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Margin vs Markup

See Also:
Gross Profit Margin Analysis
Retail Markup
Chart of Accounts (COA)
Margin Percentage Calculation
Markup Percentage Calculation

Margin vs Markup Differences

Is there a difference between margin vs markup? Absolutely. More and more in today’s environment, these two terms are being used interchangeably to mean gross margin, but that misunderstanding may be the menace of the bottom line. Markup and profit are not the same! Also, the accounting for margin vs markup are different! A clear understanding and application of the two within a pricing model can have a drastic impact on the bottom line. Terminology speaking, markup is the gross profit percentage on cost prices or cost of goods sold, while margin is the gross profit percentage on selling price or sales.

Effective Ways to Optimize Profitability

So, who rules when seeking effective ways to optimize profitability?. Many mistakenly believe that if a product or service is marked up, say 25%, the result will be a 25% gross margin on the income statement. However, a 25% markup rate produces a gross margin percentage of only 20%.


NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!

Download The Pricing for Profit Inspection Guide


Markup vs Gross Margin: Which is Preferable?

Though markup is often used by operations or sales departments to set prices it often overstates the profitability of the transaction. Mathematically, markup is always a larger number when compared to the gross margin. Consequently, non-financial individuals think they are obtaining a larger profit than is often the case. By calculating sales prices in gross margin terms they can compare the profitability of that transaction to the economics of the financial statements.

(Try the calculators at the bottom of the page to discover for yourself which is better!)

Steps to Minimize Markup vs Margin Mistakes

Terminology and calculations aside, it is very important to remember that there are more factors that affect the selling price than merely cost. What the market will bear, or what the customer is willing to pay, will ultimately impact the selling price. The key is to find the price that optimizes profits while maintaining a competitive advantage. Below are steps you can take to avoid confusion when working with markup rates vs margin rates:

Establish a Price

Still deciding whether to use margin or markup to establish a price? Easily discover if your company has a pricing problem and fix it with either margin or markup. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

margin vs markup, Effective Ways to Optimize Profitability

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Effective Ways to Optimize Profitability, margin vs markup

Margin vs Markup Chart

15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit

Margin Calculator

Markup Calculator

(Originally published by Jim Wilkinson on July 24, 2013)

83

Markup Percentage Calculation

See Also:
Margin vs Markup
Margin Percentage Calculation
Retail Markup
Gross Profit Margin Ratio Analysis
Operating Profit Margin Ratio Analysis

Markup Percentage Definition

Define the markup percentage as the increase on the cost price. The markup sales are expressed as a percentage increase as to try and ensure that a company can receive the proper amount of gross profit. Furthermore, markups are normally used in retail or wholesale business as it is an easy way to price items when a store contains several different goods. Now, look at the markup percentage calculation.

Markup is great. But if you aren’t intentionally pricing for profit, then you’re missing out on some opportunities for big improvements. Click here to download your free Pricing for Profit Inspection Guide now.

How to Calculate Markup Percentage

By definition, the markup percentage calculation is cost X markup percentage. Then add that to the original unit cost to arrive at the sales price. The markup equation or markup formula is given below in several different formats. For example, if a product costs $100, then the selling price with a 25% markup would be $125.

Gross Profit = Sales Price – Unit Cost = $125 – $100 = $25

Now that you have found the gross profit, let’s look at the markup percentage calculation:

Markup Percentage = Gross Profit/Unit Cost = $25/$100 = 25%

The purpose of markup percentage is to find the ideal sales price for your products and/or services. Use the following formula to calculate sales price:

Sales Price = Cost X Markup Percentage + Cost = $100 X 25% + $100 = $125

As with most things, there are good and bad things about using markup percentage. One of the pitfalls in using the markup percentage to calculate your prices is that it is difficult to ensure that you have taken into consideration all of your costs. By using a simple rule of thumb calculation, you often miss out on indirect costs.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

Markup Percentage Calculation Example

For example, Glen started a company that specializes in the setup of office computers and software. He decided that he would like to earn a markup percentage of 20% over the cost of the computers to ensure that he makes the proper amount of profit. Furthermore, Glen has recently received a job to set up a large office space. He estimates that he will need 25 computers at a cost of $600 a piece. In addition, Glen will need to set up the company software in the building. The cost of the software to run all the computers is around $2,000. If Glen wants to earn the desired 20% markup percentage for the job, then what will he need to charge the company?

(Looking for more examples of markup? If so, then click here to access a retail markup example.)

Step 1

First, Glen must calculate the total cost of the project which is equal to the cost of software plus the cost of the computers. Find the markup percentage calculation example below.

$2,000 + ($600*25) = $17,000

Step 2

Then, Glen must find his selling price by using his desired markup of 20% and the cost calculated for the project. The formula to find the sales price is as follows:

Sales Price = (Cost * Markup Percentage) + Cost
or
Sales Price = ($17,000 * 20%) + $17,000 = $20,400

In conclusion, Glen must charge the company $20,400 to earn the return desired on cost. This is the equivalent of a profit margin of 16.7%. For a list of markup percentages and their profit margin equivalents scroll down to the bottom of the Margin vs Markup page, or you can find them using the above markup formula. Using what you’ve learned the markup percentage calculation, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.

markup percentage calculation, Markup Percentage

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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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markup percentage calculation, Markup Percentage

(Originally published by Jim Wilkinson on July 24, 2013.)

115

Daily Cash Flow Forecast

See Also:
Cash Flow Statement
Steps to Track Money In and Out of a Company
How to Create Cash Flow Projections
Thirteen Week Cash Flow Report

Daily Cash Flow Forecast

Use the Daily Cash  Flow Report to report on the daily cash balance and to help manage cash on a weekly basis. This tool is especially useful when entering a situation where active cash management is required for your daily cash flow. The daily cash flow report template is used best as a tactical, active cash management tool. Knowing your daily cash position as well as your weekly cash commitments gives you added impetus to collect money and/or to generate revenues. You can then take the information generated in the daily cash flow report and incorporate the information into another useful tool, the Flash Report!

Why use a daily cash report? When facing a cash crunch, CFO/Controllers often manage cash by reviewing the online bank balance. Though easy to do, this number is not accurate. It does not take into consideration outstanding checks. Another symptom of a cash crunch is that accounting falls behind in processing information. By preparing this daily cash flow forecast or projection you force the accounting department to stay current with posting transactions.


NOTE: Want the 25 Ways To Improve Cash Flow? It gives you tips that you can take to manage and improve your company’s cash flow in 24 hours! Get it here!

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Use in Conjunction With the 13-Week Cash Flow Report

This tool is also helpful when used in conjunction with the Thirteen Week Cash Flow Projection. It is helpful to think of the 13-Week Cash Flow Report as giving you the strategic big picture needs, while the Daily Cash Flow Report provides a more tactical level measure of your firm’s cash position. You can tie a week’s worth of cash receipts and cash disbursements as reported in the Daily Cash Report to the 13- Week Cash Flow Report.

Update the Daily Cash Report daily; remember, this process should not take more than thirty minutes to prepare. However, there is some element of planning involved insofar as weekly cash commitments are concerned. If the company is in a severe cash crunch, you may need to negotiate with vendors about partial payments.

The Daily Cash Report format should be set up and managed by the CFO/controller. However, it can be outsourced to a staff member in accounting to keep up on a daily basis. There are 3 sections to the Daily Cash Report: Today’s Cash Position, Weekly Cash Position and Payables Detail.

Prepare the daily cash flow report in the morning of each workday. Use the information on the report to help you manage cash for the day that you prepare it.

Note: Today’s Cash Position is really the ending cash position from yesterday.

Daily Cash Position

This purpose of this section is to give you the cash position at the start of the day as per the G/L balance. The cash position for the start of today is the same as the ending cash balance from the last business day. Hence, the report you update and start off with at the beginning of today will be on the information from the last business day. (Reminder: this report is prepared the following day of the reporting period.)

Starting Balance

If the report you are preparing for today is based on information from the last business day, then it is important to capture all the cash flow events that happened during the course of the last business day. To do so, we need to have several anchors. First, you need a starting balance. This starting balance is the beginning cash balance per G/L and any outstanding checks from last business day (usually yesterday). This beginning cash balance is the same as the ending cash balance from two business days ago. Both the cash balance and outstanding check balance should be summed together to a Reconciled Balance. Click here for more information on account reconciliation.

Cash Inflows

After obtaining the starting balance for the last business day, we need to capture cash inflows. Examples of cash inflows include cash payments, lockbox payments, credit card payments, and any checks received through the mail. Again, these cash inflows and deposits are from the last business day. Add up the total amount of cash inflows together to obtain the Total Deposits.

Managing your cash flow is vital to a business’s health. If you haven’t been paying attention to your cash flow, access the free 25 Ways to Improve Cash Flow whitepaper to learn how to can stay cash flow positive in tight economies. Click here to access your free guide!

Cash Disbursements

The third piece of financial information you need to obtain is information on cash disbursements from the last business day. Cash disbursements include payroll checks, A/P checks. Your firm may prefer to have a separate line item for certain significant cash disbursements. As long as you keep the overall report simple and uncluttered, this is fine. After all cash disbursements have been accounted for, sum up together to obtain Total Disbursements. Enter the cash disbursements as negative numbers. The report is intended for non-accountants who think in terms of expenses being negative.

Sum up all of these elements together to obtain the ending cash balance for the last business day:

Reconciled Balance + Total Deposits – Total Disbursements = Cash Balance.

Incoming monies from yesterday Disbursements (Insert Date from 1 business day ago)- Payroll Fees – AP Checks – Other Disbursements = Total Disbursements

ENDING CASH BALANCE AS OF : This is also the Beginning Cash Balance for TODAY. Reconciled Balance + Total Deposits – Total Disbursements.

Weekly Cash Position

The weekly cash position gives management an estimate of how much incoming cash and cash disbursements the company expects to have for the entire week. Remember, this is an estimate only. Update this estimate periodically so that the company improves on the estimate. Your company may prefer to have a separate line item for certain significant cash disbursements. This is acceptable as long as you keep the overall report as simple as possible.

A template follows as below:

Estimated Deposits for the week ending: Lockbox/Mail + Credit Cards = Total Estimated Deposits

Estimated Disbursements for the week ending: Hourly Payroll + Salary Payroll + A/P Checks Committed + A/P Checks Expenses = Total Estimated Disbursements

Managing Payables

The CFO/controller will need to list the different vendor/suppliers that the company intends to pay for the week. During times of extreme cash shortage, it may be helpful to make a note of which vendor/suppliers are of high priority.

Update daily. However at the beginning of the week, plan to give extra attention to prioritize which vendors should be paid. Depending on the cash situation of the company, try to think of paying only a portion of what’s owed.

List of the vendor/suppliers with the amount needed to be paid. Finally, sum up the total amount. Vendor A + Vendor B + Vendor C = TOTAL

Monitor & Review

Monitor and review the Daily Cash Flow Report on a daily basis in situations where cash management is big key part of company survival. A key part to focus on is the estimate of weekly cash deposits. Monitoring and reviewing the cash deposits will improve the accuracy of the estimates. For more ways to improve your cash flow like this one, download the free 25 Ways to Improve Cash Flow whitepaper.

Daily Cash Flow forecast
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Daily Cash Flow forecast

Originally published by Jim Wilkinson on July 23, 2013.

0

Debt Restructuring

See Also:
How to Keep Your Corporate Veil Closed
Corporate Veil
Bankruptcy Information
Debtor in Possession
Insolvency
Mezzanine Debt Financing (Mezzanine Loans)
Relationship With Your Lender
Reorganization

Debt Restructuring

A company can fall into financial trouble for many different reasons. Often, the gut reaction of management is to file for Chapter 11 bankruptcy. In our practice, we consider bankruptcy a last resort remedy. We always try to keep our clients out of bankruptcy. Why? Because an out-of-court debt restructuring or liquidation has the potential of achieving higher returns for all of the stakeholders at a lower cost. Furthermore, companies increase the chances for a successful operating turnaround by avoiding the negative publicity often generated by a bankruptcy filing. The purpose of this memo will be to describe the secrets of successful out-of-court debt restructuring for debtors and creditors.

The Usual Scenario That Results in Debt Restructuring

The usual scenario can occur in any type of company –  manufacturing, distribution, services, retail, etc. Typically, there is a bank lender with a line on accounts receivable, inventory, equipment, land, and trade creditors. If the business does not own real estate or equipment, then there will be a landlord and some equipment lessors. These are small differences and the principles discussed below will apply regardless. Although the bank loan may be current or just a payment or two behind, there are significant covenant defaults and payments to trade creditors are delinquent.

Restructure or Liquidate

The first thing the business must do is determine whether or not to continue operations/restructure or liquidate. This will depend largely on whether or not there is a sufficient market for the company’s products or services. If there isn’t, it is pointless to continue and the decision will be for liquidation. In the event of a decision to liquidate, the Company must then decide whether selling as a going concern perhaps to a competitor or shutting down immediately will maximize the value of the assets. We often recommend that the client hire a competent turnaround professional. They will assist with this evaluation and the creation of a viable action plan. In addition to assisting in this regard, an independent turnaround professional provides the Company with credibility when approaching creditors for concessions.

Maximizing Value

One might ask why the Company should care about maximizing the value of the assets. The answer is that often, the principals have personal guarantees that need to be satisfied. These guarantees act as a significant incentive for management to obtain the maximum value. Moreover, our experience is that most principals want to achieve the maximum recovery for all concerned. In many instances, they believe the assets are worth more than their appraised value. If the business can be sold as a going concern, then it must be able to run at close to cash flow break even for at least 90 days. This will give management a chance to market the assets as a going concern. If this is not achievable, then the business must shut down.


Click here to Download the Top 10 Destroyers of Value


The Business Plan

If there is a market for the business and the Company can operate at close to cash flow break even, then it must come up with a reasonable business plan for going forward. The business plan is often provided in two stages.

First Stage of a Business Plan: Eliminate Cash Flow Crunch

The first stage is when the Company is in crisis and it simply needs to eliminate a cash flow crunch. At this point in time, the plan must provide at a minimum for the collection of enough revenue to cover the payment of ongoing business expenses such as payroll, taxes, rent, utilities, critical supplies, transportation costs, etc. Ordinarily, this means that the Company will likely have to curtail payments on past due loans, leases, and trade credit while the business operations are being turned around. In addition to curtailing payments on past due debts, the Company usually reduces headcount and undertakes other cost-cutting measures to equalize the sources and uses of cash. Competent turnaround professionals are excellent at identifying areas where business can cut costs and become more efficient. The plan should include current and projected balance sheets, income statements, and cash flows.

Second Stage of a Business Plan: Negotiate Out-of-Court Settlements

The second stage of the business plan is developed at a later date. Hopefully, the Company’s efforts to cuts costs and make operations more efficient has turned a negative cash flow situation positive and the long term prospects for the Company are brighter. At this point, the Company has the ability to negotiate out-of-court settlements with its creditors.

Creditor Negotiations

The bankruptcy attorney, the Company, and the turnaround professional work together to negotiate with creditors. There are typically two stages to these negotiations, which also mirror the stages of the business plan. The most important negotiation obviously is with the bank; they typically hold a lien on assets, and therefore, the bank has the ability to foreclose. Contemporaneously with this process, the Company should contact its unsecured trade creditors. First, we will discuss how to approach the bank and then the trade creditors.

First Stage Bank Negotiations

Assuming the Company has identified its problems early in the process, the bank is probably not aware that a crisis exists. The worst thing the Company can do under these circumstances is attempt to continue to hide the crisis from the banker. Rather, the Company must go to the banker and disclose the nature of the crisis and provide a plan for resolving it. This is perhaps the hardest principal for most companies experiencing financial difficulty to accept. The Company almost always believes that the bank will take immediate action to liquidate its collateral. This is almost never the case since the bank really does not want to own the collateral. Also, the bank is often impressed with the honesty and integrity of the Company in bringing the problem to its attention.

Banks are not strangers to financial difficulties. Negotiations are even more effective if the Company has already hired a turnaround consultant who has reviewed the business operation and developed a plausible plan to stabilize the situation. Ideally, the meeting with the bank should be with the Company, the turnaround consultant, and the bankruptcy attorney. The Company should let the banker know that an attorney will attend the meeting, so the banker will know to invite his bankruptcy attorney. The knowledge that an attorney will attend the meeting telegraphs and prepares the banker to expect a problem.

Volunteer Complete Access to Company Records

In the wake of Enron and other corporate fraud, bankers are often suspicious and may believe their borrowers are bleeding money out of the company inappropriately. The best way to combat this problem is to volunteer to provide the banker and/or its auditors with complete access to company records.

Circumstances: Liquidation or Continue Operations

The negotiations with the bank are going to depend on the facts and circumstances of each case. They can run the gamut from a simple request to waive a covenant default or a total forbearance. This depends on the cash flow situation and whether or not the Company has decided to liquidate. If the Company has decided to liquidate, then the banker will want to know the nature of the program for selling the assets, the costs of sale, and how the proceeds of the collateral will be transmitted to the bank. If the Company has decided to continue operations, then it will usually request some form of relief on debt service.

The forms of relief can be a total cessation of debt service for a short period of time while operations are being stabilized. Or it can be an agreement to pay interest only for a certain period. Assuming the Company is honest and has a reasonable business plan, it is a virtual certainty that the bank will enter into an agreement.


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First Stage Trade Creditor Negotiations

The negotiations with trade creditors are less involved. This is because they ordinarily do not hold liens and the consequent power to shut down operations. Typically, the Company will create two lists of creditors.

The first list will consist of non-critical vendors. These creditors will be sent a letter requesting a standstill for at least 60 days. Ordinarily, no further credit will be extended by these creditors and the Company will only be able to do additional business with them on a COD basis. In this letter, the Company (or the bankruptcy attorney) will describe the extent of the financial crisis and the steps being taken to rectify the situation. If possible, the letter should include recent financial statements. The concluding sentence should promise to get back to the creditors before the end of the standstill period. Then provide a report and/or an offer to settle the debt. There are several purposes for this letter.

Communication with Creditors & Vendors

First, it is simply good business practice to notify your creditors about the situation. Oftentimes, creditors with past due debts will make collection calls.  Then company personnel will do any of the following:

  • Duck the calls
  • Promise to make payments the Company really can’t afford
  • Make phony excuses

These types of responses will only make the creditors mad. Second, the flow of information to the trade creditors will have virtually the same impact as providing information to the bank. That is, most trade creditors will agree to the standstill as an alternative to litigation. Obviously, the purpose of this effort is to avoid the cost and expense of litigation. Moreover, if a creditor obtains a judgment, then it can force the Company to file for bankruptcy, thereby defeating the entire purpose of an out-of-court settlement.

Critical vendors (i.e. those absolutely necessary for the business to survive) must be dealt with separately. In essence, keep these debts current. If the Company cannot keep them current, then it must figure out a way to do business with these vendors on a COD basis.

Equipment lessors are often the most difficult set of creditors to deal with. In the situation where the Company has leased equipment not being used, notify the leasing companies and invite them to repossess. Oftentimes, the equipment lessor will ignore these letters, and they will continue to demand payment. On at least one occasion we have sold equipment and given the proceeds to the equipment lessor who absolutely refused to repossess. If the equipment is being used in the business, then the Company should make the payments if possible or try to reschedule them.

Second Stage Negotiations

Once again, these are going to depend on the circumstances. In a reorganization, the best case scenario is that the business has turned around and is now in a position to propose a restructure or refinance of its bank debt. Here again, turnaround professionals can provide assistance in presenting refinancing requests to asset based lenders, factors or investors. These individuals are typically less risk averse than banks. Furthermore, mail a second letter to trade creditors offering either of the following:

  • A discounted cash settlement assuming funds are available
  • A payout of a larger percentage over time

Most trade creditors will accept a deeply discounted cash option rather than litigating or waiting for a larger payout over time. This is usually a good decision. We have negotiated many such settlements in the range of ten to twenty cents on the dollar.

If the business has not turned around sufficiently to proceed in this manner, then the Company should meet with the bank again to discuss the process and request an additional extension of time. Make a similar request to the trade creditors.

In a liquidation, the Company should meet with the bank periodically to report on the status of the sale of assets. Issue similar reports to trade vendors. Sometimes, trade vendors demand to be paid something immediately. The parties must note that once the Company is in default under a secured bank loan, the diversion of collateral proceeds to third parties without bank consent is actually a crime. This crime is Hindering Secured Creditors. It is a felony if the amount involved exceeds $1500. See Texas Penal Code §32.33. It is extremely rare for a bank to consent to such payments. Use this little known fact to dissuade trade creditors from taking collection action.

Conclusion

Assuming a Company is honest and trying to fulfill its fiduciary duty to creditors, then an out-of-court workout will produce a higher return to creditors and a quicker payout than a bankruptcy filing. The parties can tell if a company is honest if it provides information upon request and access to records. When you employ a competent and independent turnaround consultant, you greatly improve the likelihood of a successful outcome. Of course, a single creditor can interrupt the process by filing suit and obtaining a judgment. Such a creditor may think that it is jumping ahead of the crowd and gaining leverage to achieve a higher settlement. In most instances, this is faulty logic for several reasons.

Reasons for Faulty Logic

First, if the Company files for bankruptcy, the creditor will forgo the opportunity to be paid out-of-court. Assuming all circumstances are equal, the return will be reduced by the amount of professional fees paid to exit bankruptcy. Second, if the creditor is paid a higher percentage than other creditors, then the additional amount ordinarily is not enough to cover the legal fees the creditor must pay for the collection work. Third, if the Company ends up filing bankruptcy within 90 days, then the payment is subject to being recovered as preference. In most instances, it makes more sense to work with a Company in financial trouble (debt restructuring) than to file suit.

Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

debt restructuring

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debt restructuring

Originally published by  on July 24, 2013.
1

Capital Asset Pricing Model (CAPM)

See Also:
Cost of Capital
Cost of Capital Funding
Arbitrage Pricing Theory
APV Valuation
Capital Budgeting Methods
Discount Rates NPV
Required Rate of Return

Capital Asset Pricing Model (CAPM)

The most popular method to calculate cost of equity is Capital Asset Pricing 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.

Cost of Equity

Also known as the required rate of return on common stock, define the cost of equity as the cost of raising funds from equity investors. It is by far the most challenging element in discount rate determination.


Download The Pricing for Profit Inspection Guide


Calculating Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) states that the expected return on an asset is related to its risk as measured by beta:

E(Ri) = Rf + ßi * (E(Rm) – Rf)

Or = Rf + ßi * (risk premium)

Where

E(Ri) = the expected return on asset given its beta

Rf = the risk-free rate of return

E(Rm) = the expected return on the market portfolio

ßi = the asset’s sensitivity to returns on the market portfolio

E(Rm) – Rf = market risk premium, the expected return on the market minus the risk free rate.

Expected Return of an Asset

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 market index. Additionally, determine the beta of a company by the three following variables:

  1. The type business the company is in
  2. The degree of operating leverage of the company
  3. The company’s financial leverage

Risk-Free Rate of Return

Short-term government debt rate (such as a 30-day T-bill rate, or a long-term government bond yield 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.

Risk Premium

Additionally, risk premium indicates the “extra return” demanded by investors for shifting their money from riskless investment to an average risk investment. It is also a function of how risk-averse investors are and how risky they perceive investment opportunities compared with a riskless investment.

Cost of Equity Calculation

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%

Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Capital Asset Pricing Model (CAPM)

Strategic CFO Lab Member Extra

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Capital Asset Pricing Model (CAPM)

Originally published by Jim Wilkinson on July 23, 2013. 

0

Limited Liability Company (LLC)

See Also:
S Corporation
General Partnership
Limited Partnership
Partnership
Sole Proprietorship
Role of a Company Back Office

Limited Liability Company (LLC) Definition

A Limited Liability Company or LLC is a business form which provides limited liability much like a corporation. There can be an unlimited number of members to the company. There are also many tax benefits that emerge from forming this type of business.

Limited Liability Company (LLC) Meaning

A Limited Liability Company means that it contains the same barrier to personal liability for actions by an employee or member of the company unless there is a case of fraud 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 a private equity group, corporation, or any individual as long as they are an American citizen.


Click here to download: The Smart Back Office for SMBs


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 a partnership or a corporation. The first option means that the profits and losses will flow through to the members, but this all depends on ownership percentages or an agreement by contract. Therefore, the IRS only taxes members once at the individual level. An LLC can choose to be taxed as a corporation as well. This means that the company 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 the company to own its own intellectual property. Because this is a private form, there is also greater protection from being acquired by other companies. This allows the company to grow at its own pace and make decisions without having to worry about pursuit of other companies.

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.

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Limited Liability Company

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Limited Liability Company

Originally posted by Jim Wilkinson on July 24, 2013. 

0

Journal Entries (JEs)

See Also:
Double Entry Bookkeeping
Journal Entries For Factoring Receivables
Accounting Principles
Accounting Concepts
Adjusting Entries
Role of a Company Back Office

Journal Entries Definition

A journal entry is a recording of a transaction into a journal like the general journal or another subsidiary journal. Journal entries for accounting require that there be a debit and a credit in equal amounts. Oftentimes, there is an explanation that will go along with this to explain the transaction.

Journal Entries Meaning

A journal entry means that a transaction has taken place whether it is a sale to a customer, buying goods from a supplier, or building a warehouse. These transactions affect both the balance sheet and income statement.

As said before, journal entry accounting requires that there be an equal debit and credit for every transaction. This is also known as double entry bookkeeping. Many journal accounts have a normal balance. For example, assets have a normal debit balance if the account is increased and it is a credit if it is decreased.


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Journal Entries Example

The following example will use both balance sheet and income statement accounts to show how they work.

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 its supplier. Thus, Toys inc. will record the following journal entries into the Sales Journal:

Cash………….$14

Sales Revenue…………..$14

COGS………….$9

Inventory…………………..$9

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Journal Entries

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Journal Entries

Originally posted by Jim Wilkinson on July 24, 2013. 

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