A Self Check list Before You Consider For Any Investment Products

Before you get tempted to go for investments other than placing time deposit, you should seriously consider your own personal profile for investments.

Append below is the self check list:

SELF CHECK LIST:

1.0 First understand how much net worth you have before you even start investing. Are you really having positive net worth or are you still mounted with debts which you need to pay in the near or medium future

2.0 Know what are your investment objectives and risk appetite:

• Conservative re: investment must be 100% principal protected
• Willing to take a little investment risk with some potential capital gains
• Willing to take a large amount of investment risk in exchange for higher potential capital gains
  

3.0 Understand what is your investment horizon:

• Short term: less than or equal to 1 year
• Medium term: between 1 to 5 years
• Long term: between 5 to 10 years
• Greater than 10 years

4.0 What sort of investment experience and number of years of investment experience you have for the following products:

• Bonds and commercial papers
• Equities
• Non-principal protected unit trusts
• Principal protected unit trusts
• Non-principal protective derivative linked investment
• Principal protected derivative linked investment
• Others:……….
• None
  
  

5.0 How well you understand the features and risks involved in your selected product(s) ( item 4)

How To Improve Your Company's Tight Cash Flows Situation

In earlier article, we have discussed the harm derived from overtrading in a business.

This article looks at ways and means to improve the company's tight cash flows situation.Without the right level of liquidity ( cash is not equal to profit), a company might be not able to survive.Hence, the company’s immediate task is to improve its cash flows. The company needs to review all its cash flow projections whether cash inflow or outflows and must be able to PLAN, TIME or MATCH it accordingly. This might “help” to alleviate some challenges posed by the immediate cash flow deficit though this is a short term gap measure.

The following are some of the ways to improve the company’s tight cash flow situations:

RELOOK AT YOUR CAPITAL EXPENDITURE BUDGET AND FOCUS ON BETTER UTILIZATION OF NON CURRENT ASSETS

• Manage your cash outflow of capital expenditure by ensuring that the fixed assets are absolutely necessary before incurring it. For a business, there is a need to weigh profitability and cash flow in investment appraisal .Hence, payback basis might be one answer to improve cash flow.

• Defer projects that cannot achieve acceptable cash paybacks.

• Defer unnecessary and unproductive capital expenditures

• Focus on short or quick payback though profitability level might not be the desirous level. Perhaps, balancing this cash flow with other projects that give higher yields might be more appropriate

• A business cash flow can be improved if top management exercise less risk appetite and are more conservative/ prudent so that cash flow can be conserved within the business instead of aggressive investments into the projects.

• Hive off or dispose off unwanted, surplus fixed assets and investments

• Plan strategically by looking at innovative means of unlocking cash out of your fixed assets like Sale and Leaseback, creating Real Estate Investment Trust (REIT)

• Make your fixed assets investment turn faster. For example, convert it into warehousing facilities to lease out to others or sub-lease your office which has surplus space or share common facilities and leave balance for rental, etc

FOCUS ON IMPROVING OVERALL COMPANY’S PROFITABILITY

• Improving Pricing policy

With more innovative pricing, higher gross profit margin can be achieved and assuming constant cost hence when the money is collected , there is then a larger quantum of “liquid profits”

• Attempt to increase Sales Volume

Again, the impact means a higher sales and assuming costs maintained. So,if cash are collected back, then there is a larger quantum of “liquid profits”

• Reduce or manage effectively the business expenses.

With this, cash outflow in terms of payment of goods or services can be smaller hence overall net cash flow can be saved/improved

• Eliminate or simplify unwanted business operations to reduce costs of operations

Seek to eliminate goods or services which are really value-adding to the company’s business hence reducing costs

FOCUS ON SOURCING ALTERNATIVE FINANCE

• Strategically, when the business is expanding drastically and to prevent overtrading or under-capitalized ,it is critical that the shareholder need to put additional money in the form of paid up capital into the business instead of relying on external parties

• Obtain other sources of financing like bank overdrafts, term loans, debentures, and longer credit terms from suppliers.

• Use factoring facility to convert your billings to customers into cash.

• Instead of using one lump sum to paid for fixed assets, go for leasing or hire purchase terms to alleviate cash flows problems

FOCUS ON CONVERTING SHORT TERM BORROWINGS TO LONGER TERM BORROWINGS

• Try to convince your bankers to convert some of short term borrowings into longer term loans. Also see whether repayment can be staggered or pay at tail-end of project instead of up-front loading.

FOCUS ON MINIMIZING OR DELAYING YOUR CASH OUTFLOWS FOR THE TIME BEING

• Minimize your cash dividend payout by issuing script dividend or bonus issue.

• Seek to extend/re-negotiate debt repayment periods & banking facilities.

• Apply for tax installments to the Authority for the payment of any income tax payable

• Seek deposits or multiple stage payment.

FOCUS ON IMPROVING YOUR DAILY WORKING CAPITAL CYCLE

• Improve your Order to Cash cycle by simplification, standardization and automation leading to error free process flows to enable money to be collected without much disputes

• Review any cash term with our creditors, if need be to extend the credit terms by ensuring long term relationship and promise to pay timely

• Make prompt payments only when we need to enjoy discount from the creditors.

• Use barter to acquire goods and services.

• Establish better planning and forecasting to reduce the lead time of inventories from suppliers.

• Use the 80/20 rule to manage current assets.

• Encourage suppliers to keep stock for us ( just in time concept) or on a consignment basis

• Convert raw materials into work-in progress to anticipate for sale to customers. This needs great efforts for both production,sales department and the customers.

• Sell off or return obsolete/excess inventory(even with a loss just to generate the cash flow)

• Improve systems for billing and collection.

• Review credit terms with our customers wherever possible

• Be more selective (if possible) when granting credit.

• Offer a well structure cash discounts scheme to enable faster collections from customers (add deterrent charges like late payment charges /fees if debtors have not settled on time).

The Importance Of Understanding Overtrading, Its Causes, Symptons or Signs And Its Remedies

There is one critical destructive term known as "overtrading" in business which justify a detailed explanation.

This common word “Overtrading” is more often used by bankers, credit rating organizatio, analysts and accountants.

This article looks at what is Overtrading, its causes and the serious repercussions that will happen and what we should do to remedy it.

Overtrading basically,

Denotes a condition in which the resources in particular the liquid resources of a business are insufficient to maintain the existing level of trading. This particularly happens during the booms when companies increase revenue without considering it means to finance the increase turnover.

In colloquial terms, we can also say that the management has failed to cut their coat according to their cloth.

Some of the Causes of Overtrading are as follows:

Internal Factors:

• By expanding turnover without the correspondingly increase in working capital. For example, assuming the present turnover is $12 million and average debtors of $250,000. If turnover increase by 30% and assuming the same credit terms on the new turnover, its debtors are likely to rise by 30% i.e. $750,000. So this $750,000 needs to be obtain from existing working capital resources or injection of share capital. If management ignores this point by “overstretching”, it will face the “Overtrading situation”,
• By increased investment in fixed assets like land and building, machinery, etc and acquiring investments in a subsidiary or associated companies without a corresponding increase in equity or borrowings. Any increase in the above-mentioned capital expenditure will then deplete the net current assets,
• By allowing a longer than usual cash conversion cycle namely by the increase in stock levels and extending exceptionally long credit,
• Through trading losses which will reduce the net current assets. This also happened in cases of abnormal losses like redundancy payments, additional contribution to pension funds, payments of damages and others.

External Factors:-

• Changes in taxation rates or system. Higher amount of tax payable will deplete the net current assets,
• Changes in the date of payment of taxes.If the date of payment is brought forward, working capital will fall which causes financial strain during the period,
• Cutbacks in bank lending. In the event there is cutback where the company cannot find the funds to meet its debt, an Overtrading situation can occur,
• Inflation and Price Control. Inflation will basically mean the need to have increased investment to maintain the existing physical monetary inventories like raw materials, work in progress and finished goods whilst price control will erode margins hence reducing net cash flow.

Next step is to understand whats repercussions will happen to the company if this overtrading trend is still not curbed:

• Inability to pay creditors on time, hence the reputation will be at stake,
• Increased purchase cost due to inability to benefit from cash discounts from the suppliers, unable to buy in bulk hence losing quantity discount and choosing suppliers who are willing to extend credit terms but with higher prices and or lower quality,
• Due to the need for cash to pay creditors and others, we might pressurize the debtors to pay early,
• Reduce stocks level unnecessarily which affects the business operation,
• By offering too liberal discounts to encourage prompt payment from debtors hence affecting the bottom-line results,
• Deferring the crucial investment in capital expenditures or delaying the maintainance of important facilities infrastructure which are crucial to generate incomes from these fixed assets,
• Inability to pay the salaries of the employees hence delaying the time of payment until money is received from the debtors. This will cause very low morale to the employee which will affects productivity and others,
• Inability to pay taxes which will put the company in bad book of the authority,

To spot overtrading, we can notice some danger signs/warnings:

• Pressure on existing cash
• Exceptional cash generating activities like offering very high discounts for early cash payment or selling off of company assets which are not idling
• Bank overdraft exceeds authorized limit
• Seeking greater overdrafts or lines of credit
• Part-paying suppliers or other creditors
• Paying bills in cash to secure additional supplies
• Management pre-occupation with surviving rather than managing
• Frequent short-term emergency requests to the bank to help pay wages, pending receipt of a cheque
• The liquidity ratio namely the quick assets and current assets ratio are deteriorating quite badly,
• Turnover/equity shareholders funds rises excessively,
• Trade creditors increasing faster than turnover. Also, we can see that the ratio for average credit days from creditor trend is increasing dramatically,
• Progressive reduction in liquid resources. Positive cash balances turning into negative bank overdrafts facilities or trade facilities like bill payables and others,
• Borrowings increases without corresponding increase or injection of share capital. If the gearing ratio rises excessively we needs to analyze the reasons or cause,
• The charging of more and more assets to secure loans as more and more is borrowed,

To remedy overtrading, the obvious answers are

• To cut the coat smaller or

• To obtain some more cloth/finance

( See another article on how to alleviate overtrading by managing the business's cashflow)

Basic Understanding of the term:Cash Conversion Cycle/Daily Operating Cycle or Day Working Capital

A business besides focussing on making profit should consider its cash flow. One of the key performance metrics to assist management in gauging the "cash" performance is to fine-tune or quicken the pace of the company's cash conversion cycle or daily operating cycle or day working capital.

Below article looks at the some details of the aforesaid terms in the context of managing business finance of a company:

(a) The importance of understanding cash conversion cycle or daily operating cycle or day working capital:

• it is actually another simple way of looking at working capital management,
• by improving CCC, we are able to balance sales growth with the required liquidity to fuel the growth,
• with an adverse CCC, survival of the company is at stake particularly when the company is overtrading and recession is around.

Is the CCC a new thing?

No, the CCC’s existence is as old as when accountants were looking into ways of how to reduce or manage the dollars tied up in the working capital of accounts receivable and stocks and optimizing the period owing to accounts payables.

(b) Definition of Cash conversion cycle:

• it represents the amount of time in terms of the number of days between the purchase of materials by a company to produce its end products and the receipt of payment for those end products in the supply chain, it represents the amount of time it takes to turn a dollar spent with a supplier into a dollar received from an end customer. It sounds familiar isn’t it , it is really the operating cycle of a company we are talking about.

Logically, the CCC is so critical as a company with a low CCC is more efficient as it is able to turns its products into cash more efficiently, minimizing the non productive working capital tied up in its business & making more cash available to fund growth and create shareholder value

A basic model of the CCC is as follows :

DSO (Days Sales Outstanding) plus: DIO (Days Inventory Outstanding) less: DPO (Days Purchases Outstanding) = CCC (Cash Conversion Cycle / Day Working Capital)

Let’s try to understand the various definitions involved:

• Days Sales Outstanding or DSO represents number of days, the Accounts Receivable (AR) is outstanding in term of number of days of sales.

• Days Inventory Outstanding or DIO is then represents the number of days, the Inventory is outstanding in term of number of days of Cost of sales.

• Days Purchases Outstanding or DPO represents no of days, the Accounts Payable is outstanding in term of number of days of Purchases

Now, it sounds familiar like it is another ratio of working capital. The difference is that CCC is represented in terms of time or number of days.

(c) The advantages of using cash conversion cycle/daily operating cycle as one of the key performance index:

• CCC as a performance metric is indeed a very simple, easy to understand and to use & is a flexible tool for understanding the favourable or adverse changes in working capital management.
• Surveys conducted by reputable accountancy bodies like CFO Asia.com includes CCC as part of their key performance metric to rank good performers amongst companies in similar industry.

Warrants-Basic Understanding And Warrant Strategies

This article deals with the following:

• Warrants and the concept of Gearing effect;
• Advantages of buying warrants instead of other instruments and
• Some strategies when buying warrants

Warrant’s unique power is pertaining to the concept of gearing. Unlike the the reduced board lots for share trading it only helps investor with the issue of affordability but does nothing on the side of gearing and heightening exposure.

If you bought 1000 shares of X and it gained RM1, your 100 shares investment of X will only provide you with a gain of 10sen which is proportionate to the amount you invested. If the former elicits a return of 10%, the latter should likewise and be no different.

Warrants and Gearing Effect:

On the other hand, if you invested in a warrant that is ten times geared (for example, warrant B is RM1 when share B is RM10), a RM1 gain in share B will likely to result in a similar gain of RM1 in warrant B if the warrant is just `at the money’ (that is, the price of share B = exercise price of warrant B). In this instance, you will find that the gearing effect of the warrant has kicked in to enable the investor to make 100% returns when the investor in the mother share has made only 10%!

Although the same gearing effects can be found when trading in financial futures, financial futures do not provide inherent downside protection like in the case of warrants. In fact, the mechanics of financial futures trading requires the maintenance and topping up of margin accounts as and when the margin level falls below the minimum required by the futures house.

Advantages of Buying Warrants:

• Warrants like stocks do not require any further capital outlay unless the warrant holder chooses to exercise the warrant on or before expiration date;
• provide excellent gearing capabilities in bullish markets;
• As it confers the right but without the obligation to acquire a fixed quantity of assets such as shares for a specified price within a limited period of time, your downside is therefore limited to the initial investment whilst you still continue to enjoy possibility of upside potential from the investment;
• Additionally, the need to only pay a small amount for the `right to ownership’ rather than ownership itself also permits the investor to leverage and increase market exposure for the same amount of capital invested;
• For a sum of less than one seventh of the market value of core component blue chips like Maybank and Tenaga, investors are able to gain the same amount of exposure to mimic and benefit from gains in the KLCI over the next four and the half years but without having to be fully exposed to the vagaries in owning these stocks per se.

• The balance capital not invested in these warrants can then be invested in fixed income securities like the all-time favourite fixed deposits and corporate bonds to provide the capital protection that most investors yearn for in today’s volatile market conditions.

Warrants and strategies:

• Invest in long dated warrants. Basically, avoid those that are close to expiry and as the element of time decay kicks in, such warrants lose their premium value quickly. In the case of short dated and `out of money’ warrants where the exercise price of the warrant is higher than the current price of the mother share, investors stand the likelihood of losing all of their capital outlay when the warrant expires worthless!

• Buy warrants that are `at or in the money’. Such warrants will experience sharp increases in their delta value for investors to enjoy hefty gains. As the delta value of the warrants captures the sensitivity of the warrant movement against the movement of the mother share, the higher the delta value the better the gearing benefit for the warrant holder. Typically, once a warrant becomes way `in the money’, the movement of the warrant will almost mirror the movement of the mother share, moving about one to one.

• Do not pay excessive premiums. The warrant premium is calculated as the ratio of the sum of the warrant and exercise price against the price of the mother share. Investors are willing to fork out such premiums for the benefit of gearing. Typically, the higher the volatility of the mother share, the higher the premium for the warrant but once this premium becomes excessive, it runs the risk of becoming over-valued.

• The higher the gearing effect, the better.

Investing in lowly geared warrants simply defeats the primary reason of investing in this instrument. Where possible, look for warrants that are at least three times geared. Gearing is simply the ratio of the mother share price to the warrant price.

• Buy as many types of warrants as possible: as we do not know which warrants price will shoot up, it’s good to buy as many different types of warrants in different industries;

• Buying warrants in a bullish market: it’s important to know that warrants works extremely well in the bullish market environment. Investors can reap benefits from its gearing effect.

• Above all, make sure we are comfortable with the fundamentals of the mother share. There is no point having a geared play on share which will fall in value rather than rise.

For any investors, it is important to understand that the gearing effect works both ways i.e. on the upside as well as on the downside!

FINANCE TERMS-Alphabet A

ALPHABET [ A ]

Arbitrage

• Trading strategies designed to profit from price differencesfor the same or similar goods in different markets. Historicall, the term implied little or no risk in the trade, but more recently it has come to suggest some risk of loss or uncertainty about total profits.

Accounting

• Accounting is the process of identifying, recording, classifying and reporting information on economic events in a logical manner for the purpose of providing financial information for decision making.

Accounting policies

• The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

Accounting rate of return

• Measures the profit earned on investment expressed as a percentage of the average investment.

• Does not take into consideration cash flows

Accounting profit

• Profit or loss for a period before deducting tax expense

Accounting ratios

• Terms used to describe the different types of financial calculation use to measure the performance of a business.

Acid Test Ratio

• refer quick ratio

Acquisition Cost

• costs directly related to the acquiring of assets. Includes all costs like purchase price and all incidental costs including transport, duties, taxes, packaging, preparation and installation.

Accrual basis of accounting

• The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Or it is a method of accounting whereby revenue is recorded when earned (regardless of when received) and expenses are recorded when incurred.

Accounts Payable and Accrued Liabilities

• A short-term liability account reflecting amounts due to individuals or organizations for goods and services purchased.

Accounts Receivable

• An asset account reflecting amounts due from individuals or organizations for goods and services rendered.

Activity ratios

• financial ratio which measures how fast a business is able to meet its current liabilities. This depends on the rate at which the debtors and stocks can be converted into cash.

Allotment of shares

• relates to new share issues whereby the applicants receive an allotment letter detailing how many shares they have been allocated/given.

Application and allotment account

• the account to which monies are credited when prospective shareholders apply for shares (on application) and when shares haven been allocated to them (on alloment)

Allotee

• a prospective shareholder who has been allotted shares in a limited company.

Allowable expenses

• that portion of expenses which are tax deductible which are included in the income statement.

Amortization

• Gradual reduction over time of the cost or value of an intangible asset.

Amortize

• Process of writing off a regular portion of the cost /value of an intangible asset over a period of time. In line with the matching concept.

• Term is also used to provide for extractive or wasting assets such timber tracts, oil fields and tin mines.

Amalgamation

• two or more businesses join together to form a new business.

Analyze

• To evaluate the condition of an accounting-related item and discover possible reasons for discrepancies.

Annualize

• To extend the cost into a twelve month or yearly basis. Say rental expense is $1,000 for 4 months. If we want to annualize it then the total rental expense is $1,000 x 3 =$3,000 a year.

Annual Report

• A financial report prepared annually that includes chairman’s report, director’s report, financial statements and the auditor’s report.

Annual Return

• Annual documents sent to the Registrar of Companies which gives particulars of directors and members plus a copy of the last balance sheet and income statement.

Annuity

• An annual payment made to a person normally a retiree in return for a lump-sum investment. The annual payment made will depend on the amount invested and the age of the person when the investment was initially made.

Appropriation

• Distribution of net income after tax to various reserves and persons such as the shareholders as dividends.

Application of funds

• Outlines the way that the managers of a business have spent the funds available to them during an accounting period.

Arbitrage

• The method of profiting from price differences when the same asset is traded in different markets.

Asset

• A resource controlled by an entity as a result of past events; and from which future economic benefits are expected to flow to the entity

Asset backed

• Generally for shares where they are backed by company’s assets.

Arm’s Length Transaction

• Transactions entered into by willing, knowledgeable and unrelated parties, each acting in its own interest. Generally prices transacted will be a fair market price.

Articles of Association

• Is a document filed with the Registrar of Companies by the promoter of a company.

• It includes the internal rules and regulation of a company that stipulate the rights and duties of shareholders and directors and procedures for meetings.

Asset turnover

• the ratio of sales to assets, i.e. the number of times that assets are utilized in a year.

• Indicates the company’s efficiency of using its assets to generate sales.

• High ratio shows favorably the company’s ability to effectively employ its assets.

Associated Company

• A company over which an investor is able to exercise influence and not control. Generally, an investee company is considered an associated company if the investor holds at least 20% but less than 50% of its voting rights.

At Par

• Shares issued at their nominal or face value.

At sight

• When a financial instrument is payable on presentation

Authorized Share Capital

• The maximum amount of shares that can be issued by the company.

Audit

• the process where an independent person namely the auditor check the financial records of a business to ensure that the records show a true and fair view.

Auditors

• people usually trained accountants who specialize in checking financial accounts that have been prepared by someone else. External auditors are appointed by the shareholders of the company. The external auditors are from outside the organization.

Auditors’ remuneration

• amount paid to the auditors for the work done in checking the financial records( final accounts) of the business.

Auditors’ report

• prepared by the auditor which will indicate whether the financial statements have been audited and the auditors’ opinion about the financial statements. Report is normally quite bried and contain not much information.

Authorized signatories

• people who have the authority to sign cheques on behalf of an organization

Average rate of return

• another term to describe the accounting rate of return