Free Cash Flow and Financial Ratio Quiz

Posted by on Jun 10, 2013 in Blog, Featured, Finance | 0 comments

This is a selection of True/False questions from a corporate finance course I took.  The questions are designed to be tricky, so read them carefully.  If you dont recognize certain terms, use this as a good opportunity to learn what they mean and how they can be used.  I have found Investopedia.com to be a good reference for this.  You might want to start with what ‘free cash flow’ is.  In future articles we will try to explain some of the answers and how these ratios are important to your company and general investing.

1. (T/F) An increase in ‘accounts receivable days outstanding’ will reduce free cash flow to the firm (FCFF).

2. (T/F) Reducing debt balances will decrease free cash flow to Equity (FCFE), all else equal.

3. (T/F) An increase in dividends paid will reduce free cash flow to the firm, all else equal.

4. (T/F) An increase in ‘accounts payable days’ will reduce the length of the ‘cash cycle’.

5. (T/F) An increase in interest expense will reduce the Return on Invested Capital.

6. (T/F) Comparing two firms with identical operating performance and size, the company with the higher debt ratio will experience greater variability in its Return on Equity, all else equal.

7. (T/F) Holding other factor constant, if a company increases its accounts payable balances and uses the cash to repurchase its own stock, the Return on Invested Capital will improve.

8. (T/F) The Return on Assets is unaffected by a company’s financing choice of debt versus equity.

9. (T/F) If two companies have the same level of current assets and current liabilities, the Quick Ratio will identify the company with more inventory as having lower liquidity risk (greater liquidity).

10. (T/F) A problem with using net income as a performance measure is that it is likely to lead to over-investment.

Answers: (1. T, 2. T, 3. F, 4. T, 5. F, 6. T, 7. T, 8. F, 9. F, 10. T)

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Mind Readers

Posted by on May 23, 2013 in Blog, Featured, HR | 0 comments

The ability to read another person’s mind has been a fixture in popular movies and books for at least a century.  Characters like mutants, aliens, vampires and mad scientists are usually portrayed using this power for evil.  People are rightly uneasy with the notion of having their most intimate thoughts plucked from their minds and exposed for others to see.  Likewise, you can understand how these inner-most-thoughts could easily be exploited.  I would like to inform you that a mind-reading device was invented over a decade ago and its use has recently exploded in the last 5 years.  Stalkers, news organizations, global corporations and even the government have access to this device and will use it on you if you are not careful.  Strangely, the device of which I speak does not extract thoughts through compulsory means, but rather, individuals reveal their thoughts voluntarily.

Twitter, Facebook, and to a lesser extent LinkedIn, are broadcasting our collective thoughts 24 hours a day.  I find it funny, and at times disturbing, how often I see news of a celebrity apologizing for some Tweet they posted while tired or utterly inebriated.  It’s even more unbelievable when they are perfectly coherent.  Does your iPhone need a breathalyzer? Do we need a driver’s license for social media?  Maybe not, but your company does need a solid policy for social media.

We all have crazy thoughts, but some people just can’t keep them to themselves.  In the past, this would have only caused an awkward moment at a social gathering, but today, thousands of people will know about these unfiltered thoughts in a matter of seconds.  This poses a huge risk for your company.  Your hard-earned reputation could go down the tubes because of an off-color joke or socially insensitive remark carelessly posted by one of your employees to all his followers.

It’s obvious that anything coming from the official company account needs to checked an rechecked before it gets posted.  This type of work should not be pawned off on the volunteer intern.  This is your company’s image and you should take great care in making sure it’s correct.  There are tools available that will delay a social media post for a predetermined amount of time just in case you want to retract your words before its too late.

What your employees post in their personal time is an entirely different beast.  Your policy on such behavior should be clear.  There are many legal and privacy questions around this subject.  Many companies have policies that limit what high profile employees can say on their personal accounts.  Some companies even state that their executives are not to have personal social media accounts at all.  The bottom line is that you need to mitigate this risk to your company by implementing a policy that makes sense for your industry, your business and your customers.  Once something hits the Internet it is impossible to erase it.

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Junior Achievement: Entrepreneurs In Training

Posted by on May 2, 2013 in Blog, Featured | 0 comments

For the last few months I have been visiting Ms. Lawrence’s 3rd grade class as a representative for the Junior Achievement Organization.  JA teaches kids about workforce readiness, entrepreneurship and financial literacy though a network of volunteer professionals.  The curriculum is tailored for kids K-12 and teaches a message that I am very passionate about.  Too many kids go on to be adults without the necessary skills to be financially independent.  Many kids do not know what majors are available in college or what careers are out there beyond professional athletes and entertainers.  Many also do not fully understand the dangers of consumer debt and spending more than they earn.

The 3rd grade curriculum is based on learning about the local community.  We discuss things like how cities are zoned and the important role of city planners.  We also started our own restaurants and talked about the considerations of starting a new business.  The kids used data of local preferences to choose a cuisine and set prices. I was surprised by the class’s understanding of how pricing affects the demand and profitability of a product.  The children were also very keen about hiring a proper employee from a list of resumes.  Next time I will discuss the vital role of banks in the local economy.

An important component of the JA program is the exposure to people in various careers.  I try to teach the children about working at HP and the careers available in science and engineering. I answered several questions about how I became interested in computers at an early age and it was fun to see the kid’s interest and enthusiasm as they handled the circuit boards I brought in.

Being a role model is a very important part of the program and I plan to visit low-income schools that may lack access to professionals in the tech industry.  I believe this program is a positive force in the effort to break the ongoing cycle of poverty in our country.

JA is available across the US and I implore you see if you can make a difference by volunteering your time.  I have found it be incredibly rewarding.  The children are excited to see me and hear about my experiences.   The thought of just one child being inspired to pursue a career in the tech industry is well worth the small amount of time I devote to the program.

 

 

 

 

 

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Money (Crystal) Ball

Posted by on Apr 18, 2013 in Blog, Featured | 0 comments

Trent from The Simple Dollar posed an interesting question in a recent post titled, Anticipating Wealth.  He asks the question of what would you do differently if you knew your income would not increase over the next 10 years.  What if it went down? The level of income certainty in today’s economy is definitely different after the recent recession.  People that had steady jobs suddenly lost them.  Others with locked-in government jobs soon saw drastic cuts in pay.  Small business owners, especially, took a big hit.

So, do you make your financial choices with the assumption that down the road you will be making more than you are now?  The only time I have made this assumption was when I was in college, because I was making negative dollars.  Otherwise, I budget based on my current salary.  If I suddenly got a raise tomorrow, I honestly don’t know where it would go.

But what about for your business?  A large part of running a business is forecasting revenue and making plans that will affect you three to five years into the future.  Should I buy this equipment or move to this new building?  You don’t know what the future holds, but you have to act as if you do or you will never make it.

One thing to understand is that there are various zones of profitability at different levels of revenue.  These “profit zones” are not equally spread out along the revenue curve.  Just because you managed to increase revenues by 10% does not mean profits will increase accordingly.  If you have found a profit zone, understand it and be able to recreate it.  You might be tempted to reach for the next profit zone, but it may require financial leverage and increased risk.  In other words, you could get out of control.  How does this relate to the initial question?  In the midst of an ecomonic downturn you may have to scale back to lower profit zones.  Knowing how to stay profitable with lower volume is a key to survival.

The other thing you should consider is if you are not able to increase profits in the long run, you should at least be able to increase control. Try to make the same amount of money with less effort.  The world keeps score with dollar bills, but if you can make a comfortable living working half as much as the next guy, have you not achieved success?

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The “Thou Shalt Not’s” of Leadership

Posted by on Apr 4, 2013 in Blog, Featured, Leadership | 1 comment

Recently Jack Welch (former GE CEO) and his wife Suzy Welch (bestselling author) wrote an article on linkedin.com on called The Six Deadly Sins of Leadership.  It proved to be a worthy read and brought up several points that are easy to change if you current management style requires it.  We have given some of our thoughts on the sins below.

1. Not Giving Self-Confidence its Due.

Ryan’s Take:

Many Type-A personalities natually stifle self-confidence in others because they percieve it as a threat.  Managers with these traits need to be cognicent of this and do their best to build up those around them.  As the Welches point out, confidence gives people the ability to make bold moves.  In many ways self-confidence is like liquid courage (alcohol), only without all the embarrasing party antics and crushing headaches the next day.

Ken’s Take:

Self confidence can be encouraged by leaders in the way they respond to questions.  Using every question as a teaching opportunity, the leader creates confidence in the employee to continue to ask questions.  When questions are asked mistakes are avoided, communication increases and relationships of trust are forged.

2. Muzzling Voice.

Ryan’s Take:

This may come as a no surprise to many of you, but I regularly watched Star Trek: The Next Generation.  I think Captain Jean-Luc Picard is a model leader.  He makes the hard decisions, but he always consults his knowledgeable staff. Whether it’s Geordi La Forge’s knowledge of the ship or Worf’s expertise on security issues, Captain Picard carefully listens to recommendations without ego.  One person can’t know everything, even if he is the boss.

Ken’s Take:

Know-it-alls seem to demand respect for their knowledge.  Respect needs to be earned, not demanded.  Humility with a listening ear creates an environment of group accomplishment and pride.  All voices being heard makes for a strong company.

3. Acting Phony.

Ryan’s Take:

Sometimes it’s hard to avoid seeming like a phony when you are legitimately trying to change your bad leadership habits.  Employees might recognize the change and not trust it.  In this case, transparency is key.  Tell them you want to change and why, to gain their trust.

Ken’s Take:

Acting phony is saying I am all of that and a bag of chips.  I like to keep it fun and real. I try to focus on laughing and caring.  Whether in business, church or family lets start by laughing at me and caring about you.  It works.

4. Lacking the Guts to Differentiate.

Ryan’s Take:

Differentiating is wearing an orange shirt when everyone else is wearing white.  If you are wrong, your error is completly exposed.  The fear of this exposure leaves people frozen in their tracks  They do nothing, which in the end, is the worst thing they could do.

Ken’s Take:

My mentor also taught you must be able to fund the winners and close the losers.  You can’t let the losers drag you down.  This is actually more difficult than you might think.  You want every investment decision to be correct.  Closing down is an admission something went wrong.  Mix that with playing a large role in people’s lives and you have the reason why leaders deserve the big bucks.

5. Fixation on Results at the Expense of Values.

Ryan’s Take:

You need to know who you are to succeed.  However, nobody else places much stock in your values, just your results.  Have you ever heard of an earnings call that went like this,  “We are sorry to report that earnings are down 10% year over year.  We would have met our guidance had we bribed a Russian dignitary, illegally dumped toxic chemicals and used more child labor.”  Taking shortcuts has tempted many managers, but skirting your values will eventually lead to disaster.

Ken’s Take:

I am fixated on results!  The only question is timeline.  Positive long term results will always be supported by the real values of an organization.  A transparent, honest, positive passion for excellence creates a foundation for long term success.

6. Skipping the Fun Part

Ryan’s Take:

I went from a company that never celebrated to one that celebrates often, but with a style so canned I can tell you exactly what will be served (cupcakes), the color of napkins and the music that will be playing.  It’s a little like watching the movie Ground Hog Day.  While I do appreciate the gesture, I think these formalized celebrations are only marinally better than doing nothing.  It is akin to receiving a form email versus a handwritten card (with money stuffed in it).  As an employee, I realize how much a personal touch can make.

Ken’s Take:

Owners don’t like to celebrate because at the top of every mountain is the danger of falling.  It feels like we might be letting our guard down,  thinking we have arrived and we don’t need to work as hard.  I am not saying this is right, I am just saying I understand why celebrations make leaders nervous.

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