Working Capital

The number one reason most people look at a balance sheet is to find out a company’s working capital (or “current”) position. It reveals more about the financial condition of a business than almost any other calculation. It tells you what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. By studying a company’s position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt.

Working Capital is the easiest of all the balance sheet calculations. Here’s the formula:

Current Assets – Current Liabilities = Working Capital

One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can’t pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor – all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.

Companies that have high inventory turns and do business on a cash basis (such as a grocery store) need very little working capital. These types of businesses raise money every time they open their doors, then turn around and plow that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stock pile the proceeds from their daily sales for a short period of time if a financial crisis arises. Since cash can be raised so quickly, there is no need to have a large amount of working capital available.

A company that makes heavy machinery is a completely different story. Because these types of businesses are selling expensive items on a long-term payment basis, they can’t raise cash as quickly. Since the inventory on their balance sheet is normally ordered months in advance, it can rarely be sold fast enough to raise money for short-term financial crises (by the time it is sold, it may be too late). It’s easy to see why companies such as this must keep enough working capital on hand to get through any unforeseen difficulties.

Repair Your Bad Credit

In the world, we have many needs that will be achieved. For most people there are three basic needs for their life, namely food, clothing and housing.

Yes in this world of easy credit we can buy anything our heart desires. Household goods like the newest television set or the new laptop we keep trying at best buy. But, its not how we get the credit that burdens us it’s how we use the credit to purchase those things.
As a result of the easy credit mentality that we have been going through some people are now trapped in bad credit. There life seems not so easy anymore and if they are unable to dispute it with the credit company how does this solve their problems?

There is a solution out there for credit repair; a website that I came across helps those with bad credit help build and clean credit that they have accrued. One phone call can mean the difference in your bills continuing to pile up while your credit goes down the tubes. Or, one phone call can give you a way out and stop the collectors and the worrying with one monthly payment to all of them. They can help improve credit that you have now and provide you with the credit repair services you are looking for. Send them your problems and let them help you find solutions to the issues with credit that you have. They will negotiate with your creditors on your behalf and this way you can easily begin to start a new life with improved credit. Then with the lessons learned you can use the credit more wisely for future purchase that you make.

"Kiss" – Keep It Simple, Stupid!

Two of the greatest investors in history, Warren Buffett and Peter Lynch, are renowned for one trick that helped them develop investing records of 20% to 30% compounded over long stretches of time. Buffett summed it up in the acronym “Kiss”, which stands for “Keep it simple, stupid!” When you truly understand what it means, it can have big ramifications for your portfolio and help you make sense of a turbulent market.

The One-Paragraph Test

The test that these two men applied was roughly the same. According to sources, Peter Lynch used to start an egg timer when on the telephone with financial analysts and traders, for forcing them to explain the basic premise of an investing idea in less than a minute. Buffett recommends that you write out a short paragraph saying something along the lines of, “I am buying $10,000 shares of Company XYZ at $25 per share because I believe (insert reason here such as profit will grow twice as fast as the current price-to-earnings ratio, hidden assets are on the balance sheet, there was a management change for the better, valuation is too low, etc.) Then, monitor the situation, always mindful of your basic thesis.

The practical result is the meat, or substance, of your argument of the matter is separated from the water down nonsense. Too often, stockbrokers and financial journalists spew dozens of facts they have regurgitated from a 10k or annual report. So many facts obscure the truly important figures such as sales growth, profit margins, expected capital expenditures, expected depreciation, and return on equity. Investors instead become bogged down in reading about a $12 million transaction at a firm generating $20 billion in sales. In a vast majority of cases, information of that kind isn’t particularly or necessarily relevant.

Avoiding Multiple Break Points

Another major advantage of the “Kiss” approach is that you factor in basic probability theory into your decisions. Which would you rather have: a stock that has a 65% change of doubling in the next five years or a stock that has a chance of quadrupling if eight different events all take place (perhaps a business license in a new state, a new factory built, etc.), each event having a 90% probable success rate? The latter, believe it or not, has an approximate 43% chance of coming true – much worse odds than the former option! With more links in a chain, you have a greater probability of something going wrong. If a stock could go up 1,000% but for it to do so, the labor unions must drop demand, fuel supplies must collapse, a bankruptcy court must force a competitor to pay its promised pension obligations, and new management to come in and cut stock option expenses, you are probably going to be disappointed. hx2kutzbs4

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The Securities Investor Protection Corporation – SIPC

There are several ways to hold your investments (for more information, read all about investment holding methods). Most ordinary investors own their stocks, bonds, mutual funds, and other securities through their brokerage accounts. The result is that the firm itself technically owns the stock and holds it on behalf of their clients. If and when a brokerage firm goes bankrupt, without protection from the SIPC, the clients would lose all of their assets and be wiped out despite the businesses they held, companies such as Coca-Cola or Berkshire Hathaway, being perfectly fine. Stock certificates, on the other hand, can be lost in addition to being a hassle to register, put in a safe deposit box, turn back in upon sale, and re-register to the new owner. Knowing this, the government created the Securities Investor Protection Corporation – the SIPC for short – in 1970 through Securities Investors Protection Act. It is not an agency of the Federal government, but instead a member institution where each of the financial institutions that are a part of it pay in to the system.

The SIPC does not protect investors against losses from their investments. All it does is replace many of the investments held in their account if their broker or financial institution goes bankrupt. That’s it. If you owned 500 shares of General Electric prior to a bankruptcy, all you’re going to get is 500 shares of General Electric in a new brokerage account at the institution of your choice after the bankruptcy is sorted out by the SIPC staff. It’s that simple. In the meantime, GE might be up, it might be down, or it might have gone nowhere.

It’s important to understand what the SIPC does not cover. According to the official web site, “SIPC does not cover individuals who are sold worthless stocks and other securities. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons,” They also go on to say:

When SIPC gets involved. When a brokerage firm fails owing customers cash and securities that are missing from customer accounts, SIPC usually asks a federal court to appoint a trustee to liquidate the firm and protect its customers. With smaller brokerage firm failures, SIPC sometimes deals directly with customers.

Investors eligible for SIPC help. SIPC aids most customers of failed brokerage firms when assets are missing from customer accounts. (A list of ineligible investors may be found in the fourth question in the next section of this brochure).

Investments protected by SIPC. The cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC. Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well investment contracts (such as limited partnerships) that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

Terms of SIPC help. Customers of a failed brokerage firm get back all securities (such as stocks and bonds) that already are registered in their name or are in the process of being registered. After this first step, the firm’s remaining customer assets are then divided on a pro rata basis with funds shared in proportion to the size of claims. If sufficient funds are not available in the firm’s customer accounts to satisfy claims within these limits, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account.

How account transfers work. In a failed brokerage firm with accurate records, the court-appointed trustee and SIPC may arrange to have some or all customer accounts transferred to another brokerage firm. Customers whose accounts are transferred are notified promptly and then have the option of staying at the new firm or moving to another brokerage of their choosing.

How claims are valued. Typically, when SIPC asks a court to put a troubled brokerage firm in liquidation, the financial worth of a customer’s account is calculated as of the “filing date.” Wherever possible, the actual stocks and other securities owned by a customer are returned to him or her. To accomplish this, SIPC’s reserve funds will be used, if necessary, to purchase replacement securities (such as stocks) in the open market. It is always possible that market changes or fraud at the failed brokerage firm (or elsewhere) will result in the returned securities having lost some – or even all – of their value. In other cases, the securities may have increased in value.

How Long Will It Take to Get Your Investments Back?

The SIPC goes on to say, “Most customers can expect to receive their property in one to three months. When the records of the brokerage firm are accurate, deliveries of some securities and cash to customers may begin shortly after the trustee receives the completed claim forms from customers, or even earlier if the trustee can transfer customer accounts to another broker-dealer. Delays of several months usually arise when the failed brokerage firm’s records are not accurate. It also is not uncommon for delays to take place when the troubled brokerage firm or its principals were involved in fraud.”

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Is a Full Service Broker Right for You?

In a world of discount brokers with $10 trades, is there any reason to return to full service brokerage firms with their commissions that can sometimes run as high as $400, $600, or more per trade? Believe it or not, there are some of you that might be better suited for these types of full service brokerage firms with their mahogany paneled walls, well-heeled brokers, and fine cut crystal glasses despite the substantial costs.

What you get when you pay for a full service broker

With a discount broker, you are simply paying to get your trades executed. For those with experience, the ability to analyze financial statements, and an understanding of businesses, this is an ideal arrangement. You just need someone to place the trades you order. For those without any financial experience or who want the comfort and security of handholding – and just as importantly, don’t mind paying for it – a full service broker can be worth the cost.

Although services and products are not fully uniform and costs will vary from firm to firm, typically you should want some or all of the following from your full service broker:

Perhaps the biggest benefit for someone without experience is the opportunity to have a reputable firm guide you through the process. Although it is highly probable that the fees will cut into your returns, you may be better off in the long run because a good broker can hold your hand through turbulent markets, helping you to avoid mistakes such as selling at market bottoms or buying during speculative bubbles.

That is, of course, if you can resist the temptation to bail. It’s amazing how many investors, who are the first to admit they don’t know hide nor hare about the market, will call their broker and complain about a few percentage points drop. Just last week, I was chatting with a financial representative from a major U.S. bank in his office and he confessed that when his client accounts were up more than 20% last year, no one called. Yet, a 4% drop in the broader markets caused, no joke, what he estimated were 250 calls to his office. That is madness. As long as you have a reputable firm with a proven history of good, long-term results, stay the course.

An alternative to full service brokerage firms

There is one alternative to full service brokers that is particularly attractive if you don’t have a lot of capital to invest or you are primarily interested in buying and holding stocks for the long term (ten years or more). You aren’t likely to hear about them because there really isn’t a motivation as they don’t produce profits for any brokerage house.

It’s called a direct stock purchase plan or a dividend reinvestment plan. Basically, these low-cost plans allow you to buy shares directly from a company, paying only $1 or $2 in commissions through optional cash payments or regular, recurring withdrawals from a checking or savings account. Every quarter, you’ll likely receive a statement detailing the reinvested dividends, purchases, sales, stock splits, or any other information that resulted in changes to your account.

Put together enough of these plans, and you have a simple, cheap way to build equity in some of the biggest names in the world – Coca-Cola, General Electric, Bank of America, Home Depot, Wal-Mart, etc.