The TBTF (Too Big to Fail) Landscape

The TBTF (Too Big to Fail) Landscape

Throughout the 2008 crisis, governments around the world came to the aid of the ailing financial sector in various ways. Bottom line is that the banking industry received massive public support with some banks receiving government funding or becoming nationalized.

However, scarce capital relative to bank risk increased the depth of the financial crisis and the cost of government involvement. Hence, reforms passed under the Dodd-Frank Act are designed to reduce the probability of too-big-to-fail (TBTF) bank failure by increasing minimum capital levels. While that makes sense in theory, is this working in practice? In other words, should excessively large banks be prevented from failing for the public good?

Big Banks: Too Big?

The Dodd-Frank Act was designed to avert a repeat of the 2008 crisis and prevent governments from having to rescue big banks. However, the largest banks in the U.S. are bigger today than they were prior to the meltdown. Five banks (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs) held more than $ 8.5 trillion in assets at the end of 2011 compared to $6 trillion in 2006.

There is a legitimate concern that Dodd-Frank Act legislation has not solved the problem of putting taxpayer money on the hook for TBTF banks.

The Dodd - Frank Act Legislation

Title II of the Dodd-Frank Act created the Orderly Liquidation Authority. Under this special process, the Federal Deposit Insurance Corporation (FDIC) has the power to bail out a large financial institution under crisis.

To minimize widespread consequences, the FDIC will allocate a selected portion of the firm's asset and liabilities to a new institution, allowing some creditors to receive higher payments than under a bankruptcy or a bailout.

However, bailing out some creditors can have a negative effect that actually increases the chance of bank failure. Generally, creditors administer risk undertaken by a financial firm by cutting their exposure. A bailout will put them in a comfort zone and gives them less reason to be cautious.

Moreover, the shareholders in a failing bank, unlike creditors bailed out under Dodd-Frank, will not be protected, causing uncertainty throughout the bailout process.

The Steps Ahead

Industry experts are proposing various methods to ensure the stability of the industry and address the problem of TBTF.

Restructure big banks: According to Richard Fisher, president of Federal Reserve Bank of Dallas, the corporate entities of large financial institutions should be reorganized to ensure a speedy bankruptcy process. Smaller banking entities that are more in line with the 99.8 percent of banks in the U.S. are easier to regulate.

Expose big bank assets: U.S. accounting principles allow banks to cover up derivatives trading: U.S. banks hide about $5 trillion in derivatives assets in their balance sheets. Industry pundits believe U.S. banks should adopt International Financial Reporting Standards (IFRS) t0 reveal assets held in derivatives. Moreover, following IFRS guidelines will force banks to disclose their true book to market ratios. True book-to-market-value ratios will be less than 1.0, in a sense restructuring all big banks into small operational units.

Expose the use of special purpose entities: The special purpose entity--an accounting device engaged by Enron to hide its debts--is finding its place again. Wells Fargo's "variable interest entities" had total assets of about $1.5 trillion by the end of 2011 as cited by Forbes. Industry experts demand transparency in these activities.

Examine banks' role in the economy: The key function of banks is to increase opportunities and condense the risk for citizens and enterprises. The monetary help banks receive from the Federal Reserve has no positive impact on the economy. Banks are doing well and getting bigger, but the real economy is struggling. Efforts should be made to monitor bank activities devoted to uplifting the economy.

Expose "bad profits" practices: In their quest for profits, a few banks began practicing what is commonly known as "bad profit practice" such as rigging LIBOR rates, mistreatment of foreclosures, tax dodging activities, and money laundering. New regulations designed by the Federal Reserve and other governing bodies should make industry reporting more transparent and make it easier to keep a close eye on such practices and thus, track the impact of bank practices on the economy.

The Future

The Dodd-Frank Act includes procedures to wind down troubled institutions. But in order for Dodd-Frank to succeed, regulators must take stern steps against large, politically interconnected, and powerful companies. The Federal Reserve must encourage the financial sector to provide transparency. If banks fulfill the purpose of their existence in the economy, then profits will follow.

High Loan To Value Mortgages Remain Elusive

High Loan To Value Mortgages Remain Elusive

Over the last six years, since the beginning of the banking crisis, the number of deals offered to high value mortgage clients has decreased. As lenders have fallen by the wayside and those that remain have become more reluctant to lend, the choice of large mortgage deals of one million pounds or more has fallen sharply.

However, research has found one area which has benefited over that time. High deposit mortgages, for people looking to borrow less than 60 per cent of their home's value, have increased significantly as lenders compete for this low-risk business.

Research from financial analysts Moneyfacts has discovered that the number of mortgage products in the 60 per cent 'loan to value' bracket has rocketed in recent years. Prior to the banking crisis high 'loan to value' mortgages of 90 per cent or more were the norm, as were high income multiples but such mortgage deals are now almost non-existent. Now that 60 per cent 'loan to value' mortgages are the norm the first time buyer market has stagnated but banks and other lenders remain keen to secure high deposit mortgage business.

While mortgage deals for first time buyers and at higher loan to values are still hard to come by, there are plenty of deals if you have a large depositof 40 per cent or more. The low risk nature of this type of borrowing has led many lenders to offer superb rates in order to attract good quality large mortgage business.

As well as high deposit mortgage deals from mainstream lenders, there are also countless more products available through private banks in the UK and overseas. High value mortgage clients who need over £500,000 at a low loan to value have a superb choice of deals right now. The Government's Funding for Lending scheme has been a contributing factor to the increased choice of deals.

However, some experts believe the government initiative is not targeting the right type of borrower; those looking for a 90 per cent loan to value, which the initiative was designed to help. The scheme effectively has just widened the choice of deals for those who already had a choice.

If you're struggling to agree a home loan, you're not alone. Banks and other lending institutions are focusing more than ever on profitable clients only and even some higher net-worth clients are feeling the effects. And, it's not just the large high street banks and building societies that are limiting the deals available. Privatebanks, which have traditionally prided themselves on establishing personal relationships with their customers, have begun to weed out the less profitable clients.

High 'loan to value' mortgages for high net worth finance clients arealso harder to obtain as some smaller banks are ceasing lending for such home loans. Fortunately, there are still some private banks with an appetite to lend to large mortgage clients and a number of London mortgage brokers have developed relationships with private banks in the UK and overseas who are still keen to lend to high net worth individuals, oftenwith extremely competitive pricing.

Situations When A Financial Advisor Will Help With Retirement Savings

Situations When A Financial Advisor Will Help With Retirement Savings

Nearly 6 million people contribute to a retirement savings plan each year. This is only 24 percent of the eligible population of the country. The average contribution towards retirement savings is less than 4 percent of the disposable income of a household. This is placing many people in a position where it will be necessary to work beyond the traditional retirement age in order pay bills. One solution is to hire a financial advisor to help create a more structured and realistic plan for retirement. There are several reasons to hire an advisor.

No Financial Experience

Even the most well-educated professionals often have a limited amount of knowledge about the financial markets. Understanding the constantly changing world of finance is something that is best left to individuals who have dedicated years to education and learning within the industry. It is always a good choice to turn to a financial planner when personal knowledge of the markets, economics and finance is limited. Making the wrong decisions could have devastating repercussions a decade or more in the future when it is too late to consult an advisor.

Late Start

Many people have trouble starting to save as early as most experts suggest. Some individuals go through long periods of underemployment that make it impossible to save for retirement. Starting to save late in life is a very good reason to contact a financial advisor. The advisor will look at the reality of the situation and establish realistic goals that will allow a comfortable retirement later. The advisor might also suggest using more aggressive investment options that have the potential to erase some of the years without savings.

Complex Assets

Some individuals who are planning for retirement have a very complex collection of assets. This could mean stock options with several employers combined with retirement accounts and tax-deferred investment vehicles. Some people might have to deal with large estates or commitments to businesses established by family members. A financial planner will take the time to sort through complex financial situations and discover exactly how the assets will affect retirement. A planner also has the knowledge to prevent different types of investments and vehicles from becoming a tax burden because of conflicts and missed opportunities.

Previous Mistakes

Financial mistakes do occur on a regular basis. Many people attempt to manage savings for retirement personally at some point. A financial advisor should be hired if a large financial mistake has occurred. The mistake might involve moving accounts and losing money to taxes, losing money because of a poorly balanced portfolio or making poor savings choices that have minimized returns. These mistakes can derail retirement plans. An advisor will have the skill to navigate out of bad investments and could potentially restore the savings over time.

Life Changes

Dramatic changes happen to everyone at some point during life. This could mean a divorce, a death or a bankruptcy. It can be difficult to recover after a life-changing event. Allowing retirement savings to lapse or go unmanaged for a long period after an event can affect returns. A financial advisor will have the objectivity and time to sort through retirement plans and protect the money that is already saved.

Top 3 Reasons Why Virtual Accounting Is The Way To Go

Top 3 Reasons Why Virtual Accounting Is The Way To Go

This day and age we are living in a technology society. Everything is online - banking, photos, shopping, music, TV shows and even movies. Yet at the same time, I am amazed at how many people don't want to do things online. Are they going to stay in the paper age forever?

Even with accounting. People will put all of their business online but not their accounting records. They will share picture of kids, post check-in's all over town and tell the whole world everything they did and ate for the day. Yet they won't use online banking or a cloud based software - systems that are way more protected than these social media accounts. And why is that? It's fear of the unknown and trust me I get it. But if you find a reputable company that has all the proper security controls in place, as most companies do, you should have nothing to worry about. Just make sure the company has an emergency plan. This is a plan that will keep your data safe and accessible in the event of an emergency. Often times there is a backup of all the data on a completely different server in a completely different city and state.

Here are three more reasons why you should give virtual accounting a try.

1. Accessible from anywhere. Virtual accounting gives you the ability to access your files from anywhere, whether you're at home, work or on travel. It will save you time and money. It also allows your accountant or CPA to access your files remotely. This helps cut don't travel expenses that you would typically pay as part of your fee. You can also use scan, mail or use cloud services to store and send documents that your accountant.

2. Immediate software updates. Using a virtual system that hosts your main software package, will save you money. You don't have to pay the premium cost of purchasing the software up front. And as a result you never have to worry about software updates. The hosting company will take care of that for you.

3. Safe and secure. Despite what you hear or read in the media, offsite servers and cloud services are safe and secure. Most companies that I have been in contact with use a 256 bit encryption, which is the same security used by bankers. They also provide automatic dual site back-ups that provide that extra security in knowing you can sill access your data in the event of an emergency event.

PDQ Machines Use in Retailing

PDQ Machines Use in Retailing

PDQ machines are used to process card payment transactions at the point of sale. The name is an acronym for the ability to Process Data Quickly. For a number of different reasons PDQ machines have become extremely popular in the last few years, and they are probably the most common device used for processing card payments in the retail environment.

Before the Chip & Pin system was introduced, PDQ machines were used to read data that was embedded in the magnetic strip on the back of the payment cards when they were swiped through the card-reader. The POS included connection to the cash registers, where the items and total transactions values were input. The system also includes the option for manual input of the transaction value. The PDQ machines were then involved with the verification and authorization process, and, in the case of credit card payment transactions, purchasers were asked to sign slips in order to match signatures on the back of the credit cards.

The recently introduced Chip & Pin system was developed to reduce the occurrences of payment card frauds that according to recent reports, total billions annually. Each payment card is assigned a 4 digit PIN which should be entered into the machines as another layer of verification. The cards now include embedded computer chips, that are replacing the magnetic strips on the backs of the cards. The cards are inserted into the machine, and are read in almost the same manner that the magnetic strips were read, but the data storage is now in a different form of integrated circuits and contact with the reader is needed.

Signatures are no longer needed for authorization, as the transactions are completed by the PDQ machines. There may no longer be any input required from the retailer, and the machines are now being used in self-serve units.

It is also possible to use the machines without the card-holder being physically present during the transaction. Retailers or merchants still have the option of manually entering card information such as the card number, during telephone sales, but in place of the assigned PIN, alternative information such addresses or personal security codes, may be requested. The duration of the process may increase slightly when compared to the input of Personal Identification Number.

Retailers are required to pay some fees that are associated with the use of PDQ machines. Processing fees are included with all credit card transactions, and these fees are usually higher than those of other payment cards. However there continues to be dramatic increases in both the volumes and the number of electronic payments, and it is hoped that economies of scale, with much higher volumes, can contribute to lower processing costs.

The machines are available in both the wireless and wired versions. The wireless version is most suitable for mobile commerce, when payments can be processed, anywhere, and at any time, while retailer stores continue to use the wired version.

For the merchant or the retail outlet, not having a method to process credit card payments will result in lost sales as most consumers may often wish to avail themselves of the opportunities and conveniences to pay with payment cards.

The Use of Forex Trading Indicators

The Use of Forex Trading Indicators

Forex trading Indicators, are an important part of technical analysis, in this article we will introduce tools which when applied properly can liberate us from having to constantly observe currency rate fluctuations.

Momentum Indicators or Trend Following

Overall, there are two types of indicators. First there are the so-called indicators of "momentum" or "trend following."These indicators are rather unique as they give you delayed signals. More clearly, the exchange rate will begin its movement and then the indicator will give you the signal. On the other hand, indicators called "oscillators", provide you with signals in advance, meaning before rates begin their movement.

Why are there indicators giving delayed signals, while others giving in advance?

The Difference Between Oscillators and Trending Indicators

With experience you quickly realize that oscillators give many false signals. However, when the signal is correct, you the chances of generate substantial gains are very high. Contrary to this the trend following indicators will give fewer false signals; however the gains will be smaller, since the current trend has already announced before the onset of the signal. Let us look at these different types of indicators in detail.

The Oscillators

We must first understand what these indicators actually want to show us. You should know that through the incoherent movements exposed by graphics, there are two types of configurations that should interest us. The first is the trend, i.e. the exchange rate is clearly moving in one direction, for this reason we employ trend following indicators. The second is the one that could be described as cyclical, i.e. that prices move broadly in ranks without a clear trend. In this situation the oscillators will give optimal signals.

The basic principle of oscillators is that they consider that the exchange rates have a point of balance. When the exchange rate is too far away from that point they trace it to return to this balance.

Trending Indicators Contrary to the oscillators, these indicators are used during clear trend phases. It is not helpful to rely on such indicators in market range conditions. Indeed we must first understand what the purpose of these indicators is. They are typically used to filter out the movements and locate s trend. It is common practice to utilize them together with another filter to a obtain an entry point.

The best known of indicators to monitor trends continues to be the moving average (also called rolling average in statistics). This indicator is applied directly to the exchange rate depending on the time and allows to know the basic movement of the market.

In conclusion, we need to stress the fact that that there are really no type of indicator which is better than the other. Oscillators are very different to trend following indicators and they definitely each have their strengths and weaknesses. Therefore, we can compare oscillators between them, but it is useless to compare them with momentum indicators, it would be like comparing chart patterns with the Fibonacci retracement.

Reasons Why Risk Control And Cutting Losses Are Important To Market
Trend Investors

Reasons Why Risk Control And Cutting Losses Are Important To Market Trend Investors

It is truly surprising how stocks can move so fast. Before a person has time to think, a stock can change substantially. This is in large part a factor as to why complaints surrounding the viability of stock investing is usually related to the heavy losses that can be suffered in the span of a singe day. For this reason, one of the most important things a trader can learn early is risk management and the science of learning how to cut losses. This should be a part of all investing strategies, but these are a few specific reasons why risk control and cutting losses are important to a market trend investor.

Market Trends Investors Trade According to Market Trends

As straightforward as that can appear, really consider that. Because the philosophy of this investing plan is based around using indicators to show the direction of stocks, a market investor should avoid trading against the market trend at all costs. However staying in a bad trade despite all the signs is doing exactly that. Sometimes information is missed, sometimes indicators can give false signs. Depending on your position the rise or fall of a stock can result in losses initially. There are times where this is okay but if the gap gets to be too much, just cut losses before it becomes impossible to make up the difference.

Stop-losses were invented specifically to safeguard against traders losing too much money. What type of stop-loss to use depends entirely on the trade you're taking part in. But the basics are that the guaranteed stop-loss will place an absolute hold on the losses you are able to sustain. The trailing stop-loss will assure you of your profits while protecting from loss as it moves up or down according to your profits. Some brokers charge extra for the use of certain stop-losses so make sure that you read up on what your broker does before trying to use one.

Market Trend Investors Cannot Trade Without Limits

When success and trading are discussed, it is often about the trades that make overnight millionaires. What many do not talk about is the discipline that traders need in order to be successful every year. Letting profitable transactions serve their purpose takes as much discipline as does cutting losses when investments are going bad. The amount of losses that you can afford will depend on how much you have to start. Set your absolute limit there or at whatever amount you can't afford to lose. Being aware of where your limit is can make it easier to quit a trade when it gets out of hand. You will have to resist the temptation to hold on. Trading is about doing transactions that profit you.

Market Trend Investor Cannot Linger

When a transaction is not going anywhere good and every sign and indicator is telling you that there is no change coming, don't wait until you're facing ruin to get out. In heeding to the natural human desire to believe in one's own abilities, a trader can lose a lot of money fighting losing battles. A market trend investor needs to be flexible and to not take individual trades personally. Market trends move with too much speed for traders to stick to one trade at the expense of all others. Should the stock begin showing itself alive, it is possible to get back into trades.

People can and sometimes do make incredible sums on the stock market. Because of this it is easy to get lured into the trap of trying to complete the most profitable trades. The reality for most successful traders is that several profitable trades in a day are more valuable than one massive victory. Trend investors do not have the resources or time to stay fixated on a stock that is costing the more money. A home run trade means nothing when the deficits are too much to make the difference.

Nobody wants to be seen as someone who lost everything on the stock market. For this reason very few people are willing to talk about why risk control and cutting losses are important to a market trend investor. The thing is, regardless of what people want to think they do need to trade with trends, abide by self-imposed guidelines, and never linger over a stock to their own detriment. Those who want to trade successfully will need to know how to cut losses quickly in order to make more money on the stock market.

Tips on How to Grow Your Profits

Tips on How to Grow Your Profits

Small business owners in cafes, coffee shops, sandwich bars and take away food outlets all struggle with the same concept: how to increase their profits and decrease their workload. It might seem like an age old dilemma for which there is no solution, but the truth is there are plenty of techniques you can employ to grow your profits without doing any extra work.

Accountants for coffee shops and the like are experts at dealing with that very thing. They understand the high pressure situation of the hospitality industry and the need for owners to maximise profitability while still being able to compete in the market. However you look at the figures, though, it all comes down to 5 important factors:

1. An effective pricing strategy - if you want to grow your profits, you might have to raise your prices. If you sell a sandwich at $5.00 that costs you $3.00 to make, your gross profit will be $2.00. If you sell 50 sandwiches a week, that earns you $100.00 gross profit. However, if you raised the price of the sandwiches to $6.00, your profit per sandwich would be $3.00, meaning you would only have to sell 34 sandwiches a week to generate the same gross profit. That means more money from less work using fewer ingredients: a winning formula.

Now consider the competition. The coffee shop down the street is selling similar sandwiches for $4.50. Should you reduce your prices to $4.00 to make them more competitive? If you do, remember that each sandwich now brings in only $1.00 gross profit, so you need to sell twice as many just to stay level - and that means twice as much work as well.

2. Lowering direct costs - secure the best deals from your suppliers by leveraging your loyalty and continued support. Stay alert to changing trends, however, and be brave enough to change suppliers if it makes sense to your bottom line.

3. Maximising performance - if something is not working, consider doing without it. Nothing sucks life and profit out of a business quicker than an underperforming product. You may have a fondness for it, or it may be the catalyst that got your business started in the first place; but if it is not making a profit it has to go.

4. Increasing volume - it might be that you have the time and staff available to produce 200 sandwiches a week. Provided they all sell, that could increase your gross profit margin by 400%.

5. Lowering overheads - try to renegotiate leasing terms on your premises and any equipment hired out, perhaps at reduced rates over longer periods. Make sure you are getting the best rates for services such as electricity and water, and discuss ways to reduce the expense with providers. Find out if there might be a more efficient way of using your staff team, and train staff to contribute to the overall running of the business to ensure there is minimum wastage and maximum customer satisfaction.

Accountants for coffee shops and hospitality based businesses can help you seamlessly integrate these kinds of strategies into your business plan. Contact the small business specialists at Nexus Accountants today for more information.

Pros and Cons of an Interest Only Mortgage

Pros and Cons of an Interest Only Mortgage

In the current economy it is difficult for some people to get hold of a property. It is especially difficult for young couples just starting out. There are a few options that might be considered. Regardless of the choices, the options all have pros and cons attached to them. It is therefore a good idea to weigh these up before you make any decision.

For example, the interest only mortgage offers you the option of paying off the interest and not the capital. This could be the ideal way of obtaining a property, but you need to consider the pros and cons carefully before you make the decision.

What are the Pros for an Interest Only Mortgage

It is important to note the pros, as this would be the initial reason for opting for this type of mortgage.

  • You would only pay off on the interest of the capital.
  • Thus, you do not pay anything toward the capital.
  • The monthly installments would therefore be far less than with a normal home loan.
  • You could therefore save more or pay off other debts.
  • One of the advantages of this is that you could take out an endowment policy or set up a savings account for when you reach the end of the mortgage term.
  • It is an ideal way for young first-time buyers to get into the property market, provided they follow the advice of starting a savings account or taking out an endowment policy.

What are the Cons for an Interest Only Mortgage

With this type of loan, there are a few cons to note:

  • You are only paying off the interest only, and at the end of the mortgage term, you are still saddled with the full capital to be paid. A normal mortgage would have paid off the full debt.
  • This means that you will end up with a very high installment.
  • Some hope that the property will increase in value and could be sold at a profit. However, this is entirely dependent on the property market and is therefore quite risky.
  • The fall in the property prices can cause the mortgage debt to increase. You will, in the end, have to pay more than the value of the home.

It is important to make the right decision at the start, as it would be difficult to change the contract at a later stage. It may seem that it is a great way to reduce monthly expenditure, but if you are not going to be diligent in saving, or taking out an endowment policy, you will have to deal with a much greater debt in the end. The best is to speak to others who have done this before and find out as much as you can before making this your decision.

Litigation Funding: Getting Financial Help In Tough Times

Litigation Funding: Getting Financial Help In Tough Times

Court cases can drag on for years and during that period it's easy to see money dwindling in legal fees. Early settlements or settling for amounts that are not satisfactory just to get the case over with is what many do to keep themselves from going broke.

This unfortunate occurrence can be avoided by seeking a loan from family and friends who allow you to pay it back slowly. However, there's only so much they can lend so once you've exhausted that route, it's time to consider litigation funding.

The process sometimes receives flak for supposedly encouraging frivolous claims while others say financing companies cater only to those clients who have a better chance of winning. This isn't true for reputable companies which make no distinction who to loan money to other than ensuring clients meet certain eligibility requirements. Besides, any financial institution will always hesitate to lend to people with dubious financial standings so the argument cannot be placed against litigation funding companies alone.

The process begins by vetting cases and weighing the odds of winning a verdict. If the risks are too high, the case is usually not entertained but if there's a strong chance of winning companies will more than likely approve an investment. If the verdict is lost, whatever investment was made is also lost and companies will not claim anything. Some lose as much as 20 percent of their investments every year by lending against cases that don't pay out.

Where court cases are expected to drag on for a long time and high expenses are invariably incurred, litigation funding companies can prove to be invaluable to individuals, law firms and corporations alike. For clients, there's nothing to lose if the winning verdict goes to the opposing team but if the tables are turned, not only do they receive a settlement amount that's satisfactory but the lending companies profit from the same. It's a win-win situation even if you have to pay out a substantial sum to the investors.

So what's the return on investment like? Typically, lending companies seek a 25 to 45 percent return. However, the figure is calculated on a case-by-case basis so there's no minimum or maximum amount.

Like all financial matters, there are some risks to approaching lending companies but the benefits far outweigh them. For instance, if a case goes on for years and the verdict falls in your favor, you're liable to pay back a considerable amount and may be left with less than what you expected. But since investors are also taking a big risk with their money, this is to be expected so it isn't a drawback so much as it is a reality.

A rule of thumb for clients is if you don't have to borrow money, don't. You'll be debt-free. But if there's no other recourse and the only way to get through a case is by borrowing money, this is the safest bet. The risks are negligible at best, you don't need to be employed, don't need to get your credit record checked and the amount received won't impact your credit rating.

On your part, do some homework on the reputation and credibility of the lender. If referrals can be sought from a trusted person, all the better. Most of all, calculate the rates carefully to avoid facing a hefty cut if you win the case.

Find Out the Value of Any Business: How to Do It in Two Easy Steps

Find Out the Value of Any Business: How to Do It in Two Easy Steps

If you are trying to quickly determine how much your business, or for that matter any business, is worth, here is an easy way of calculating it.

1. Use the last year's earnings before interest, taxes and depreciation. This is commonly known as EBITDA, which simply means earnings before interest, taxes, depreciation and amortization.

If you are not sure what the EBITDA is but you know earnings, you can begin with earnings and add back all paid in taxes, interests, and whatever was subtracted as depreciation and amortization.

If last year's figures do not represent a normal year in the business, try to adjust for a normal period. Did the business pay interests above the normal for a special reason? Did it pay taxes above what is expected as the normal in the business? Did depreciation and amortization contain one time amounts or charges?

In other words, try to arrive to an EBITDA that is very representative of a normal year. Knowing EBITDA is the first step towards finding out the value of any business.

2. Use the appropriate multiple for the industry. Multiples can be seen in several different ways. The simplest is to think of a quick way to multiply earnings to find out the value of any business.

From the seller perspective, the price is the amount needed to let those future earnings go. From the buyer perspective, the multiple is the number of years needed to wait to recover the investment.

Some businesses are worth five times EBITDA. Some other industries take that all the way to eleven. The higher the multiple is the higher the price of the business. You can use the following multiples as a starting point.

  • Manufacturer: 5 - 9
  • High Tech and IT: 6 - 11
  • Healthcare Services: 5 - 8
  • Retailer: 4 - 7
  • Advertising, Media, Public Relations: 3 - 6
  • Food and Beverages: 4 - 8

The obvious next step is to multiply EBITDA times the multiple to find out the value of any business. The result is the estimated price of the business.

There is a lot of analysis that can be done from this point. For example, one is why certain industries companies vary in price so much. Another is why company value changes across time. Yet another is why certain geographic locations represent more value than others. In any case all of these are valid questions that need good and thoughtful consideration.

5 Ways You're Probably Throwing Money Away

5 Ways You're Probably Throwing Money Away

Did you know that Americans waste half a TRILLION dollars every year? And that's just what economists can measure! The true figure is probably much higher than that. These days, though, we don't have the luxury of flushing our money down the toilet. So, what are you wasting money on? And, more importantly, how can you stop?

1. Wasted food - $165 billion each year.

Before you order in a pizza or head to the drive-through window, take a look in your fridge. Odds are you've got food you've already paid for that'll make for a great meal!

Think everything in your fridge looks boring? Head to the world wide web and search for some ways to jazz up the ingredients you've got. A few creative new recipes could save you hundreds of dollars every month!

2. Wasted energy - $146 billion each year.

You thought your electric bill seemed high, but yikes! Luckily, cutting back on your energy costs doesn't require a complete life overhaul. Instead, simple things - like changing your air filter every three months, turning the thermostat in your water heater down slightly, and using cold water in the washing machine - can make a huge difference.

3. Credit card interest - $49 billion each year.

Did you know the average American cardholder has a balance of more than $2,000 every month and an APR of nearly 13%? You can avoid all of that debt in the first place by creating (and sticking to!) a reasonable budget. Use your credit cards sparingly - like for that unexpected trip to the emergency room, instead of a shopping spree at the mall. And, when you do pay with plastic, set firm goals for paying the balance off.

4. Traffic tickets - $12 billion each year.

This is a low estimate, because it's impossible to add up all of the extra insurance premiums that add up as a result!

So, slow down, stop texting, use your turn signal, and do all of those other great things you learned in Driver's Ed. Sure, you might get to your destination five minutes later or miss a phone call, but at least you won't see police lights in your rear-view mirror!

5. ATM fees - $7 billion each year.

Sounds kind of ridiculous, right? After all, you're paying money to get your own money! Unfortunately, banks keep charging more and more for the convenience of ATMs.

So, what's the solution?

Say "bon voyage" to that giant bank. Big banks are the worst when it comes to through-the-roof ATM fees. Smaller banks even tend to have arrangements with places (like grocery stores) where you can use the ATM for free. Some credit unions take it a step further by reimbursing you for ATM fees!

If all else fails, avoid the ATM altogether. Instead, wait until you have an errand to run and get cash back at the register. That's always free!

How to Compute Your ROI When Making an Investment

How to Compute Your ROI When Making an Investment

The most important thing an investor needs to understand is how to calculate their return on investment also known as their ROI. Even ROI can be computed differently and is sometimes broken down more specifically into the internal rate of return (IRR) or cash on cash return. I will briefly describe each and give very simple examples to help you grasp the concept. When calculating any of these, keep in mind every single expense you had while you were getting a return of your capital. This includes repairs, loan interest, insurance, commissions, fees, etc.

Your return on investment or ROI is the highest level calculation and is what I usually look at for a quick general view into what my investment returned. Keep in mind that ROI can also be negative. You can also compute your anticipated ROI when going into an investment based on your research and projections.

Example 1: Calculating ROI

Bought 100 shares of stock ABC at $10.00 per share. Sold 100 shares of ABC at $12.00 per share. The online broker's commission is $10 each time you buy or sell and you borrowed $1000 at 8% from another investor. This is known as a hard money loan. You held the investment for one year. Most people will simply see that they made $200 on $1000 and say they have a ROI of 20%. This is typically incorrect and too simplified. Here's the correct ROI calculation based on the example above:

Purchase $1000

Commision $20

Loan Interest $80

Total Investment $1100

Sale $1200

ROI $1200-$1100 / $1100

So what on the surface looks like a 20% return, is actually a 9.1% return after you include the fees, interest and rebase your investment from $1000 to $1100.

Your IRR is also 9.1% since you held the investment for only one year. If you had held this investment longer, the IRR would be less. The IRR would be 4.6% over two years (9.1% divided by 2 years) if we pretend that you didn't accumulate more interest on the hard money loan you took out. We of course know this isn't the case in the real world and would have to re-compute the entire ROI.

My favorite part of investing is calculating the cash on cash return. This is where it can get fun! In the example above, you borrowed almost all the money for the investment. Your total cash invested is $20 in the form of the online broker's commission. At the end of the investment you have to repay the lender $1080 (the initial $1000 loan plus the 8% interest). This leaves you with $120. This means your cash on cash return is 500%! You multiplied your actual money five times!

Here's the calculation written out $120-$20 / $20.

Now that you understand ROI, IRR and cash on cash return, your investing will take on a new exciting life.

How A Spouse Can Claim Spousal Benefits Now And More Benefits Later

How A Spouse Can Claim Spousal Benefits Now And More Benefits Later

Social Security pays benefits (i.e. income) based either on your own earnings or on your spouse's earnings. The latter is a spousal entitlement. Gimmicks abound by how you can increase your takings from the Social Security System. Here's another...

The Social Security System pays benefits based on you waiting to your full retirement age (FRA) to receive them. Your birthday determines your FRA as defined by Social Security. It used to be 65 for all, but the age is moving slowly higher.

Nevertheless, benefits paid out to you before your FRA - as early as 62 - are permanently reduced from your FRA benefits according to how much earlier you begin them. And, if you wait until after your FRA to begin receiving benefits, they increase by about 8% per year. There's no further increase for waiting beyond 70.

You always have the right to claim either your own earnings benefits or your spousal entitlement - whichever is greater.

The maximum spousal (let's assume wife's for clarity) benefit you can claim is 50% of your husband's earnings benefit. If the wife claims this before she turns her FRA, it's further reduced -as her earnings benefits would be too.

Working out the best way to get the most from Social Security over time really depends on your age, your spouse's age, your own earned benefits and those of your spouse.

Below is one option for a spouse (assume wife again) to claim now, and then to claim more later.

Claim Spousal Benefit at FRA, and then own benefit at 70

If a wife also has her own earnings benefits and has reached her FRA, she has a choice to make. She can choose to take her own benefits or her spousal entitlement benefits - whichever is larger. If she took her own benefits at her FRA, there could be no possibility for them to increase - outside of Social Security annual Cost of Living Adjustment (COLA).

But she could also choose to receive only her spousal entitlement benefit now. Because she is delaying receiving her own benefits until after her FRA - perhaps at age 70, those benefits will increase by about 8% per year. At, say, 70, she could then switch to her own benefits.

This would make sense only if her own benefits were equal or less than her spousal benefits, but would increase - because of her delay in taking them beyond her FRA - to a greater amount than her spousal entitlement. You can neglect the effect of COLAs since all benefits go up each year by that amount.

She can continue working too. Her work credits can serve to increase her final benefits just that much more. But check with current law just to be sure nothing has changed since this writing.

Financial Ratios And Their Meanings

Financial Ratios And Their Meanings

Over the beginning of this summer, I have had the chance to work with a few startups. While working with them, I realized there is a missing piece of core understanding that is needed to grasp financial ratios. These ratios tell a company, whether new and unstable or old and stable, a lot of important information that a business needs to know in order to make informed decisions. It is not enough to merely glance over the balance sheet if an owner wants to succeed, they need to understand what the numbers mean and what they can do to change their outcome. I will explain three ratios, solvency, efficiency, and profitability.

Starting with the solvency ratio, what is this? This is one of many ratios that is used to measure a company's ability to meet long-term debt and obligations. In layman's terms, the solvency ratio measures the size of the company's after tax income, which excludes non-cash depreciation expenses, which is compared to a company's total debt obligations. Essentially, this ratio provides a measurement of how likely a company will be able to pay its future debts and obligations. The equation to find this ratio is (after tax net profit + depreciation)/(long term liabilities + short term liabilities).

After giving the definition, let's consider the importance of this ratio. Typically, a healthy solvency ratio is above 25%. The lower the solvency ratio, the more likely the company will default on its debts. When an owner is looking over their balance sheet, it does not take much effort to extract the required information to calculate this ratio, and it tells them so much. Yet, many owners miss these concepts, why is that? In many startups, the owner has thought of an idea, an idea they love. They are betting on their product doing well, which is perfectly fine. However, because they are so enthralled with their idea, they often believe they don't need to worry about the fine details such as ratios to make decisions. Therefore, they bypass these issues and look at the big picture only. Knowing if you are able to pay your debts is imperative not only to you, but to your investors. In addition, knowing you have been able to consistently pay them reflects stability, showing a worthy company.

Secondly, we have efficiency ratios. Efficiency ratios are used to explain how well a company is using its assets and liabilities within the company. For example, how much liabilities and assets did the company have to take before reaching said goal. Although the calculations vary, the most common one is expenses/revenue. (Expenses typically do not include interest expense)

When an owner knows this ratio, they can quickly measure their ability to turn resources into revenue. The lower the ratio, the better. For example, if Walmart's total costs, excluded interest expense, totaled $5,000,000,000 (B=billion), and their revenue totaled $8,000,000,000, (5B/8B=63%) they have a 63% ratio. This means that it took Walmart $.63 in expenses to generate $1 of revenue. That is not necessarily bad, nor is it outstanding. If a startup company owner can see this ratio on their normal expenses and revenues, they can understand how their company is doing and if they're absorbing too much cost. If a company consistently checks this ratio on a monthly basis, they can see how they are trending and what types of expenses and revenues are causing the most fluctuations.

Lastly, we have the profitability ratios. These ratios, as the title suggests, helps explain what type of profits the company is achieving. More precisely, it assesses the company's ability to generate earnings compared to its expenses. Some of the ratios include: profit margin, return on assets, and return on equity. We will specifically look at net profit margin (NPM). This ratio tells us how much profit a company sees for every dollar in revenue or sales. This ratio is the inverse of the efficiency ratio. The calculation is (net income/total income).

Looking at the calculation closer, let's take the Walmart numbers. Net income = 8B-5B=3B, now we take the 3B and divide that by the total income of 8B, which equals 37%. In a neater form, (3B/8B=37%). Remember, our efficiency ratio was 67%, 1-.67=.37. Again, the NPM in the inverse of the efficiency ratio. So, Walmart has a NPM of 37%, this tells us that for every dollar they earn, they profit $.37. As the inverse of the efficiency ratio, we want the ratio to be higher, not lower. As a startup, the owner needs to know what types of profits they are seeing after expenses are deducted. Like all other financial analysis, this ratio needs to be done on a monthly basis to examine any trends or to simply have a specific idea of how well the company's dollars are being used.

As I briefly mentioned in the intro, I spent some time with a few startups over the summer and noticed that very few startups understand the importance of these ratios. It is true that these numbers are not the answer to everything, but they provide excellent insight into how a company is functioning and whether or not adjustments need to be made. The issue I observed wasn't that the owners were not intelligent enough to know these calculations; it was arrogance. These owners and their startups have a sense of pride in their product, which is great. But, they are so confident in their product that they don't see the need to perform financial analysis over their incoming data to understand where they have been, where they are, and where they may go. There are many stories in the numbers that the owners need to know, and there is no need for them to miss it.

Post-Holiday Budget Crunch Fashion Thrift Tips

Post-Holiday Budget Crunch Fashion Thrift Tips

You might have realized by now that the winter holiday season is not for the faint of wallet. Between food, drinks and supplies for hosting holiday parties, gift-giving, and shopping for party outfits and cold weather gear, these holidays can outstretch the finances of even the wealthiest of merrymakers. That's why this New Year's season, we reached out to thin-pocketed fashion college students who are awfully good at making a little bit of cash really last. Luckily, we ended up with some great tips on how to hang on to your dollar bills in the early days of 2013 by hitting the thrift stores and being smart about what you buy.

1. Not all thrift shopping is created equally. If your post-holiday budget is stretched extremely tight, it's important to dismiss the common misconception that all secondhand clothes shopping is inexpensive. For those of you that live in bigger cities like San Francisco, Los Angeles or New York City, you will definitely have noticed by now that it majorly depends where you go looking if you are truly trying to find a bargain. In order to keep it extra thrifty this January, avoid smaller vintage boutiques where the staff hand-selects all of their merchandise. Instead, hit up bigger thrift warehouses like Goodwill or the Salvation Army. Sure, these places might require a little bit more time digging around to find your special treasures, but the prices are so cheap, it will be well worth the extra time.

2. Try everything but do NOT buy everything. Start your second semester of the school year at fashion colleges with a sleek and stylish late winter look. In order to accomplish this look, a great strategy is to combine any clothes (sweaters, boots, scarves, etc... ) you might have collected over Christmas and Hannukah from various gifts with some special, new thrift shop finds. Even at a super cheap second-hand clothing emporium, experienced shoppers often report that they still rack up quite a bill just off of the sheer temptation to buy too much stuff because of the reasonable prices. Avoid this temptation! Careful shoppers know that a few unique thrift accents can take your wardrobe a long way. No need to buy everything!

3. Look for unique, one-of-a-kind stuff. Most young fashion designers or designers in training at fashion schools recognize the importance of individual style. That being said, almost anybody (designer or not) would feel mortified if they walked into school, work or any other event and they were wearing the same outfit as somebody else!

Thrift shopping comes in handy in a major way when it comes to keeping one's wardrobe selections unique. Think about it this way: There is a much higher chance of dressing like somebody else if you stick to shopping only at major retail chains like H&M or The Gap. The trick is to hit up secondhand or vintage stores and hone in on whatever really unique clothing or accessories you find that speak to you. There is much less of a likelihood that the store you are at will even have more than one of whatever item you like in stock, so you can pretty much always go home knowing that nobody else around will be rocking that same look. This way you can be careful about money AND promote your individual style.

We hope you enjoyed your holiday season, but these thrift shopping tips are also supposed to remind you that no can last forever... Sigh, until next year!

President Obama: Emancipation 2013?

President Obama: Emancipation 2013?

Time for hope and change. Why doesn't President Obama call an emergency closed door meeting with Congress? The purpose is, "Ric's Plan;" to put pressure, and convince Congress that they need to speak with their lobbyist, today. What is in everyone's best interest, is that their lobbyist persuade their corporation's to immediately put into work and start the best of what they have planned on their book's (new divisions, upgrades, etc.,) now, with jobs in the USA a primary consideration! If all corporations put the best of their plans into work, we would have an all at once, coordinated effort by our corporations, to jump start the American economy and create millions of jobs. Wouldn't this bring some certainty where there has only been uncertainty? Why not at the same time have a committee put together the plans for the "infrastructure bank," and have those plans finalized and started in a few days? This is just the beginning of the plan... What did happen with corporations and FDR during those 18 months prior to December 1941?

Don't we need urgent action, and not business as usual, with the state of our depression like economy, that is trending worse and facing... ?

Corporations are doing better than ever, looking at profits and productivity; don't corporations owe "We the People," just a little risk taking for 2013, and start creating jobs, today?

Is one of the reason's corporations have done so well in these last few recessions, due to loopholes, and at times blind-eye politicians (politicians not following up on regulators, and/or under funding or not funding oversight agencies, etc.?)

Does money really have a label of D or R; aren't Congressmen of both parties paid for by the exact same corporations?

Do we really have a two party system, or is it a one party system of corporate governance?

Don't all profitable corporations have plans on their books that they would like to execute, today, but with the uncertainty in our economy, the prudent move for these corporations has been to stay liquid?

If we jump start the American economy today, how will corporate earnings look in 2014, and 2015?

Why doesn't Congress start dialing for jobs, instead of dialing for dollars?

Could something as simple as, if the Rating Agencies, or if the Rating Agencies Regulators had done their jobs correctly, would 2008 have even happened?

What was the turn of events that allowed Rating Agencies to become alchemist, in the beginning of the 21st century? "Credit and Credibility" video http://www.pbs.org/now/shows/446/

Isn't a major problem today in going after questionable actions of corporations, the fact that in some cases our regulators were present when these questionable actions were occurring, so how do you prosecute, if government was present?

When is Congress going to reenact the Glass-Steagall Act?

Why are, three of the four too big fail Wall Street firms of 2008, larger institutions now in 2013?

What is happening to our national debt?

If Congress had not turned a blind-eye to businesses who hired illegal immigrants in the 90's and the first 5 years of the 21st century, would we have 12 million illegal immigrants in our country today in 2013?

Why in 2002, the World Economic Forum ranked U.S. infrastructure 5th in the world, and today in its latest report, we were 25th?

How do they keep us, "We the People," so distracted, while the country is crumbling down around us?

Something has gone painfully wrong in our USA in the last 30 years, doesn't it seem that way to you?

Is it time our politicians seriously work at getting Americans, back to work?

Don't we need a real sense of URGENCY, TODAY, JOBS?

Another Great Train Robbery in Cyprus - Hidden From the Public Eye

Another Great Train Robbery in Cyprus - Hidden From the Public Eye

Do you realise that there was a press blackout about this in the US?

With Europe's May Day and a holiday in China, this was a perfect time to pull off a massive robbery in Cyprus. It was also a perfect time for a total news blackout in North America.

This shocking news on Cyprus' large depositor's confiscation of funds has not been reported for obvious reasons, but it does not make this historical event disappear.
What's more, the banks have announced "very temporary capital controls" which means that these depositors cannot take all their money out even if they want to! So not only have they banks stolen over a third of large depositors' funds, but they have also frozen another 30% of depositors' money. Keep in mind that so-called "temporary controls" have historically gone on for significant periods of time. i.e. months and even years in some cases.

These are very serious events and you should not take them lightly. If you do not get out of the banking system, you will probably not be able to get out of the system in the future. These actions have created a dangerous precedent and there are signs that other larger countries are considering stealing depositors funds in order to prop up failed banks. And future thefts may not be restricted to large depositors. People with small amounts could be robbed as well.

The plan is to wind down the Popular Bank of Cyprus known as Laiki, and to shift deposits of less than 100,000 Euros to the Bank of Cyprus to create a "good bank" and leave problems behind in a "bad bank." Deposits above €100,000 in both banks, which are not guaranteed by the state under EU law, will be frozen and used to resolve Laiki's debts and recapitalise the Bank of Cyprus, the island's biggest, through a deposit/equity conversion. So basically they are stealing depositors' money in order to prop up a bankrupt bank. Unbelievable.

The USA black out on the news in Cyprus does not mean this event didn't happen to large depositors. What it means is that those in control do not want you to know about it so that you won't be frightened into taking your savings out of the system. Please see the warning signs. We are under the same astrological aspects as we were during the Great Depression and the time when Hitler became Chancellor of Germany. There were warnings then too, but many did not heed them. We are fortunate that we have the internet today, so we can share information worldwide within seconds. Don't be taken by surprise and get yourself out of the system before the powers that be legalise stealing everything from under our feet.

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