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

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

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?

 

• 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.

 

http://www.businessinsider.com/jim-chanos-china-is-headed-for-a-huge-crash-2009-11

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.

The "go-it-alone" option for growth

One option for growth that falls between internal and external growth is the go-it-alone option.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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:

1. Selling similar or related new products to exisitng customers.
2. Selling existing products into new markets, even overseas.
3. Selling new products to new markets.

Before deciding on diversification, take the following actions:

1. Thoroughly research both markets and customers for the new product or service.
2. Decide on a clear development strategy.
3. Do a trial run with a limited output of prototypes to test the market before committing to the new product or service.
4. 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

1. Are there ways in which you can improve the efficiency of the business? 
2. The use of a system of statistical process control will show if your processes are working correctly.
3. Could the quality of the product or service be improved?
4. Adopting a system of Total Quality Management (TQM) may effect a change to your end product.
5. Are costs as competitive as they can be?
6. 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.

1. What is your vision for the future?
2. Does your business plan offer a realistic guide as to your future direction?
3. Do you just want to consolidate your current position or do you want to find ways to make the business grow?

Starting a business can involve lots of hard work, courageous decisions, and not a few risks, and it may seem a good idea to just sit back, relax, and enjoy the benefits of all your efforts.

1. Can you afford to do nothing?
2. While you do nothing, your competitors will be growing and taking your market share - this will seriously damage your business's future.
3. 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.

2.  External growth will involve joining forces with another business, either

• 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. 

• 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:-

CAPITAL COSTS
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

• has to put more pressure on debtors or
• seek further sources of finance. 

For instance, disbursements are lumped together, and you need to spread your payments to creditors more evenly throughout the year.  This will lower bank credit and interest costs. 

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:

1. How many products/services do you expect to sell in the first year?
2. Can you predict a rate of sales growth for the next three years?
3. How will you price your products/services?
4. What will be the cost of producing your product/service?
5. What will your operating expenses be?
6. How many employees do you intend to hire and how much will you pay them?
7. Have you established whether your business will be a proprietorship, a partnership, or a corporatin?  The tax consequences of each form will vary considerably.
8. Will you be leasing/renting/buying an office?  What will the costs be?
9. How much finance will you need to raise?  What is the interest rate on funds that you are borrowing?
10. 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:

• 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.

Our economist expects GDP to expand by a robust 5.3% in 1Q10, and by 4.2% in 2Q10.  The macro growth momentum, however, is expected to decelerate, with GDP expanding by only 2.5% in 3Q10 and 2.1% in 4Q10 as the low base effect tapers off moving towards the second-half of the year.

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

should lead to further expansion in PE multiples.

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?

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:

• 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.