STAGE
WHAT IS IT? When your business is just a thought or an idea
FINANCIAL SOURCES:
2. START-UP STAGE
WHAT IS IT? When the company has officially launched.
FINANCIAL SOURCES:
3. GROWTH-STAGE
WHAT IS IT? When a business has successfully traded for a period.
FINANCIAL SOURCES:
4. MATURE STAGE
WHAT IS IT? When its business has an established place in the market.
FINANCIAL SOURCES:
Key terms
Angel investor: a wealthy individual, often a retired business owner or executive, who hands over capital to a new business in return for ownership equity.
Venture capitalists: commonly large institutions seeking to invest considerable amounts of capital into growing businesses through a series of invesmtent vehicles that include state and private pension funds, university endowments, and insurance companies.
Commercial paper: a money market secuirty issued by large banks and corporations for short term investments (maximum nine months) such as purchases of inventory. These unsecured IOUs are consideed safe, but returns are small.
Factoring: describes a loan by a third party (factor) given in the form of cash (often within 24 hours) for accounts receivable. The borrower pays a percentage of the invoice.
1. DEBT FINANCING involves a loan that will accumulate future interest.
2. EQUITY FINANCING involves accepting a lump sum in exchange for selling the future benefits and profits of your business to investors.
WHAT MIX OF DEBT/EQUITY IS USED IN A BUSINESS LIFE CYCLE?
1. SEED STAGE
WHAT IS IT? When your business is just a thought or an idea
FINANCIAL SOURCES:
- Family and friends
- Private savings
- Credit cards: usually much quicker than waiting for a loan approval.
2. START-UP STAGE
WHAT IS IT? When the company has officially launched.
FINANCIAL SOURCES:
- Banking, typically the first option of small business owners.
- Small, community banks.
- Leasing: paying a monthly payment for renting assets like equipment or office space.
- Factoring: paying an advance rate to a third party (factor) in exchange for cash.
- Trade credit: when a supplier allows the buyer to delay payment.
3. GROWTH-STAGE
WHAT IS IT? When a business has successfully traded for a period.
FINANCIAL SOURCES:
- Angel investor: a wealthy individual who hands over capital in return for ownership equity.
- Venture capital funds: large institutions seeking to invest considerable amounts of capital into growing businesses through a series of investment vehicles.
- Initial public offering (IPO): the sale of equity in a company, generally in the form of shares of common stock, through an investment banking firm.
4. MATURE STAGE
WHAT IS IT? When its business has an established place in the market.
FINANCIAL SOURCES:
- Capital market securities such as common stock, dividends, voting rights.
- Bonds - loans that take the form of a debt security where the borrower (known as the issuer) owes the holder (the lender) a debt and is obliged to repay the principal and interest (the coupon).
- Commercial paper - a money market security issued by large banks and corporations for short-term investments (maximum nine months) such as purchases of inventory
Key terms
Angel investor: a wealthy individual, often a retired business owner or executive, who hands over capital to a new business in return for ownership equity.
Venture capitalists: commonly large institutions seeking to invest considerable amounts of capital into growing businesses through a series of invesmtent vehicles that include state and private pension funds, university endowments, and insurance companies.
Commercial paper: a money market secuirty issued by large banks and corporations for short term investments (maximum nine months) such as purchases of inventory. These unsecured IOUs are consideed safe, but returns are small.
Factoring: describes a loan by a third party (factor) given in the form of cash (often within 24 hours) for accounts receivable. The borrower pays a percentage of the invoice.
External Form of Growth: Could your business benefit from these?
Business can grow by:
EXTERNAL FORMS OF GROWTH
Could your business benefit from an acquisition or a merger?
Again, you need to take a good look at the business to understand just where it is at the present time.
SOME OF THE QUESTIONS TO ASK ARE:
FACTORS TO CONSIDER
So what would be the reasons for considering growth either through a merger or by an acquisition?
Among the forms of external growth are:
- Internal growth: By paying attention to the internal affairs of the company, and diversifying into new products and new markets.
- Go-it-alone option:
- External growth: Through mergers and acquisitions.
EXTERNAL FORMS OF GROWTH
Could your business benefit from an acquisition or a merger?
Again, you need to take a good look at the business to understand just where it is at the present time.
- What are the strengths that you can build on?
- What do you have that would make your company attractive to other companies?
- Are there areas of weakness in the business?
- Could these be strengthened by acquiring another company or merging your business with another?
SOME OF THE QUESTIONS TO ASK ARE:
- Should we obtain more quality staff with different skils?
- What do we know about our sector of the industry or service? Could we improve our business intelligence to our advantage?
- Is our business underperforming and, if so, in which area(s)?
- Can we access funds for further development without endangering the normal business cash flow?
- Could we access a wider customer base and increase our market share without outside help? How much would it cost in extra resources?
- Could we diversify into other products or service areas? What would be the long-term effects?
- Can we reduce our cost and overhead structure without damaging our product, service, or customer base? Would there be an adverse effect on performance and quality?
- What would be the effect if we could reduce the competition?
- Would "organic growth" take too long?
FACTORS TO CONSIDER
So what would be the reasons for considering growth either through a merger or by an acquisition?
- Bigger is better?
- Image enhancement?
- Market expansion?
- Product range expansion?
- Diversification?
Among the forms of external growth are:
- Mergers
- Acquisitions
- Joint ventures
- Partnerships
- Collaborations
Mergers and Acquisitions: When not to?
When not to merge or acquire?
- When a review of the business shows that internal processes can be improved and that growth can be achieved internally.
- When the costs of either option would not be commensurate with the increased turnover and profits.
- When the cost of raising finance for an acquisition would not be covered by the sale of unwanted assets.
- When there is a danger of losing the identity of your company in either option.
- When there would be no chance of creating a working management structure for the enlarged business.
- When the market would not be able to support the planned increase in production.
- When the merger or acquisition would lead to the danger of a loss of intellectual property.
Successful Mergers and Acquisitions
- Do a company "health check." Examine every possible facet of the business.
- Discover if there any areas for improvement and prune out any waste.
- Complete an up-to-date SWOT analysis.
- Ensure that your strengths and opportunities support an external growth strategy.
- Weigh up the likely contenders for a merger/acquisition.
- Decide which strategy will be best for the company, bearing in mind that an acquisition can be a costly and sometimes bitter affair.
- Try to prevnet plans for either form of growth being made public too soon; this could build resistance.
- Decide on the future direction of the enlarged organisation and management strategies before any move is made.
- On acquiring another company, there may be parts that do not fit into future plans; have a policy for disposal.
- Decide in advance the financial limits.
Merger and Acquisitions - What can go wrong?
What can go wrong?
The extent and the quality of planning and research done before the merger or acquisition deal is done will largely determine the outcome. Thee are occasions when situations will arise that are outside your control. It is worthwhile to consider the following situations and to prepare for them.
THE DEAL COULD FAIL OR PROVE TO BE VERY EXPENSIVE IF:
1. Agreement cannot be reached on who should run the business in the case of a merger or, in the case of an acquisition, how long the previous management team will continue to remain involved.
2. Word gets out in the press that you are interested in merging or acquiring a particular business and a "bidding war" breaks out in which other determined parties are interested in buying into the business.
3. Your own business performance suffers because you have to spend too long on the deal and the transition stages.
4. Key people in either organization leave because of uncertainty.
5. The expected savings in costs do not materialize.
In 1999, the management group KPMG studied 700 mergers and acquisitions. Their conclusions found that:
In 2003, a report issued by another group, Towers Perrin, indicated that there was a considerable increase in merger and acquisition activity, but surveys of companies concerned "still admit to a high failure rate."
In 1999, the management group KPMG studied 700 mergers and acquisitions. Their conclusions found that:
- 53% reduced the value of the companies.
- 17% produced no added value.
- Most "mergers" were acquisitions in disguise.
- 57% of "doomed deals" were caused by incompatible cultures in the companies involved.
- In 42% of cases, a clash of management styles or egos was responsible for the failure.
External growth - Acquisition
What is an acquisition?
Meaning "to gain possession of," the acquisition of all parts of another business is an alternative method to develop or expand your own business.
1. An acquisition is the most apposite option where you need specialist skills and knowledge or facilities for your own future development.
2. This is a way of filling "holes" in a company's current or future straegy; it can be very successful as long as there is a good understanding of what the knowledge gaps are and how they cna be filled effectively.
3. As is the case with mergers, the relevant questions should be asked and answered, and the correct business fit must be achieved.
Most acquisition involve businesses of unequal size with, usually, the larger or more powerful company purchasing or acquiring the smaller. In recent times, this has not always been the case, and examples can be found of relatively small companies buying out much larger ones, either to obtain resources or to gain additional assets to supplement those currently owned.
Such deals are usually financed quite heavily with loasn and other deals and are often followed by a very vigorous pruning of parts of the acquisition to repay the financing involved. This is known as asset stripping and is rarely intended to achieve growth of an established business, but rather functions as a financial dealing that will generate cash for further enlargement.
HOSTILE ACQUISITIONS OR TAKEOVERS
Many acquisitions are known as "hostile takeovers" where the management of the company being purchased actively resists the unwanted overtures of the predator company.
When talking about mergers, such phrases as: "teamwork," "sharing," and "mutual benefit" are appropriate; some expressions used when considering hostile takeovers might be:
Before any acquisition (or merger) it is essential to establish that what you think you are acquiring is real and worthwhile and to use a process such as due diligence. This includes complete studies of the business you seek to acquire, which should be carried out by specialist, univolved, third parties, who look at every part of the business and report on its viability to meet the requirements you have set before you take irrevocable action.
VALUING THE ACQUISITION
There are several valuation methods that can be used, and it is always best to seek professional expert advice before making the final decision. You will need to consider many relevant factors to obtain an overview of how healthy the business might be, these include:
THE FINANCIAL STRUCTURE OF AN ACQUISITION IS:
Company "C" shares ----> ----> ----> Company "A" shares ---->> Larger company "A" shares
Meaning "to gain possession of," the acquisition of all parts of another business is an alternative method to develop or expand your own business.
1. An acquisition is the most apposite option where you need specialist skills and knowledge or facilities for your own future development.
2. This is a way of filling "holes" in a company's current or future straegy; it can be very successful as long as there is a good understanding of what the knowledge gaps are and how they cna be filled effectively.
3. As is the case with mergers, the relevant questions should be asked and answered, and the correct business fit must be achieved.
Most acquisition involve businesses of unequal size with, usually, the larger or more powerful company purchasing or acquiring the smaller. In recent times, this has not always been the case, and examples can be found of relatively small companies buying out much larger ones, either to obtain resources or to gain additional assets to supplement those currently owned.
Many acquisitions are known as "hostile takeovers" where the management of the company being purchased actively resists the unwanted overtures of the predator company.
- "We have bought you."
- "Do as you are told."
- "Our way is best."
Before any acquisition (or merger) it is essential to establish that what you think you are acquiring is real and worthwhile and to use a process such as due diligence. This includes complete studies of the business you seek to acquire, which should be carried out by specialist, univolved, third parties, who look at every part of the business and report on its viability to meet the requirements you have set before you take irrevocable action.
Using the due diligence procedure to arrive at incisive answers to the many questions needed, to making the decision to acquire, represents the exemplary use of due diligence.
There are several valuation methods that can be used, and it is always best to seek professional expert advice before making the final decision. You will need to consider many relevant factors to obtain an overview of how healthy the business might be, these include:
- The history of the business
- The current performance
- The financial situation
- The condition of the premises
- Intangible assets
- Employees
- how much you think the business is worth, and
- how much you are prepared to offer, if you decide to proceed.
THE FINANCIAL STRUCTURE OF AN ACQUISITION IS:
External growth - Merger
What is a merger?
The dictionary definition of a merger in the business or commercial context is "the combination of two or more companies, either by the creation of a new organization or by absorption by one of the others."
The underlying logic of mergers is that the resulting enterprise will be stronger than the combined resources of the individual companies. This is described as synergy, and it offers more business possibilities. It also has the advantage that there will be less competition as a result of the merger, although this depend on the guidelines of a monopoly commission.
WHAT ARE THE MAJOR ATTRIBUTES OF A TRUE MERGER?
1. TEAMWORK
2. SHARING
3. NONDOMINATION
4. MUTUAL BENEFIT
THE FINANCIAL STRUCTURE FOR A MERGER IS:
Company "A" Shares -----> COMPANY "C" SHARES
Company "B" Shares -----> COMPANY "C" SHARES
IS THE TIME RIGHT FOR A MERGER?
Ascertaining whether the time is right for a merger depends on the state of your business relative to the market and to the competition.
The dictionary definition of a merger in the business or commercial context is "the combination of two or more companies, either by the creation of a new organization or by absorption by one of the others."
The underlying logic of mergers is that the resulting enterprise will be stronger than the combined resources of the individual companies. This is described as synergy, and it offers more business possibilities. It also has the advantage that there will be less competition as a result of the merger, although this depend on the guidelines of a monopoly commission.
WHAT ARE THE MAJOR ATTRIBUTES OF A TRUE MERGER?
1. TEAMWORK
2. SHARING
3. NONDOMINATION
4. MUTUAL BENEFIT
THE FINANCIAL STRUCTURE FOR A MERGER IS:
Company "A" Shares -----> COMPANY "C" SHARES
Company "B" Shares -----> COMPANY "C" SHARES
IS THE TIME RIGHT FOR A MERGER?
Ascertaining whether the time is right for a merger depends on the state of your business relative to the market and to the competition.
Come and have a drink with me!
Don't Trust Anyone Who Doesn't Drink
John Carney | Jan. 14, 2010,
Why do so many social and business functions involve drinking?
Because it's one of the easiest ways to properly evaluate who is trustworthy. In vino veritas and all that.
But don't take our word for it. Here's a new economics paper making the argument.
In Vino Veritas: The Economics of Drinking:
It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one's actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a "social lubricant" and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a trade-off between the efficiency gains due to the signaling effect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is efficient, social norms or laws can raise efficiency by legalizing only one drug.
(Hat tip: Larry Ribstein.)
http://www.businessinsider.com/dont-trust-anyone-who-doesnt-drink-2010-1
John Carney | Jan. 14, 2010,
Why do so many social and business functions involve drinking?
Because it's one of the easiest ways to properly evaluate who is trustworthy. In vino veritas and all that.
But don't take our word for it. Here's a new economics paper making the argument.
In Vino Veritas: The Economics of Drinking:
It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one's actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a "social lubricant" and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a trade-off between the efficiency gains due to the signaling effect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is efficient, social norms or laws can raise efficiency by legalizing only one drug.
(Hat tip: Larry Ribstein.)
http://www.businessinsider.com/dont-trust-anyone-who-doesnt-drink-2010-1
China Responds To Google: Go To Hell
China Responds To Google: Go To Hell
Henry Blodget |
Jan. 14, 2010,
China's initial public response to Google's threat is in, and it's what one would have expected: Go to hell.
Now the two can start negotiating quietly behind the scenes.
We still expect this war to be resolved in a compromise in which both parties declare victory and reserve the right to kill each other later. There's a substantial chance, however, that Google will be forced to actually follow through on its threat and leave the country. (Backing down at this point would be a disaster).
There's no chance, meanwhile, that the Chinese government will allow itself to appear to be pushed around by a pissant Internet company. So Google had to have expected this.
FT: One of China’s top censors on Thursday reaffirmed the state’s commitment to monitoring the internet, showing no signs of compromising in the face of Google’s threat to quit the country.
Wang Chen, head of the State Council Information Office and deputy head of the Communist party’s propaganda department, said internet media “must live up to their responsibility of maintaining internet security”, including censoring content.
“We must do our best to intensify self-discipline among internet media to guarantee internet security... Online media must treat the creation of a positive mainstream opinion environment as an important duty,” he said.
"A positive mainstream opinion environment." And we thought our media was bad.
http://www.businessinsider.com/henry-blodget-china-responds-to-google-go-to-hell-2010-1
Henry Blodget |
Jan. 14, 2010,
Now the two can start negotiating quietly behind the scenes.
We still expect this war to be resolved in a compromise in which both parties declare victory and reserve the right to kill each other later. There's a substantial chance, however, that Google will be forced to actually follow through on its threat and leave the country. (Backing down at this point would be a disaster).
There's no chance, meanwhile, that the Chinese government will allow itself to appear to be pushed around by a pissant Internet company. So Google had to have expected this.
FT: One of China’s top censors on Thursday reaffirmed the state’s commitment to monitoring the internet, showing no signs of compromising in the face of Google’s threat to quit the country.
Wang Chen, head of the State Council Information Office and deputy head of the Communist party’s propaganda department, said internet media “must live up to their responsibility of maintaining internet security”, including censoring content.
“We must do our best to intensify self-discipline among internet media to guarantee internet security... Online media must treat the creation of a positive mainstream opinion environment as an important duty,” he said.
"A positive mainstream opinion environment." And we thought our media was bad.
http://www.businessinsider.com/henry-blodget-china-responds-to-google-go-to-hell-2010-1
Jim Chanos: China Is Headed For A Huge Crash
Nov. 11, 2009,
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos. Read the whole thing >
Chanos is reportedly attempting to short the entire Chinese economy. What's fueling the short case against China?
http://www.businessinsider.com/jim-chanos-china-is-headed-for-a-huge-crash-2009-11
- The $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.
- China seems to be cooking its books. For instance, it reports that car sales are surging while gasoline consumption is flat. Is that realistic? Or are state run Chinese companies just stock-piling cars?
- China may have too much capacity. The central planners built out productive capacity for a booming economy but China is stalling. In nearly every sector of the economy, China is in danger of producing huge quantities of goods with no buyers.
- China's economic and political posturing signals that its leaders have no idea what is in store for them. The result may be a surprising economic collapse, akin to what happened when the housing bubble popped in the US.
The practicalities of growth in your business
There are many resources that need to be considered when deciding to grow the business. Among these are:
FINANCE
It is unlikely that the business will have generated large reserves of cash that will enable expansion to be paid for from internal sources.
STAFF
Do you have sufficient staff to undertake the extra work, or will you need to employ more people?
PREMISES
Do you have sufficient rooms for the new production facilities and increased stock levels of both materials and finished parts?
MARKETING
Can your current marketing arrangements cope with increased sales and the new product or service?
Having posed some questions regarding the availability of finance, staff, and premises, it is necessary to know where to look for sources of supply of these.
FINANCE
It is unlikely that the business will have generated large reserves of cash that will enable expansion to be paid for from internal sources.
STAFF
Do you have sufficient staff to undertake the extra work, or will you need to employ more people?
PREMISES
Do you have sufficient rooms for the new production facilities and increased stock levels of both materials and finished parts?
MARKETING
Can your current marketing arrangements cope with increased sales and the new product or service?
Having posed some questions regarding the availability of finance, staff, and premises, it is necessary to know where to look for sources of supply of these.
The "go-it-alone" option for growth
One option for growth that falls between internal and external growth is the go-it-alone option.
- The major benefit of this option is that the business retains full control with all profits (or losses) retained in-house, as are all designs, manufacturing and marketing knowledge.
- It presupposes the business is in good financial and operational "health": and that it can supply all of the necessary resources to launch and supply into the market.
- Although the title of the option suggests that all the work is carried out in-house, this will depend on the manufacturing strategy that is operating within the company.
- Even though most businesses would like to keep control of all the processes involved in manufacturing their products or the services they offer, economics and common sense decree that some processes are best performed by outside contractors. This is referred to as a "make or buy policy" and will determine where work is performed.
- The work of the contractors is controlled to advantage through agreements and contracts.
Internal Growth through Diversification into other related products or services
Many small businesses can grow by diversifying into other related products or services. For example, an office stationery supplier might decide to add a range of computer consumables to its portfolio. This could result in existing customers now buying these items as well.
Diversification can occur in different forms, such as:
Before deciding on diversification, take the following actions:
It would be damaging if the customer orders are plentiful but the supply of the product or service is intermittent.
In early stages, diversification will rate highly in your risk assessment program, and in order to mitigate some of the risk, it is advisable to try to secure customer orders or commitments in advance of stepping up production.
Diversification can occur in different forms, such as:
- Selling similar or related new products to exisitng customers.
- Selling existing products into new markets, even overseas.
- Selling new products to new markets.
Before deciding on diversification, take the following actions:
- Thoroughly research both markets and customers for the new product or service.
- Decide on a clear development strategy.
- Do a trial run with a limited output of prototypes to test the market before committing to the new product or service.
- Ensure that the internal departments and outside suppliers can maintain a steady throughput to provide continuity.
It would be damaging if the customer orders are plentiful but the supply of the product or service is intermittent.
In early stages, diversification will rate highly in your risk assessment program, and in order to mitigate some of the risk, it is advisable to try to secure customer orders or commitments in advance of stepping up production.
Business strategy for growth
Business strategy is ... "....the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals."
This necessitates a thorough evaluation of a business to get a clear picture of its strengths, weaknesses, opportunities and threats (SWOT). This will provide important insights into the type of growth strategy that best suits the business for the immediate and long-term future.
INTERNAL GROWTH
The first thing to establish is whether you can increase your share of the market. To do this, you would have to take customers from your competitors or attract new customers. You have to understand your customer base and that of your competitors.
CUSTOMERS
Who are your existing customers?
Are there any that you ahve not yet targeted?
Are there any that no longer do business with you? Why?
Do any of them buy from your competitors? Why?
Do they have instant, alternative choices?
COMPETITORS
What are their strengths? Can you match them?
Have you lost customers to them?
What do they do better than you do?
OURSELVES
What is our sustainable competitive advantage?
What do we do that is better than our competitors?
What is our unique selling point?
How will growth affect our pricing, marketing and service levels?
Before increasing output by increasing the capacity of your processes, you need to ensure that there will be a market for your proposed additional producsts. Many companies have increased output in the anticipation that the market will follow, only to find that there is a downturn or that a competitor has already improved performance.
This necessitates a thorough evaluation of a business to get a clear picture of its strengths, weaknesses, opportunities and threats (SWOT). This will provide important insights into the type of growth strategy that best suits the business for the immediate and long-term future.
INTERNAL GROWTH
- Are there ways in which you can improve the efficiency of the business?
- The use of a system of statistical process control will show if your processes are working correctly.
- Could the quality of the product or service be improved?
- Adopting a system of Total Quality Management (TQM) may effect a change to your end product.
- Are costs as competitive as they can be?
- If these checks are carried out successfully, then it is reasonable to expect that the business will grow by its organic growth. This will make the business more competitive.
The first thing to establish is whether you can increase your share of the market. To do this, you would have to take customers from your competitors or attract new customers. You have to understand your customer base and that of your competitors.
CUSTOMERS
Who are your existing customers?
Are there any that you ahve not yet targeted?
Are there any that no longer do business with you? Why?
Do any of them buy from your competitors? Why?
Do they have instant, alternative choices?
COMPETITORS
What are their strengths? Can you match them?
Have you lost customers to them?
What do they do better than you do?
OURSELVES
What is our sustainable competitive advantage?
What do we do that is better than our competitors?
What is our unique selling point?
How will growth affect our pricing, marketing and service levels?
Before increasing output by increasing the capacity of your processes, you need to ensure that there will be a market for your proposed additional producsts. Many companies have increased output in the anticipation that the market will follow, only to find that there is a downturn or that a competitor has already improved performance.
Assess your options for growth in business
After you have completed a full assessment of your business in its current state and you feel confident that you have all departments and areas working efficiently and under control, it is time to look to the future.
Growth options can be divided into two categories, internal and external.
1. Internal growth or growth that can be achieved within your own business will involve
- What is your vision for the future?
- Does your business plan offer a realistic guide as to your future direction?
- Do you just want to consolidate your current position or do you want to find ways to make the business grow?
- Can you afford to do nothing?
- While you do nothing, your competitors will be growing and taking your market share - this will seriously damage your business's future.
- To ensure that your business remains a success, it is time to identify your options for growth.
Growth options can be divided into two categories, internal and external.
1. Internal growth or growth that can be achieved within your own business will involve
- increasing market share or
- diversification.
- by merging with or acquiring another company or
- by forming a partnership or joint venture with another business.
Gathering Information to create the budget
Once you have identified your objectives, you need to turn to the important process of gathering key information to enable you to create the budget.
ESTIMATING SALES AND REVENUE
As sales of products and services are the lifeblood of most companies, you will inevitably start with a projection of sales and revenue. This can be a tricky process because it involves guessing the future, but there are certain actions you can take to make a forecast easier.
The next part of your budget should include all the costs of operation involved in producing and delivering the product or service to customers. These are factors that need to be considered:
SPECIFIC PRODUCT COSTS
ONGOING COSTS
START-UP COSTS
CHALLENGING THE FIGURES
At this stage, you may feel confident about stating some figures (more typically expenditure because these are easier to predict) and more nervous about sales and profit figures, mainly because these are subject to
The following approaches may be helpful in allowing you to challenge the figures that you have initially compiled.
ESTIMATING SALES AND REVENUE
As sales of products and services are the lifeblood of most companies, you will inevitably start with a projection of sales and revenue. This can be a tricky process because it involves guessing the future, but there are certain actions you can take to make a forecast easier.
- USE PAST SALES
- DISTINGUISH BETWEEN PRODUCTS
- LOOK AT THE COMPETITION
- ASK SUPPLIERS
- READ SECTOR REPORTS
- STUDY INNOVATIVE PRODUCTS
- MONITOR CASH FLOW
ESTIMATING EXPENDITURE
The next part of your budget should include all the costs of operation involved in producing and delivering the product or service to customers. These are factors that need to be considered:
- DEFINE EXPENDITURE TYPES: 4 main types:-
SPECIFIC PRODUCT COSTS
ONGOING COSTS
START-UP COSTS
- DEFINE EXPENDITURE TIMING
- ESTIMATE PROFITS/LOSS
CHALLENGING THE FIGURES
At this stage, you may feel confident about stating some figures (more typically expenditure because these are easier to predict) and more nervous about sales and profit figures, mainly because these are subject to
- a number of variables such as the action of competitors or
- changes in the economy that you have not foreseen.
The following approaches may be helpful in allowing you to challenge the figures that you have initially compiled.
- "WHAT-IF" SCENARIOS: by working on the assumption that the final result is not as favourable to the company as you had hoped. To avoid becoming too negative, you could include two sets of figures, underlying which you place your initial set of projected figures.
- ZERO-BASED BUDGETING: the process whereby a company decides what target it wants to achieve, how this can be achieved, and what resources it needs to implement the result; also known as bottom-down budgeting.
- ACTIVITY-BASED COSTING: costing by activities that define any actions that a company takes regularly as part of its day-to-day operations.
Creating a cash budget
Planning for a final (commonly called master) budget will be incomplete without a cash budget. This will show how money will be mvoed to and from the business account to make it possible to finance the company's activities.
BENEFITS
1. PLANNING TOOL
A cash budget shows the cash effect of all plans made in the budget. If the cash flow is negative, the company knows it either
2. WARNING SIGNAL
A cash budget may also give management a sign of the potential problems that could emerge and gives them time to take action to avoid such problems.
An example of a cash budget
http://spreadsheets.google.com/pub?key=thlpxQ9A0KkLx27yOw9nvBQ&output=html
BENEFITS
1. PLANNING TOOL
A cash budget shows the cash effect of all plans made in the budget. If the cash flow is negative, the company knows it either
- has to put more pressure on debtors or
- seek further sources of finance.
2. WARNING SIGNAL
A cash budget may also give management a sign of the potential problems that could emerge and gives them time to take action to avoid such problems.
An example of a cash budget
http://spreadsheets.google.com/pub?key=thlpxQ9A0KkLx27yOw9nvBQ&output=html
Start-up Budget Objectives
For start-ups, it may be useful to try to answer the following set of questions to help you make some reaonable assumptions about your business and its early days of operating and trading:
- How many products/services do you expect to sell in the first year?
- Can you predict a rate of sales growth for the next three years?
- How will you price your products/services?
- What will be the cost of producing your product/service?
- What will your operating expenses be?
- How many employees do you intend to hire and how much will you pay them?
- Have you established whether your business will be a proprietorship, a partnership, or a corporatin? The tax consequences of each form will vary considerably.
- Will you be leasing/renting/buying an office? What will the costs be?
- How much finance will you need to raise? What is the interest rate on funds that you are borrowing?
- Will you sell on credit? Have you established what payment terms you will get from suppliers and what you will offer customers?
Market strategy: Moving from recovery to expansion
The cyclical run in the market remains firmly intact throughout 1H2010 on three counts below:
The present rally is now coming to 10 months from lows seen in March 2009.
Cyclicals are expected to deliver the strongest earnings rebound as end-demand and margin recovery kick in to accentuate the growth trajectory off a low base in 2009 where earnings were diluted by writeoffs and pre-emptive loss provisions.
Overweight stance maintained on the Glove sector, with buys on both Top Glove and Kossan
Despite meteoric share price appreciation for glove manufacturer stocks, valuation remains undemanding given robust earnings performance. At current share prices, both Top Glove and Kossan are trading at PE of 11x and 10x FY10F earnings, well below its respective peaks of 30x and 18x.
Solid earnings growth as supplanted by
Key risks include
Benny Chew
AmResearch
Published in the Edge Jan 18, 2010
- Market performance historically strongest when GDP accelerates
- Earnings-driven re-rating cycle never been shorter than 12 months from trough.
- Risk to earnings on upside, as economic growth accelerates.
The present rally is now coming to 10 months from lows seen in March 2009.
Cyclicals are expected to deliver the strongest earnings rebound as end-demand and margin recovery kick in to accentuate the growth trajectory off a low base in 2009 where earnings were diluted by writeoffs and pre-emptive loss provisions.
Overweight stance maintained on the Glove sector, with buys on both Top Glove and Kossan
Despite meteoric share price appreciation for glove manufacturer stocks, valuation remains undemanding given robust earnings performance. At current share prices, both Top Glove and Kossan are trading at PE of 11x and 10x FY10F earnings, well below its respective peaks of 30x and 18x.
Solid earnings growth as supplanted by
- capacity expansion, and
- positive newsflow
Key risks include
- a sudden surge in latex price,
- energy input costs or
- an unfavourable ringgit/US$ foregin exchange rate movement.
Benny Chew
AmResearch
Published in the Edge Jan 18, 2010
Monitoring the budget
After a budget has been written and approved, the task of monitoring the budget begins. Inevitably, actual events will produce results that vary from the budget. These are recommended steps to monitor the results.
1. SET A TIME PERIOD
With an annual budget, you will have to wait a couple of months after the end of the yar. However, most budgets allow for quarterly, if not monthly, observations based on monthly projections.
2. REGISTER ACTUAL RESULTS
The first step is to write down the results achieved by the company and compare them with projections. Any discrepancies are typically called variances. When the variances are over 10 percent, it is worth looking into the reasons.
3. CATEGORISE VARIANCES
It is easier to assess the variances that concern you by categorizing them into price, volume and timing.
4. ANALYSE VARIANCES
With each variance, ask what could have led to the miscalculation. The causes are usuallly budget errors, the result of poor preparation, or changes that result from external factors such as economic change.
5. TAKE CAUTIOUS ACTION
Sometimes it's better not to take swift action. Blaming staff for not forecasting an event, when in reality they had a few ways of predicting a result, can damage morale. Be cautious. If you can make amends, look at the expense and find out if there are ways of reducing overhead.
6. REVIEW TARGETS
Some variances may be the result of overly optimistic revenue projections. Were the sales targets unattainable? Study performance of competitors and analyze whether targets were realistic.
7. REVIEW PROCESS
You should review the way the budget was put together. Were the objectives set by top management in a top-down fashion? Were middle and lower ranking directors encouraged to provide their opinions on the company goals?
1. SET A TIME PERIOD
With an annual budget, you will have to wait a couple of months after the end of the yar. However, most budgets allow for quarterly, if not monthly, observations based on monthly projections.
2. REGISTER ACTUAL RESULTS
The first step is to write down the results achieved by the company and compare them with projections. Any discrepancies are typically called variances. When the variances are over 10 percent, it is worth looking into the reasons.
3. CATEGORISE VARIANCES
It is easier to assess the variances that concern you by categorizing them into price, volume and timing.
4. ANALYSE VARIANCES
With each variance, ask what could have led to the miscalculation. The causes are usuallly budget errors, the result of poor preparation, or changes that result from external factors such as economic change.
5. TAKE CAUTIOUS ACTION
Sometimes it's better not to take swift action. Blaming staff for not forecasting an event, when in reality they had a few ways of predicting a result, can damage morale. Be cautious. If you can make amends, look at the expense and find out if there are ways of reducing overhead.
6. REVIEW TARGETS
Some variances may be the result of overly optimistic revenue projections. Were the sales targets unattainable? Study performance of competitors and analyze whether targets were realistic.
7. REVIEW PROCESS
You should review the way the budget was put together. Were the objectives set by top management in a top-down fashion? Were middle and lower ranking directors encouraged to provide their opinions on the company goals?
Defining budget objectives
Budget are made primarily to help meet objectives.
As a result, the type of budget you devise will vary considerably depending on the ultimate purpose of the plan. The following steps will help you define your objectives:
1. UNDERSTAND YOUR COMPANY
Identify your company's Strength, Weaknesses, Opportunities and Threats ( a particular technique known as SWOT) can help you amass valuable facts that will help you identify necessary action to take:
2. LISTEN TO COMPANY SECTIONS
If you are a small company, it will be easier for you to identify the core strengths, weaknesses, opportunities, and threats but in a larger company, these may vary significantly.
3. SUMMARIZE CORE AIMS
Summaries of the core objectives of the company and the different departments, or mission statements, could include
4. SET FINANCIAL TARGETS
Make sure you have taken into account the financial targets of every department, including
As a result, the type of budget you devise will vary considerably depending on the ultimate purpose of the plan. The following steps will help you define your objectives:
1. UNDERSTAND YOUR COMPANY
Identify your company's Strength, Weaknesses, Opportunities and Threats ( a particular technique known as SWOT) can help you amass valuable facts that will help you identify necessary action to take:
- STRENGTH: What advantages does your company have over rivals?
- WEAKNESSES: Where is the company underperforming and what are competitors doing better and why?
- OPPORTUNITIES: Where are the biggest chances for growth?
- THREATS: What are the biggest obstacles facing you: for example, competition, or shortage of investment capital?
2. LISTEN TO COMPANY SECTIONS
If you are a small company, it will be easier for you to identify the core strengths, weaknesses, opportunities, and threats but in a larger company, these may vary significantly.
- You need to gather information from different deparments to ensure their needs are met by the budget.
- For instance, marketing and advertising may be understaffed, and this could negatively affect overall sales, no matter how much time you've put into improving the core product.
3. SUMMARIZE CORE AIMS
Summaries of the core objectives of the company and the different departments, or mission statements, could include
- "We are trying to increase revenue."
- "We want to raise market share by xx."
- "We need to focus on cutting costs."
- "We need to research new product lines."
4. SET FINANCIAL TARGETS
Make sure you have taken into account the financial targets of every department, including
- marketing and advertising
- purchasing/inventory
- personnel
- administration
- finance department
- sales
- customer service
TIMING OF A BUDGET
TIMING OF A BUDGET
1. There are no fixed time periods a budget should cover. The longest range budgets can cover a period of between three and five years, although the most typical period is one year, to coincide with the company's financial year. This is called a fixed budget.
2. Even an annual budget is typically split into quarterly or monthly statements to make the process more manageable and easier to follow. A fixed bduget that is regularly updated to keep up with rapid changes in the company's particular sector is sometimes called a rolling budget.
3. Some businesses budget on a 1-4 week cycle, but these are most effective when they work within a longer time framework.
4. For a one-year cycle, it is best to set the next budget at least three months before the end of the current budget. For a shorter-term budget (one month, for instance), the process should have started at least by the third week of the current budget.
1. There are no fixed time periods a budget should cover. The longest range budgets can cover a period of between three and five years, although the most typical period is one year, to coincide with the company's financial year. This is called a fixed budget.
2. Even an annual budget is typically split into quarterly or monthly statements to make the process more manageable and easier to follow. A fixed bduget that is regularly updated to keep up with rapid changes in the company's particular sector is sometimes called a rolling budget.
3. Some businesses budget on a 1-4 week cycle, but these are most effective when they work within a longer time framework.
4. For a one-year cycle, it is best to set the next budget at least three months before the end of the current budget. For a shorter-term budget (one month, for instance), the process should have started at least by the third week of the current budget.
Sunday, 17 January 2010
Why budget?
The key to successful financing of daily operations is to budget.
These are some of the key benefits of a well-planned budget:
1. ANTICIPATE PROBLEMS
The process of budgeting forces you to anticipate and prevent problems. It demands that you estimte how much capital you are going to need for your daily operations and how you will meet these financial obligations without facing a cash flow crisis.
2. PERSUADE BACKERS
With a budget that anticipates potential bottlenecks in your operations and delays in cash flows, you will be in a better position to make a case for a loan from your bank or investment fund.
3. MEASURE RESULTS
A budget or plan helps you keep score: effectively you are meeting your objectives because you have a concrete list of landmarks or targets against which you can measure results.
4. IDENTIFY PROBLEMS
Budgets try to create the most ideal scenario for your business to follow, but they can also throw up any potential challenges or obstacles that you might otherwise have ignored in your pursuit of preferred results.
5. IMPROVE DECISION MAKING
When you lay out a template of what the company can achieve and how much it will cost, you are in a better position to make some tricky decisions such as dropping a favourite project because the figures won't add up or to pursue a strategy that you had written off initially.
6. MOTIVATE STAFF
A budget helps staff to understand what direction the company is going and the parameters in which it is working. Workers can follow targets, such as sales figures or number of new customers recruited, and measure how well they are performing.
7. SAVE TIME
While many managers feel that the research and paperwork involved in preparing a budget can cause unnecessary delays to the core operations of the business, the opposite is in fact true. Lack of planning will inevitably lead to stalled projects while directors grapple with problems that could have been anticipated at an earlier stage.
8. CREATE STRATEGY
You may have a clear idea of what the business needs to achieve in the short term, but you may have overlooked how the company and the sector you are working in may change in 12 months' time. A budget can help develop a picture of the future and force you to implement relevant strategies to cope with any adverse conditions.
These are some of the key benefits of a well-planned budget:
- ANTICIPATE PROBLEMS
- PERSUADE BACKERS
- MEASURE RESULTS
- IDENTIFY PROBLEMS
- IMPROVE DECISION MAKING
- MOTIVATE STAFF
- SAVE TIME
- CREATE STRATEGY
1. ANTICIPATE PROBLEMS
The process of budgeting forces you to anticipate and prevent problems. It demands that you estimte how much capital you are going to need for your daily operations and how you will meet these financial obligations without facing a cash flow crisis.
2. PERSUADE BACKERS
With a budget that anticipates potential bottlenecks in your operations and delays in cash flows, you will be in a better position to make a case for a loan from your bank or investment fund.
3. MEASURE RESULTS
A budget or plan helps you keep score: effectively you are meeting your objectives because you have a concrete list of landmarks or targets against which you can measure results.
4. IDENTIFY PROBLEMS
Budgets try to create the most ideal scenario for your business to follow, but they can also throw up any potential challenges or obstacles that you might otherwise have ignored in your pursuit of preferred results.
5. IMPROVE DECISION MAKING
When you lay out a template of what the company can achieve and how much it will cost, you are in a better position to make some tricky decisions such as dropping a favourite project because the figures won't add up or to pursue a strategy that you had written off initially.
6. MOTIVATE STAFF
A budget helps staff to understand what direction the company is going and the parameters in which it is working. Workers can follow targets, such as sales figures or number of new customers recruited, and measure how well they are performing.
7. SAVE TIME
While many managers feel that the research and paperwork involved in preparing a budget can cause unnecessary delays to the core operations of the business, the opposite is in fact true. Lack of planning will inevitably lead to stalled projects while directors grapple with problems that could have been anticipated at an earlier stage.
8. CREATE STRATEGY
You may have a clear idea of what the business needs to achieve in the short term, but you may have overlooked how the company and the sector you are working in may change in 12 months' time. A budget can help develop a picture of the future and force you to implement relevant strategies to cope with any adverse conditions.
What is a budget?
A budget is a tool for converting plans into reality.
It covers the process of
A budget should include the following components to be effective:
It covers the process of
- defining objectives;
- forecasting expectations of sales, profits, and expenses of every sort;
- deciding what actions will best help the company achieve these targets;
- determining how much money will be needed to support these actions; and,
- finally, providing a way to monitor whether the actions chosen are the most appropriate at the current time, or whether they need to be modified in some way.,
A budget should include the following components to be effective:
- Clearly defined objectives, both short- and long-term.
- Estimates of revenue amounts.
- An analysis of revenue payments: how far do they lag behind payment of expenses?
- Estimates of expense amounts and timing of expense payments.
- A list of ongoing direct and indirect costs.
- A cash budget to predict cash flow over time.
- Procedures to monitor the progress of the budget.
Budgeting for Future Success
Why budget?
Budgeting forces companies to anticpate and prevent problems, create strategy, measure results, motivate staff, and save time.
What is it?
A budget covers the process of :
There are no fixed time periods a budget should cover. The longest range budgets can cover a period of between three and five years. A more typical period is one year, to coincide with the company's financial year.
How should a budget be created?
DEFINE OBJECTIVES by
GATHERING INFORMATION by
CREATE A CASH BUDGET. No final (or master) budget can be complete without a cash budget that will
How should a budget be monitored?
SET A TIME PERIOD. Although some companies operate on an annual budget, most allow for quarterly, if not monthly, observations.
REGISTER ACTUAL RESULTS. Write down the results achieved by the company and compare them with projections.
CATEGORIZE VARIANCES. Divide into price, volume, and timing.
ANALYZE VARIANCES. Ask yourself in each of the categories, what could have led to the miscalculation.
REVIEW PROCESS. Finally, review the way the budget was put together. It may be that the objectives were unrealistic or not defined specifically enough.
Budgeting forces companies to anticpate and prevent problems, create strategy, measure results, motivate staff, and save time.
What is it?
A budget covers the process of :
- defining objectives;
- forecasting expectations of sales, profits, and expenses of every sort;
- deciding what actions will best help the company achieve these targets;
- deciding how much money will be needed to support these actions; and
- finally, providing a way to monitor whether the actions chosen are appropriate or whether they need to be modified.
There are no fixed time periods a budget should cover. The longest range budgets can cover a period of between three and five years. A more typical period is one year, to coincide with the company's financial year.
How should a budget be created?
DEFINE OBJECTIVES by
- understanding your company,
- listening to company sections,
- summarizing core aims,
- setting financial targets, and
- defining strart-up objectives.
GATHERING INFORMATION by
- estimating sales and revenue,
- estimating expenditure,
- estimating profits/loss, and
- challenging the figures.
CREATE A CASH BUDGET. No final (or master) budget can be complete without a cash budget that will
- show how money will be moved to and from the business bank account.
How should a budget be monitored?
SET A TIME PERIOD. Although some companies operate on an annual budget, most allow for quarterly, if not monthly, observations.
REGISTER ACTUAL RESULTS. Write down the results achieved by the company and compare them with projections.
CATEGORIZE VARIANCES. Divide into price, volume, and timing.
ANALYZE VARIANCES. Ask yourself in each of the categories, what could have led to the miscalculation.
REVIEW PROCESS. Finally, review the way the budget was put together. It may be that the objectives were unrealistic or not defined specifically enough.
Saturday, 16 January 2010
Facing threats from market forces
Consider a small-town five-and-dime store that saw its business start to erode when the first Wal-Mart moved to town 40 years ago. Think of the 75 year old family bookstore that started to see fewer customers when the first Barnes & Noble superstore opened at a nearby shopping center.
Even for multigenerational businesses, times change. Most importantly, the players change, too. All business owners must keep valuation in the back of their minds when they sense that a game-changing company has moved into their marketplace.
But competitors aren't the only market forces that change a company's fortunes. Look at what outsourcing and more modern technologies have done to established companies. If they haven't kept up, they have three choices:
Many business owners may not see the end coming, whereas the best valuation professionals do. Valuation is not all about that final dollar figure; it's about measuring a business's short- and long-term viability as well. A valuation expert with knowledge of your industry - or access to outsider experts who have that knowledge - is as much a central business advisor as your accountant or attorney.
Even for multigenerational businesses, times change. Most importantly, the players change, too. All business owners must keep valuation in the back of their minds when they sense that a game-changing company has moved into their marketplace.
But competitors aren't the only market forces that change a company's fortunes. Look at what outsourcing and more modern technologies have done to established companies. If they haven't kept up, they have three choices:
- modernise (often though for smaller companies to afford),
- put themselves up for sale (to a market that may not be ready to buy), or
- simply fade away.
Many business owners may not see the end coming, whereas the best valuation professionals do. Valuation is not all about that final dollar figure; it's about measuring a business's short- and long-term viability as well. A valuation expert with knowledge of your industry - or access to outsider experts who have that knowledge - is as much a central business advisor as your accountant or attorney.
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