The most popular method to calculate cost of equity is Capital AssetPricing Model (CAPM). Why? Because it displays the relationship between risk and expected return for a company’s assets. This model is used throughout financing for calculating expected returns for assets while including risk and cost of capital.
Therefore, the expected return on an asset given its beta is the risk-free rate plus a risk premium equal to beta times the market risk premium. Beta is always estimated based on an equity marketindex. Additionally, determine the beta of a company by the three following variables:
Short-term government debt rate (such as a 30-day T-bill rate, or a long-term government bondyield to maturity) determines the risk-free rate of return. When cash flows come due, it is also determined. Define risk-free rate as the expected returns with certainty.
For example, a company has a beta of 0.5, a historical risk premium of 6%, and a risk-free rate of 5.25%. Therefore, the required rate of return of this company according to the CAPM is: 5.25% + (0.5 * 6%) = 8.25%
Truly successful people spend 80-90% of their time utilizing their excellent and unique abilities and delegate the rest.
The Importance of Knowing Your Leadership Competencies
Before we begin, I want to define leadership. It’s the ability to guide, direct, and influence people. There are four types of ability that a leader must know about themselves. Those include the following:
First, you need to know what your incompetencies are. Incompetent indicates the activities that you are not good at and the things that you don’t do well. Everyone is incompetent at something. Some incompetencies could be translating the numbers to something the CEO could use to make decisions, knowing the ins and outs of your accounting system, or working with technology. Before you can start to figure out what you are competent at, you need to know what you are not good at.
Write those incompetencies down. If you are asked to do work in those areas, either defer or delegate. It is not worth your time to invest in those areas when they are not profitable.
Know What Your Competencies Are
Then identify your competencies; these are activities that you are okay at, but the majority of others are better. In other words, the general population is good at that thing. For example, all accountants will know where assets, liabilities, and equity go on the balance sheet.
What Are You Excellent At?
After you have identified your incompetencies and competencies, then ask yourself… “What are you excellent at?” This refers to the activities that you excel at, but so do a few others. If you have a knack for knowing where to unlock cash after just looking at the financial statements, then it may be time to focus more of your energy there. Not everyone will have this skill though.
Know Your Unique Ability
Finally, know your unique ability. Your unique ability are the abilities only you possess. These are activities that drive value for yourself and others. In addition, your unique ability must be valued by society.
Strategic Coach outlines the four areas that you need to look at when identifying your unique ability:
So, how do you tell the difference between your unique abilities and your incompetence activities? Your unique ability gives you energy and your incompetence zaps your energy!
A Limited Liability Company means that it contains the same barrier to personalliability for actions by anemployee or member of thecompany unless there is a case offraud or gross negligence. Members are unlimited, but there are limitations in that all members must be domestic. In addition, a member can be anything like aprivate equity group,corporation, or any individual as long as they are an American citizen.
Advantages of a Limited Liability Company (LLC)
Limited Liability Company (LLC) advantages range from taxes to the limited exposure by members discussed above. There are tax benefits in that an LLC has the choice of being taxed like apartnership or acorporation. The first option means that theprofits and losses will flow through to the members, but this all depends on ownership percentages or an agreement bycontract. Therefore, the IRS only taxes members once at the individual level. AnLLC can choose to be taxed as acorporation as well. This means that thecompany would have certain salaries for its members and the actual entity will taxed as a whole.
Another large benefit of the Limited Liability Company is the ability of thecompany to own its ownintellectual property. Because this is a private form, there is also greater protection from being acquired by othercompanies. This allows the company to grow at its own pace and makedecisions without having to worry about pursuit of othercompanies.
Disadvantages of a Limited Liability Company (LLC)
One disadvantage of an LLC is the cost; it’s typically more expensive to operate than partnerships and/or proprietorships. There are annual state fees when you operate an LLC. In addition, banks usually have higher fees for LLCs than they do for other entities.
Another disadvantage is that you need to separate all records – business vs. personal. The money, meeting minutes, structure, and records all needs to be separate.
Bill has been looking for a certain toy for his son. He walks into Toys Inc. to find it. After some searching, Bill finds a GI Joe for $14 and buys it to take home to his son. The toy cost Toys Inc. $9 to get the toy from itssupplier. Thus, Toys inc. will record the following journal entries into theSales Journal:
In accounting, a standard chart of accounts is a numbered list of the accounts that comprise a company’s general ledger. Furthermore, the company chart of accounts is basically a filing system for categorizing all of a company’s accounts as well as classifying all transactions according to the accounts they affect. The standard chart of accounts list of categories may include the following:
(See the following standard chart of accounts example below).
The standard chart of accounts is also called the uniform chart of accounts. Use a chart of accounts template to prepare the basic chart of accounts for any subsidiary companies or related entities. By doing so, you make consolidation easier.
Organize in Numerical System
Furthermore, a standard chart of accounts is organized according to a numerical system. Thus, each major category will begin with a certain number, and then the sub-categories within that major category will all begin with the same number. If assets are classified by numbers starting with the digit 1, then cash accounts might be labeled 101, accounts receivable might be labeled 102, inventory might be labeled 103, and so on. Whereas, if liabilities accounts are classified by numbers starting with the digit 2, then accounts payable might be labeled 201, short-term debt might be labeled 202, and so on.
Number of Accounts Needed
Depending on the size of the company, the chart of accounts may include either few dozen accounts or a few thousand accounts. Whereas, if a company is more sophisticated, then the chart of accounts can be either paper-based or computer-based. In conclusion, the standard chart of account is useful for analyzing past transactions and using historical data to forecast future trends.
You can use the following example of chart of accounts to set up the general ledger of most companies. In addition, you may customize your COA to your industry by adding to the Inventory, Revenue and Cost of Goods Sold sections to the sample chart of accounts.
SAMPLE CHART OF ACCOUNTS
Refer to the following sample chart of accounts. Each company’s chart of accounts may look slightly different. But if you are starting from scratch, then the following is great place to start.
The decision to outsource instead of insource depends on the nature of the business. Typically, companies want to focus on their core business activities and outsource peripheral activities. Value chain analysis may help a company discover which activities to perform internally and which to consider outsourcing.
There are also disadvantages to outsourcing. Outsourcing customer service operations may cause customers to feel disaffected when they find out they are not dealing with the company they are trying to reach. Also, if the external organization has access to sensitive information, then there may be a risk of information leaking to competitors or other parties. Outsourcing certain operational activities may cause the company to give up valuable customer data used for marketing purposes. And finally, outsourcing may require the company to incur the costs of monitoring and auditing the performance of the external organization.
In today’s global economy, more and more companies are outsourcing business activities to external operations in other countries. Labor and operational costs may be significantly lower than in the company’s home country.