Finance mistake: Investing Short-term Liabilities into Long-term Assets

Now and then people see a problem, and on the other side of the problem lies an opportunity. Very few people are able to see that opportunity. They get excited with the opportunity and think that it would be a great business idea.

Let us assume someone has come up with an idea and he wants to start a business. Again remember when it comes to Finance/Accounting business is treated separately from the business owners. To start a business two kinds of capital is required (1) Intellectual capital (2) Financial Capital. I will not be telling you much about intellectual capital because then it would be wavering from the topic.

Financial capital is nothing but having money to start the business. In other words starting a business requires money. When business needs money, it borrows. It borrows from two sources (1) Insiders – Mainly Owners, business partners and investors and (2) Outsiders – Predominantly from a financial institution like a bank. Now let us see how it appears on a balance sheet.

Balance sheet has two headings – Liabilities and Assets. Liabilities are nothing but source s of funds. Where did the business source its money? Money sourced from insiders is called Share Capital and money sourced from outsiders is called loan.

Assets on the other hand are uses of funds. Where did the business use the money it sourced? Most of the times it is used in acquiring fixed assets. We also discussed that sometimes the business borrows in kind and they are called Current Liabilities. Similarly on the assets side there is Current Assets.

Further simplifying the Balance Sheet in four sections: (1) Share capital and Loans as Long-Term Liabilities (This is called Long-term liability as the business is not liable to pay these within one financial year. Anything payable in a period longer than one financial year is called Long-term Liabilities.) (2) Short-term Liabilities (Current liabilities is the money business is supposed to go out of business within one financial year. Hence they are called Short-term liabilities) (3) Long-term Assets (Fixed Assets) and (4) Short-term Assets (Current Assets).

We did not purchase Land, building and equipments which are fixed assets to sell within one financial year. That is the reason they are called Long-term assets. However, if you are in real-estate business or a car retailer then definitely it would not be classified as Fixed Assets. It would be classified as Inventory under Current Assets. Ideally speaking life of equipment should be equal to life of a loan.

For example, you want to start a taxi business. You are buying a car to use it for five years then take a loan for five tears. This is because you can pay a part of the money earned from the passengers as interest to the bank. That is what should be done.

Similarly, Long-term Liabilities should be invested in Long-term Assets and Short-term Liabilities should be invested in Short-term Assets. But in case of business 1 + 1 is never equal to 2. The client who tells you that he is going to give you business next week may not even give the proposed business even in a month’s time. Also the client who is supposed to pay on the 21^st day may not pay on that day. It might be 22^nd, 25^th, 30^th or even much longer.

What I want to make clear is that there is no ideal situation in Business. In that scenario it is acceptable to invest Long-term liabilities in Short-term assets. Why am I saying acceptable? It is because long-term lenders will ask for their money only after one financial year. If we have invested in short-term assets, we can liquidate (cash) that short-term asset within one financial year. When we have to pay the long-term lenders, we will have the money to pay them.

However it is a crime to invest short-term liabilities in Long-term assets. This is the second common mistake in business. Why? This is because short-term lenders will come for their money within one financial year. If you have invested their money in Long-term assets you will not have sufficient cash to pay the short-term lenders. In this scenario owners are left with only two options: (1) Pay the money from their own pocket or (2) Sell the fixed assets to pay the short-term lenders. Selling fixed assets to pay short-term lenders is the beginning of an end. This is what leads to cash-flow issues.

 

Financial Literacy

Managing finances is a great skill to have. People who can manage their finances are invariably happy. However with complexities in life increasing, more so with financial terms regular brush up of knowledge about finance is required. Many financial firms run literacy campaigns to make people aware about investments and the best use of money.

However it is not so complex. A few things if taken care of will make you a great money manager. Financial literacy is no rocket science, it is about being aware. Just follow some discipline and read regularly and you are good to go.

• Income and Expenses – In financial parlance this is known as budgeting. It is very simple to keep track of your income. Keep an excel sheet with two sheets for every month. One for income which includes regular paycheck, interest earned, dividend that you get from shares and payment from seasonal job or freelancing. In the expense sheet keep daily record of your expenses. Record every penny. It only requires fifteen minute daily to keep track of your expenses. At the end of the month total expenses. You just need to use a simple formula in Excel. If your income exceeds your expenses, put aside the balance as saving. If expenses are more than income observe the expenses which are not so essential and cut down on them. This is the first step towards financial literacy.
• Debt Management – You might have loans on you. Paying the debts on the right time frame will keep your credit record good. Good credit scores are essential if you want to live happily without any hassles. Never collect debt, it will hamper you financial health. Pay off the debts as soon as possible and use credit cards judiciously. The secret to being financially good is to manage debts and never let it accrue.
• Insure and be safe – Insurance is an essential in the present scenario. It keeps your mind clutter free and hedges you against financial risk. At least have one life, one health and one disability insurance. If you own a car be sure to regularly renew the insurance. Insurance is an investment that keeps you safe.
• Instill the saving habit and invest – Get out of the habit of spending all. Save at least 15 percent of your earnings for the rainy days. Set aside some savings for regular investment. It will help you fight inflation.
• Subscribe and read financial newsletter – In the age of the internet it is very easy to learn basic finance. Just subscribe to free newsletters and you will be financially savvy in no time.

The key to financial literacy is to manage your finances well. Keeping these basics and learning new things will help you keep abreast with the movement.

Why well managed companies fail?

 

We have discussed about Nokia failing to hold on to its market share in mobile handset. So what are the reasons for its failure? The reason is very simple.

Failure of the in-house Symbian OS – Nokia was the first to introduce multi tasking on phones. There were many applications on the phones launched by Nokia. They also launched specialized phones for gaming in the NGAGE series. But Apple iOS in 2007 and Android OS in 2008 hurt it badly. Why did Nokia not embrace the technology? The general perception is they made a mistake of choosing the Windows platform as their future. This is not true as we will discover later. But it affected them so much that they are almost out of business in the category now.

Operating System Percentage Sales Change in USA
	Jan-14	Jan-15	Percentage Change
iOS	41.7	38.2	-8.39
Android	52.3	58.7	12.24
RIM	0.6	0.2	-66.67
Windows	5.3	6.7	26.42
Symbian	0.1	0.1	0.00
Other	0.3	0.1	-66.67

Percentage Change in Sales of Operating Systems

The business has definitely shifted towards the Android OS with Apple still fighting. The era of Smartphone came and Nokia lost the market.

In 2014 Smartphone was dirt cheap and locally made, which eventually put Nokia out of the market. Samsung was the biggest gainer in the process. A small player it now has largest share of the Android phone market.

The Android, iOS and Symbian story is a classic case of disruptive technology bringing a successful company down. So what is disruptive technology? To understand the concept first coined by Clayton Christensen in his book “The Innovator’s Dilemma” we need to understand sustaining technology first.

Sustaining Technology – The new technologies that help improve a product’s performance are called sustaining technology. They will improve the performance of product already established as valued by the customer. The improvement in performance is along the lines the customer prefers. So, a sustaining technology is one which leads to a company’s success and never leads to failure. Most of the technologies are sustaining ones.

Disruptive Technology – The technology which brings a different value to the market altogether is disruptive. They will not be as good as the products which are established in the market. They will rather have additional features which are new. The thing that makes disruptive technology tick is the ease of use. There are many examples like the desktop computer being a disruptive technology for the Mainframe, and the cell phone being a disruptive technology for the Pager.

Sustaining and Disruptive technology

 

Another reason for failure is the progress of technology at a faster rate than actually required. In the honest effort to delight the customer and be ahead of competition companies invest in disruptive technology. The technology might not be popular now but can kill their creator in future. The extra feature becomes the main feature and drives the top companies away from the market. It is very evident the way pen drives came to the market. They were an innovation done by disk companies, and now these companies are going out of business.

So the established companies will not invest in disruptive technology. It is not a rational financial decision to make. The products of disruptive technology are simple and cheap and promise low margins, which is not lucrative for big players. These products are commercialized in emerging or unknown markets. They are not significant for the larger companies. And the most important thing is the most valued of the customers do not have the need for these products.

So, companies with good management and values will listen to their customers and not invest in the disruptive technology. They are concerned about profits and are doing well in the current scenario. Here is where they fail. The same holds true for Nokia and IBM. They did not invest in the disruptive technology in their segments and lost out too much to smaller players.

5 Real ways to Earn Online

You have an internet connection at home. This is the only thing required to earn money online. Yes it’s possible. It can be an excellent supplement to your regular income. In future this is going to go the service industry way.

Online Dollars!!!

Here are some easy ways you can follow to earn money online. One or many of these might be useful for you.

• Writing and Editing – If you have passion for writing and command over even one language, you can rock. There are many options like writing an e-book, becoming a proof reader or copy editor. You will get decent payment in all the above.
• Online Tutoring – This is the future. Classrooms are going to disappear soon and online classroom will take its place. You just need to have a webcam which is on every computer now. There are many platforms on which you can teach and earn handsome. If you gain popularity on this platform, you can conduct paid webinars also.
• Affiliate marketing – This is the buzz word. If you have good marketing skills you can become an affiliate with an established seller. You can be your own boss and sell products to earn good profits.
• Advertising – If you have your own website you can earn some extra bucks advertising other brands on your website. The space you sell on your website can help you generate that extra dollar.
• Selling Photos – If you are interested in photography and have a collection, rejoice! There is an unending demand for photos on the internet. You can get paid good amount for your clicks.

I hope one of the above methods works for you. I am making money on all and have tested all methods before advising. Do not wait go online!!!!

Freelancing : Time is Money

Freelancing is the in thing. Set your own calendar and work on what interests you. But be careful of the vicious circle. Most of the freelancers develop a carefree attitude which later turns into ineffective working style. You are working for yourself. You need to do the planning, strategizing and finally working. The onus of being an efficient worker lies with you and only you.

The first and foremost important is to manage time. When you are working in an office, the office manages the time with attendance books, bio-metrics and similar tools. However when freelancing this becomes the most important focus point as it is where most of the freelancers falter. Effective time management does not come naturally to most of us. While working as freelancer for only a couple of months have found out how to manage time efficiently and have time for you.

Here are some tips easy to follow and will go a long way in making you a success in freelancing.

• Know the value of your time – You and only you know your value to the fullest and time is a scarce resource for everybody. So you need to be aware of the value of time.
• Set your goals – Setting goals go a long way in effective time management. If you know where you want to be all other things fall in place.
• Have a plan for your time – When you are not planning your time you are making a Plan to Fail. Planning too much or too little also does not help. Make an optimum plan. Make a weekly plan and then Plan you day very carefully to start with.
• Always set deadlines – While working freelance we frequently linger on and focus more on producing quality work. But spending more time does not guarantee quality. It always helps to set deadlines and then work accordingly.

WhatsApp – Open Source and Monetizing?

I don’t think I need to introduce WhatsApp anymore, the instant messaging platform that is apparently used by 600 million people worldwide. You have it on your phone, it uses your telephone number and checks whether any of the people in your phone book use WhatsApp too and then gives you the possibility to chat with these people via the internet.

The idea is quite simple (as pretty much all genius ideas are, of course) and its very much an individual decision how much of this technology anybody wants to use. There are actually two aspects within the business model that caught my eye: on the one hand, the source code of WhatsApp is open source and has been from the start of its development in 2009. On the other hand, certainly facilitated by Facebook buying  WhatsApp in February 2014 for 19 billion US Dollar (yes, Billion with a capital B!), there are clear plans to try to monetize this messaging app.

Now, you might think there is nothing wrong with this combination but for me, this is new. The idea of Open Source was always that everybody should have access to these softwares and also could develop them further if they wanted. Open Source is about sharing and furthering development, not about making money. The fact that an Open Source project goes capitalist is certainly not new but still quite astonishing. Of course, Facebook wants to earn the money they have spent. But I do wonder whether the community, the users, will accept this move. At the moment, WhatsApp charges 1 US dollar subscription a year but this is likely to go up.

The vice-president for business development Neeraj Arora stated: “Monetization is on the cards. It will happen over the next few years. We believe in the subscription model and not in advertising as people do not like to have ads as they converse.” While I certainly agree that ads would drive people away from WhatsApp, I am also quite sure that any other “monetization” strategy will too. Once people are used to Open Source, you cannot take it away from them!

The Fate of Kim DOTCOM

I guess most of us have heard of the German internet sensation turned super-villan (at least according to the FBI) Kim Schmitz, who now firms under the name Dotcom. Mr Dotcom gained notorious fame and made heaps of money with the invention of Megaupload, one of the biggest and most successful file share webpages. He has been wanted by the FBI for years as they want to charge him with theft and internet piracy — one account for every time someone uploaded a movie or a song to the Megaupload webpage. If the FBI got their hands on him, Mr Dotcom would be in prison for the rest of his life.

Ever since these charges came up, an international game of cat and mouse has been going on. As extradition from NZ to the US is extremely difficult to impossible, Dotcom moved here to secure his freedom. And ever since he made this move, NZ officials try to find a reason to get him out of the country. Even the fact that he founded a party (the Internet Party) and actively participates in our public life does not stop them. So now, immigration officials did something they normally never do: They went the extra mile of checking every detail of Dotcom’s immigration application. And they might have found something: an undeclared speeding charge!

While, of course, I also want that immigration rules are adhered to, this is such an open and blatant attempt at getting rid of Kim Dotcom that it makes me angry. Kim Dotcom is certainly no saint but he used the internet to his end in a time that it wasn’t regulated. Can we really blame him for that and persecute him for it decades later?

Ello & the non-care for money

So Wired had this article on the new alleged facebook killer that is coming out and slowly eating up users. It’s underground at the moment but it’s been getting a lot of buzz and interest online. I mean sure it’s telling people now it is different than facebook but how do we really know it is different? Every startup has lofty ideals when it starts but when you are thrown a bunch of money where do your values as a startup go? Naturally they change with the scope of your business. The whole point is based off of the fact that we are bought and sold on facebook through advertisements.

[“Ello’s founders, a group of designers and programmers led by artist Paul Budnitz, use the statement to criticize social networks for building businesses that track members’ personal data and sell it to advertisers. “Your social network is owned by advertisers,” they write. “Advertisers buy your data so they can show you more ads. You are the product that’s bought and sold.”]

I’m wondering if this is going to fall into the trap of trying to not care for money but ultimately there is money to be made. Let’s face it, the internet has a multitude of uses, and one of the predominant uses is to make money and act as a digital space for markets. Only time will tell how this will turn out.

Big Brother Is Watching

As time goes by we’re seeing our technological progress constantly reshaping almost every aspect of our lives. In this blog I want to talk a little about a couple of news stories I found recently which really got me thinking.

The first news story I want to mention is this report from the BBC. The story details allegations leveled at the NZ government by Glenn Greenwald – the American reporter who played a central role in bringing Edward Snowden’s whistle-blowing revelations to mainstream attention. Now accusing the NZ government of having instigated project ‘Speargun’ (a scheme which would entail the collection of vast amounts of citzens’ metadata without their consent), Greenwald teamed up with Kim Dotcom to bring this news to a gathering of 1000 people. Edward Snowden and Julian Assange also made appearances via video link.

This kind of news should come as a shock but I’m starting to get to the point where I don’t feel shocked. These kinds of revelations seem to be coming out of the woodwork and starting to get me very cynical about first world governments. In this age of technology information is power and the more you have about a population, the easier they’ll be to handle and control. Who could resist exploiting this ever apparent fact?

A more positive technology story which came to light however is this report from the NZ Herald. A police department are using Facebook to catch criminals and enjoying a success rate of 95%. If Facebook is proving to be an effective way to nail offenders, why do we keep hearing about these plots to collect and hoard vast amounts of data about us. It’s hard to know the truth but surely these stories wouldn’t be so frequent if there wasn’t something suspect going on.

A Saving Grace

We’re all strapped for cash these days and yet seem to still be faced by a never ending barrage of advertisements telling us to keep spending, buying and investing. Where do these companies expect us to get the money from to buy all these luxurious items and why does it often seem like our responsibility to stimulate economic growth by handing our money over to private businesses whose owners and shareholders seem hell bent on immediately removing the wealth to off-shore tax havens where it does no good for the economy whatsoever? The government seems to have no idea how to handle the looming problems.

For those of you who feel these pressures as keenly as I do I might be able to offer a short-term solution to ease them. Ferratum offers confidential, fast and easy loans. Something that can help tide you over when the belt has to be tightened is a huge help. I’ve used the service and it does exactly what it says on the tin. With these kinds of lending options there’s always a danger of becoming too dependent and even falling further into debt, but handled sensibly and taken infrequently it can offer a quick way to stay secure while waiting for the next payday to arrive.