AU Blogspot

              Thanks to Mzelle Biscotte for permission to use this Photo. 

Any organization in which you find employment will have a variety of managers who have a variety of responsibilities.  A typical business will have sales, operations, financial, and other types of managers, each with a different viewpoint on what it takes for the company to succeed.  In smaller enterprises a manager may wear several of these hats.  In a large corporation managers tend to be more specialized, either as to their duties or their geographic area or product line. 

These managers speak different “languages” and sometimes the result can be a virtual Tower of Babel.  For an example of this, you might try sometime asking an accountant, a plant supervisor, and an engineer what it costs the company to make a particular product.  Having completed this course you should now be able to communicate effectively with a financial manager, and you should also know how to read and interpret financial statements, determining what they’re telling you and what they aren’t.  Armed with these skills you now have the ability to ask the right questions to make better decisions both as a manager and as an investor.  And you can appreciate why the accountant, the plant supervisor, and the engineer would look at “cost” differently.  You needn’t expect them to all agree, so long as you recognize how you need to view the cost of a product. 

Whatever profession you choose, if you’re not already tied to one, you’ll need to master its language and those of professions tied to individual departments, as well.  These could include production, purchasing, materials management, human resources, sales and marketing, and even corporate legal disciplines.  This is the purpose of a general business education such as the one you are pursuing at Ashworth University. (more…)

                 Thanks to jean poole for permission to use this Photo. 

I’d like to discuss the challenges of accounting for stock options used as compensation.  Stock options are very popular with start-ups and firms expecting high growth.  The reasoning is simple.  Both types of firms have huge cash flow needs today.  If they had to rely on salaries to attract employees, they most likely would not be able to afford the talent they really need to grow the business.  By awarding their employees stock options, the right to buy stock in the future, they delay part of their compensation expense.  Stock options give their holders the right to buy stock in the future at a specified exercise price.  Typically, the exercise price is higher than the current market price of the stock.  This gives employees incentives to take actions that will raise stock prices, including actions that favorably distort earnings.   

The problem with stock options is that the company records no compensation expense for them.  When an employee exercises an option, the firm must have a share to sell to the employee at the exercise price.  Usually employees do not exercise their options until they are “in the money,” meaning the market price is higher than the exercise price.  At this point, the company has to buy back stock at the higher market price to sell to employees at the lower exercise price or issue new shares or issue shares from treasury stock.  In any event, this is a real cost to the firm.  Currently, this expense does not appear on the income statement.  It has only recently become a requirement to disclose the expense in the footnotes to the financial statements.  For a company like Microsoft that makes extensive use of stock options, this severely overstates reported earnings. 

I discuss a couple of increasingly popular tricks used by struggling companies to boost reported earnings in your lesson reading assignments.  The first is stock buybacks for the purpose of reducing the number of shares outstanding.  By reducing the shares, the EPS rises.  This causes the stock price to rise.  The important point is that no value is created in this transaction.  The same earnings are now concentrated in fewer hands, so price per share will go up even though total market value is constant. 

Another troubling development is the creation of earnings definitions other than net income.  In order to distract attention from earnings reported according to GAAP, companies will often present alternative definitions of earnings such as pro forma earnings, core earnings, or EBIDTA.  Their argument is that GAAP earnings are not representative and the firm is trying to present a more accurate figure for its true earnings potential. The problem with this is twofold.  There are no accepted definitions for any of these alternative earnings measures.  Second, in practice, the items excluded from these earnings calculations tend to be ones that lower the firm’s earnings in that accounting period.  Beware of the firm that presents “pro forma” earnings.  The correct use of that term means forecasted earnings in the future.  Firms today are increasingly using the term to mean, “This is what our earnings would have been if all these bad, non recurring things had not happened to us.”  Often these things include depreciation and interest—I certainly don’t think these are non-recurring expenses!

Lee Woodward, CPA
Financial Statements Instructor
Ashworth University School of Business

Consumer confidence (the term used by the Conference Board) and consumer sentiment (the label used by the University of Michigan) are not quite at their all-time lows, but they are very close to them.

This seems a little odd because two of the biggest elements of consumer attitudes, unemployment and inflation, are quite benign.

Unemployment, at 5.5 percent, is a hair below its long-run average (5.6 percent).  Inflation (all items) is 4.1 percent, only a little above its long-run average of 3.7 percent.

Why the doom and gloom? (more…)

 
          Thanks to Rob West for permission to use this Photo.

Our new Ashworth University Discussion Forum has been sparking some lively debate.  If you haven’t checked out the forum yet, what are you waiting for?—get engaged with your student community!

Ashworth University Business Student, Frederick F, states: 

I recently completed the Macroeconomics course, and all the negative things about Keynes were wrong!

I do agree with government intervention to get the economy out of recession and depression as a better solution by lowering interest rates and major government projects to get people employed and spending money.

However… I wrote projects, not programs. Programs that are started to help people don’t usually work, just enough to keep people employed and create more red tape.

As for supply and demand side economics, I side with Jean-Baptiste Say whom said “Demand creates it’s own supply”

Keynes basically said that excessive saving can lead to recession or depression, True, but today we are experiencing excessive greed which is causing our current recession. (High gas prices and the mortgage crisis.)

Ashworth University Technical Services Supervisor And Resident Economist, John Ash, responds:

Well, Keynes’ ideas look dynamite on paper, but they suffer from the minute flaw of not actually holding up in the real world. I know, I know, we should ignore that and just let the beauty of his carefully constructed theories suffer no detractors, but those of us who are actually studying economics to understand the world better and use that knowledge to improve our own lives (i.e., make more money) can’t allow such intricate economic fallacies to remain unmolested.

Keynes’ theories were gospel for the economic advisors of the 60s and 70s, and it is generally believed (among economists anyway) that strict adherence to his policy recommendations led to the stagflation of those decades (stagflation is when the economy is in a recession but inflation is increasing, two things which are supposed to be mutually exclusive by Keynesian standards). Keynes is a good starting point for understanding economics, but modern post-industrial economies are far too complex to be modeled with it. Don’t fall into the trap of trying to find one unifying principle which will explain everything; it’s never going to happen. There are a lot of variables, and usually no single one is going to accurately predict the movement of the economy. (more…)

              Thanks to Luis Ramirez for permission to use this Photo.

It isn’t adequate to say ‘I am a long-term investor’ and I don’t need to pay attention to the impending financial turbulence.

But how do we deal with this? How do we respond to as well as anticipate market action? How do we preserve our capital during market corrections while being able to maximize our exposure to equities during market bull runs?

After many years of investing (I actually purchased my first stock as a 13 year old back in 1967), I have come to believe that a strategy is possible to accomplish this if you are willing to be disciplined and observant of your own stocks and of the market overall.

First of all, try to identify a universe of stocks that you believe are ‘investable’. I have my own criteria of consistent revenue growth, earnings growth, free cash flow, stable shares, and a solid balance sheet. But my criteria may not be yours. You might develop a list of stocks that exhibit good value, that exercise responsible stewardship of the earth, or whatever your particular preference might be. It doesn’t really matter. But stay consistent.

Next of all, decide what the size of portfolio would be ideal for you. I initially settled on 25 different stocks. Currently I have switched to a 20 position portfolio as a maximum number of stocks I wish to own. It doesn’t matter what the size will be. But pick your maximum and stick to it.

Now bear with me as I go through this strategy. It makes sense to me and I think you will understand my thinking as we review this.

Let us assume that our investment posture will vary with our ‘exposure’ to stocks. That being fully invested is ideal in a strong market (20 positions). And being minimally invested is best in a weak investment environment (5 positions). And I vary my investment exposure based on the market’s effects on my own holdings. That is when my own portfolio is acting ‘healthy’ I am moving from cash towards equities and when my own portfolio is acting ‘ill’ I shift from equities towards cash. (more…)

                  Thanks to Mattia for permission to use this Photo.

We’ve been fortunate enough to share the insightful perspectives of economist and entrepreneur Bill Conerly with our student community since this blog first launched in 2007.  Mr. Conerly is not only a contributing blogger, but someone we consider a friend of the greater Ashworth University community as well.  He was recently interviewed on the Small Business Advocate Radio Show on the topic of business planning after the recession.  The issues covered are of vital importance to anyone one with small business aspirations, so I highly recommend listening to this very informative podcast interview.  You can also visit Bill’s Businomics Blog to show your appreciation for his efforts on behalf of our Ashworth Blogspot readers.  Thanks everyone.

Ryan Rode
Ashworth University

                Thanks to Joanne L. for permission to use this Photo.      

In the early 1970’s I can remember hearing my father, a small business owner, saying that his job would be so much easier if he could find someone who could handle the occasional welding job that he had.  You see, he had to hire an employee who knew how to weld even though he only needed a welder every once in awhile.  The problem with this was simple; my father had to pay the employee a higher wage due to his welding expertise when most of the time the employee was doing odd jobs around the office. What was the answer to this dilemma? Outsourcing!       

In the early 1990’s I can remember asking my business partner, “Why don’t we hire an outside company to handle our minimal small engine maintenance so that we do not have to add another mechanic to our staff?”  In doing so, we would not have to pay a full-time employee for sporadic work.  Again, the answer to this dilemma was outsourcing!       

Outsourcing is the process of subcontracting work to a third party. While the idea of outsourcing is not new, many entrepreneurs have not considered the beauty of hiring others to do work that their own company can not do for itself.  If this idea seems interesting to you, you might want to join the ranks of thousands of American companies who have learned how to increase productivity while saving money.  Just this past week I was speaking to an employee of a successful landscape company in our area, and learned that this company only has five full time employees; yet, they manage over two million dollars worth of landscape maintenance each year.  How do they do it?  Outsourcing!  Some companies are in a stronger position to capitalize on this concept, yet it proves to be a strategy that could work for many small business owners.

The primary reason most organizations choose to outsource work is to reduce costs and increase profits.  As a result, the organization can focus on their internal resources that provide them with a competitive edge.   In other words, if a business can reduce costs and increase profits, they can also offer a more competitive price which will allow them to gain more business.  The landscape company that I mentioned earlier began by outsourcing the work normally found within a finance department.  They hired an accounting firm to handle their receivables and payables, deposits, and payroll.  (more…)

 
              Thanks to Mark Strozier for permission to use this Photo.

The first thing you see is that changes in stock prices are far, far greater than changes in the economy.  There are two good reasons for this.  First, corporate earnings are more volatile than the economy.  If sales drop 10 percent, many companies will see profits fall 100 percent.  Their variable costs usually don’t fall in proportion to the sales drop, and their fixed costs don’t fall at all.  So fully rational investors should change their valuations of stock prices more than proportionately to changes in their expectations for the economy.  Second, not all investors are rational.  (Surprise!  You didn’t know that?)

They often overreact to current news, causing stock market movements to swing much wider than economic trends.  There’s also a herd effect that’s at work.  You are getting nervous; not sure what to do; then you see everyone else selling like mad.  You sell.  It may not be rational, but it’s more comfortable to follow the crowd.  This might be a good time to reread Keynes’s General Theory. What is the economic outlook, given the huge sell-off?  Here’s a summary of the key points from Chapter 11 of Businomics:

• The economy impacts the stock market
• The stock market tends to be a leading indicator of the economy, but not consistently or with great precision
• The stock market can affect the economy, but only to a small extent

(more…)

 
                    Thanks to Dusdin for permission to use this Photo.

Fixed assets are an important part of every company.  These include the long-term assets that you do not plan to use up in under a year.  These items are dealt with slightly differently, and include Plant, Property and Equipment as the main categories.  Many times a company will have the CPA deal with these items, but you will be all the more valuable if you know how to account for them also!  Check this website for more information:  http://www.fixedassetinfo.com/

Misty Hand
Computer Accounting Instructor
Ashworth University School Of Business 

            Thanks to Eugene Smith for permission to use this Photo.

Mutual funds are increasingly making use of Derivatives in its portfolio as a strategy to boost the returns from investment. Peruse your Fund’s portfolio in the monthly and quarterly fact sheets to ascertain the exposure that your fund has taken in these Derivatives. Comparing these across periods will reveal the extent of churning that your fund manager dolls out in these funds.

Greater Quantum of Derivatives augments the returns and amplifies the risk of your portfolio. The strategy endorsed by the portfolio manager may be Conservative or Aggressive. A Conservative Strategy reduces federal taxes but may also constrict short-term returns. Aggressive churning on the other hand increases the Federal Tax but collates greater short-term returns. Furthermore, derivatives are more effective in flat markets vs. volatile markets.

These Derivatives are usually one of the three types-

1) Credit default swaps

2) Covered Calls

3) Index tracking Derivatives (more…)