A lot of this M&A frenzy was financed by debt. Consequently, the balance sheets of many companies deteriorated rapidly. Doubts, if the exuberant profit expectations would be fulfilled, and concerns about company leverage initiated the decline in equity markets. The bubble burst when investors realized that they were not compensated for the downside risks associated with investing in overvaluated tech companies. When a few of the TMT newcomers began to struggle, investors had to acknowledge that there was no free money to be made in TMT IPOs. Highly leveraged balance sheets caused serious problems for some of the brightest stars of the equity hype, and for some of the big companies. Actually much of the equity bubble was concentrated on large cap companies.
If the exuberant loans expectations would be fulfilled,
What were you thinking when you bought that fund?
Seeking help, you may approach a broker to recommend funds. Unfortunately, regret is likely to follow. A broker’s main interest is in loads and other commissions from frequent mutual fund sales. Loads of 5.75 percent are common. On a $10,000 investment, you are paying $575. You can buy an entire financial plan from a fee-only financial planner for less. If over the years you buy $100,000 of mutual funds, you will pay loads of $5,750. The sum of $5,750 buys several lifetimes of financial plans complete with tax savings ideas, estate planning tips, and zero-load mutual fund picks. However, unless you ask specifically and insist on an answer, you will not know the dollar amount you are paying for the privilege of buying a mediocre fund. Loads can be paid on purchase of a fund (a front-end load) or on the
sale of the fund (a back-end load) or both. A broker will use confusion and complexity against you.
The feelings are not mutual
Overwhelmed by the prospect of buying individual stocks, you may turn to mutual funds. Mutual funds are marketed as a simple way to own a diversified portfolio managed by a professional. Unfortunately, mutual funds are confusing and complex.
Confusion is rampant. There are as many mutual funds as there are individual stocks. Just when you think you have a fund picked out, the fund manager changes, the investment style is altered, and a load is imposed to purchase the former no-load fund. There are hundreds of styles and types of funds: micro cap, small cap, medium cap, and large cap, value, growth, blend, income, leveraged, unleveraged, closed-end, open-end, and so on.
Taxes are a mess. Those who buy the fund the day before the tax date have to pay taxes on capital gains that occurred before they owned the fund. Those who sell that day avoid the taxes even though they owned the fund while the gains occurred. Those who buy a day after the tax date have no taxes but a different cost basis even though they paid the same price for shares as those who bought before. Multiple systems can be used to declare your taxes and adjust your basis when you sell shares.
Calculating returns and comparing returns to other funds is equally complex. Unless you bought on January 1 and reinvested all dividends and capital gains, your returns and those in fund reports, the paper, and the magazines will be different. Ask yourself: How much complexity and confusion am I comfortable with? On these two criteria alone, mutual funds are outside the comfort zone of many investors.
Money managers dance better for a price
A money manager is not a psychologist for the difficult years. A money manager’s primary interest is in keeping your account, not helping you with your emotions. When the market and your account crash, a money manager is unlikely to admit his responsibility in loading up on overpriced stocks at the wrong time. More likely, he will attribute the loss to forces over which he is powerless and recommend you hold on for the certain recovery. Though recovery is never certain, and often takes decades, the money manager will be paid during the wait. Or the money manager might recommend a shift into less volatile bonds to quell your nerves. Typically, bonds require little research and monitoring for the money manager, and often they are chosen just as bond prices have peaked.
Your biggest liability working with a money manager is your sense of loyalty. You must be willing to cut and run when it becomes apparent that your money manager is not performing. Your ego also gets the best of you here. Beginning a conversation with “My money manager says…” indicates a degree of wealth and sophistication. “My index fund…” will only elicit boredom. Denial is not your friend either. You must analyze what your money manager is doing, get second opinions, and question him directly.
People pleasers will have difficulty here.
Nothing wrong with investment bigamy
This is a long-term process and you will be asked to repeat the steps outlined in Chapter 9 at least annually as your financial circumstances change over the years. However, if you have thoroughly worked the program outlined in this book and continue to be unhappy with your investments, do not be discouraged. The program in this book will teach you who you are in relation to investments, how to accept yourself as that person, and what investments work for that person. If nothing works for the person you discover yourself to be or if you cannot discover yourself in this process, then it is necessary to change yourself. Sometimes your investments are not wrong; instead, you need a new way to look at your investments and you need to give yourself the gift of getting those new glasses.
Accounts Payable: What is “Playing the floats” technique
Also known as predicting cash outflow, the technique of playing the floats allows companies to predict the time it takes vendors to receive and process payments as a way to capitalize on company cash. As long as the company operates ethically, it won’t break any laws or get into any financial hot water.
Most businesses have three float options to consider: the mail float (between the time the accounting department posts payment and the time the vendor receives it), the vendor’s internal processing float, and the bank system float.
Have you ever been in a situation when the rent was due but your bank account was just a little low, so you sent out a check to pay your rent, figuring that you could get to the bank and deposit your paycheck a day or two later, before the bank processed the check? If so, then you were playing the float. What you might have done out of desperation, businesses do as a strategy for managing cash flow.
Playing the float can maximize cash disbursement, but those making that decision must be aware of possible changes that can affect that float, including a change in financial institutions or electronic payment patterns. The float could disappear overnight and your company may not realize it until it’s too late.
Trade Discounts Can Add Up!
One of the untapped income sources for many companies is the trade discount offered for prompt payments. Many suppliers offer anywhere from a one percent to three percent discount if the invoice is paid within 10 days, as opposed the usual net 30 days and beyond. Use the following equation to predict your trade discount:
discount income = discount percent / (due date – discount date) x 360
Let’s assume our example company that receives a two percent discount on payments made within 10 days, rather than by the 45-day average established through weighted average invoice aging. That discount equation would be as follows:
2% / (45 – 10) x 360 = 20.5%
Unless the company’s cost of funds or interest earnings match or exceed 20.5 percent, the company gains more financial value if it pays within the trade discount period.
Many companies curry favor with suppliers by paying either prior to the due date or as an exception to their own weighted average. A company that does this should make sure the vendors know the company is making a policy exception and, if appropriate, why it’s doing so. If the company chooses to reward vendors with cash for some reason, the vendors should know why.
Managing Disbursement: Where the Accounts Payable System Earns Its Keep – part 2
A good ACCOUNTS PAYABLE system can be used to forecast a payment schedule based on cash availability, anticipated income, and past policy practices. Then line up vendors in payment order, according to preference. Some will grumble, but the smart ones know they have little choice. If they don’t play along, it will take that much longer to be paid.
Vendors unhappy with your company’s payment policies won’t be vendors very long. Give preferred suppliers priority status and reward them with more prompt payment. They will likely return the favor with better service and more understanding if your company really gets into a bind.
Managing Disbursement: Where the Accounts Payable System Earns Its Keep – part 1
The purpose of ACCOUNTS PAYABLE is to keep track of your company’s payables in an orderly fashion. But the advantage is that it enables a company to manage cash disbursement, allowing better control of cash flow and maximizing the value of funds to the organization.
As a rule of thumb, vendors meeting a company’s most critical needs—whether it’s raw materials or the retail items that are most popular or allow the highest markup—are paid first. Others follow as funds become available.
Sometimes cash flow is controlled out of necessity. There may be a snag in production or a liquidity problem that will require withholding or reducing some payments until the crisis is over. If that happens, the situation should be explained calmly and honestly to vendors. Chances are they’ve all been there and understand.
They will most probably want an estimated payment date. That’s where the ACCOUNTS PAYABLE system comes in handy.
Keeping Payables on Track
One of the keys to effective ACCOUNTS PAYABLE management is keeping track of disbursements to make sure they are in line with the company’s payment policy. Consider it the flip side of collections and remember that better tracking of payables results in better management of cash flow and reserves, even if only on a minor basis.
Earlier we suggested timely and regular payments. Let’s amend that recommendation slightly to say that payables should turn over as quickly as they need to in terms of the vendor agreement, company policy, or both. If cash is released too quickly, the company may not be taking full advantage of the trade credits offered by vendors. Also, that money, if invested, could be earning interest a little longer.
Need a benchmark? Your accounting department may want to try and match payables turnover with receivables turnover whenever possible. If the average collection time on receivables is 30 days (you wish!), then the average payables turnover time also should be 30 days. Under that scenario, the firm is using its suppliers to underwrite inventory. That means it can keep less cash on reserve, freeing it up for other, more important things.
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