Tag Archives | business cycle

Debt to Equity Ratio

What is the debt to equity ratio and does it apply to all business? The short answer is that investors and creditors use it to see if a business is likely to pay back its debt and sustain a decline in sales. This applies to most business, but it is not relevant to companies that don’t have debt. These two issues determine if the company is vulnerable to changes in the business cycle. If it is highly leveraged – meaning a high proportion of debt financing – it is riskier.

Reasons for the Debt to Equity Ratio

One reason that investors look at this leverage ratio is to judge whether the company will always be able to service its loans. If your ability to continually pay off debt is questionable, this highly geared (highly leveraged) business is not worth the risk. High debt payments can absorb any free cash flow in a business and lead it to a halt.

Debt to Equity Formula

The debt to equity formula is total liabilities/equity. This is the simplest version of the equation and considers both long and short term debt. Other versions of the debt to equity formula are adjusted to show long term debt/equity. This can be useful for certain industries but you should also compare it to the original formula (total liabilities/equity).

One thing about the debt to equity formula is that it is only one ratio. It does not give an in-depth view of the company’s debts but simply makes it easy to tell if something is noticeably off. Companies can also distort this ratio in an attempt to make another ratio look better. One example of this is with return on equity. If a business wants to keep a very high return on equity, it will only accept a certain amount of equity. The rest of the required financing will be from debt, thus optimizing the effect of the equity investment.

How do you use the debt to equity formula in your business? For further reading about debt to equity ratios, check out this article.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Debt to Equity Ratio, Debt to Equity Formula

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Business Plan

See Also:
Value Drivers: Building Reliable Systems to Sustain the Growth of the Business
Business Cycle
Business Intelligence and Finance
Make-or-Buy Business Decision
Acquisition Capital
Marketing Plan

Business Plan Definition

The business plan definition is the plan of action for business operations which has the goal of creating and growing sustainable profits. It is necessary for any business venture. A business plan has 3 main purposes: forming a strategic plan for future business initiatives, serving as a retrospective measure of the success of the business and it’s plans for expansion, and an explanation of the business for the purpose of raising capital. Business plans can vary greatly depending on creator, industry, operations, needs, phase in the business cycle, and more. Ultimately, the term business plan is used to describe a myriad of written documents which lay out the plans a business has for the future. Despite this, the goal is the same; creating profits for the shareholders of the venture.

Business Plan Explanation

Business plans are either internally or externally focused. Internally focused plans serve as a document to “rally the troops”; organize the stakeholders, especially employees, of a business and give an overall strategy to each of their regular tasks and actions. This has particular benefit for organization and motivation around the strategic goals that company leaders want to achieve. An internal business plan is the tool used to communicate these goals in a clear, effective, and calculated manner.

External business plans serve the purpose of raising capital. Banks constantly visit with small businesses desiring a loan to finance a new project. Meanwhile, venture capital firms accept roughly 1 out of 1000 companies that contact them for financing. An external business plan serves as a tool to show that the business concept is developed, evaluated, and planned. Investors and lenders want to eliminate as much risk as possible, and an external business plan provides them a way to measure and mitigate these risks. In short, an external business plan is a way for a developing company to stand out from other businesses while showing that goals and aspirations have been considered and documented.

These plans begin by following boilerplate sections and explanations. They then become unique documents. They are customized based on a variety of factors. For example, a web marketing firm has little use for the structure of an operations plan which is common to a manufacturing firm. In a similar fashion, a retail e-commerce store will even have a different business plan from a brick-and-mortar retail store. The factors of success, operations, marketing, risk, and measurement dictate this.

A Living Document

A business plan is often referred to as a “living document”. This is because a these plans are constantly changing. Whenever new developments in competition, marketing tools, the legal factors which relate to an industry, or others change a business plan must be updated so as to keep relevant. In this way a business plan is constantly evolving. A simple business plan is generally 20 pages, where a complicated one should not exceed 40 pages, on average.


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Business Plan Format

For a business plan, combine parts to make a whole. These parts, though different for each plan, generally follow common purposes. The standard business plan format is as follows:

1) Executive Summary

2) Business Description

3) Products and/or Services

4) Marketing Plan

5) Operations Plan

6) Management and Organizational Structure

7) Benchmarks and Milestones

8) Legal Entity Structure

9) Capitalization

10)Financial Plan and Projections

11) Appendix

Example

For example, Alejandro has decided to start a micro-lending firm in his native country of Mexico. Combining philanthropy with his enlightened self-interest, Alejandro plans to make a profit while also fostering the entrepreneurial spirit in people who face a difficult future. Alejandro is excited to start his company and therefore, make his impact on the world.

Alejandro knows that he has to create a business plan for his new venture. Despite this, he is a young adult and is not sure where to begin. Determined, Alejandro starts by searching the internet for the term how to write a business plan. He finds some results which begin his thought process. Alejandro picks up a few books from his local bookstore and begins his journey.

Writing the Business Plan

To start the business plan format, Alejandro starts by writing his executive summary. This process is difficult. Alejandro then learns from his research that to write the executive summary after the rest of the business plan. Alejandro stops this section and begins the business explanation.

After writing a rough draft explanation of his business, he begins the competitive analysis. Here, he does as much research as possible into competitors on the market. Alejandro searches the web and personal contacts for this information.

Then, Alejandro assembles industry statistics and information for his industry analysis section of the business plan. He will need to summarize these into a section which serves his purposes.

Alejandro continues and eventually finishes the plan. With a rough draft in his hand, he seeks some advice for what he has made. Alejandro knows that he has a lot to learn, so he prepares himself for a lot of criticism. He finds his local S.C.O.R.E. chapter and prepares to begin the mentoring process.

In conclusion, Alejandro knows that he has a lot to learn. Still, he realizes that anyone who has achieved greatness started somewhere. Alejandro prepares his plan more, parks his ego at the door, and walks into his meeting with a smile.

Template

Find a variety of business plan templates at S.C.O.R.E.

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business plan definition, Business Plan Format

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Business Cycle

See Also:
Efficient Market Theory
Economic Indicators
Economic Value Added
Supply and Demand Elasticity
Porters Five Forces of Competition

Business Cycle Definition

The business cycle refers to recurring patterns of expansion and contraction in an economy. It is also called the economic cycle. During the expansion phase of the cycle of business, the economy is prospering and growing. During the contraction phase of the business cycle, economic activity is in decline. Economists and other interested parties watch certain macroeconomic indicators to gauge the condition of the economy and to try to forecast changes in the business cycle.

According to this cycle, economic activity expands until it reaches a peak, then it contracts until it reaches a trough, and then it begins to expand again. Measure business cycles from peak to peak. Furthermore, the duration of an average business cycle is around five years. However, they do not run like clockwork – the durations of the individual phases as well as the entire business cycles vary widely. In the U.S., these cycles are measured and peaks and troughs are declared by the National Bureau of Economic Research (NBER).


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Phases of the Business Cycle

The business cycle consists of the four following phases: expansion, peak, contraction, and trough. During the expansion phase, also called the recovery phase, gross domestic product is growing, business activity is flourishing, and the economy is prospering. Expansion phases typically last around three to four years, but may be longer or shorter. The expansion phase ends at the peak, which is the high point of economic activity and the transition to contraction.

Economic contraction, also called recession, is often defined as two consecutive quarters of declining gross domestic product. During a contraction, business activity is slowing, unemployment is increasing, and the economy is struggling. A recession typically lasts about one year, but may be longer or shorter. The contraction phase of the business cycle follows the peak and continues till the trough. The trough is the bottom of the downturn, and represents the end of the contraction and the transition back to expansion.

4 Business Cycle Stages

1. Expansion
2. Peak
3. Contraction
4. Trough

Business Cycle Indicators

Economists watch certain macroeconomic indicators to gauge the condition of the economy. In the U.S., the Conference Board issues an index of several key economic indicators. There are three main types of economic indicators, including: leading indicators, lagging indicators, and coincident indicators.

Leading indicators considered predictors of economic trends. Analysts use these data to try to forecast changes in the business cycle. Examples of leading indicators include stock prices, building permits, average weekly initial claims for unemployment insurance and an index of consumer expectations.

Coincident indicators fluctuate simultaneously with the business cycle and reflect the current condition of the economy. Examples of coincident indicators include industrial production data, nonagricultural payroll data, and manufacturing and trade sales data.

Lagging indicators appear after the completion of economic trends and changes in the business cycle. Furthermore, they can be used to analyze the economy in retrospect or to confirm other economic data. Examples of lagging indicators include the following: average duration of unemployment, average prime rate charged by banks, and change in labor cost per unit of output.

Historic Data

To see historic business cycle data for the U.S., go to: nber.org/cycles

Conference Board Index

To see economic indicators issued by the Conference Board, go to: conference-board.org

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

business cycle

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The Changing Business Cycle

How is the Internet affecting the changing business cycle? Thirty years ago information moved much slower than today! People communicated primarily via “snail mail”, telephone or face to face. In addition, information was obtained from the newspapers or magazines.

The Changing Business Cycle

The Internet is changing all of that. Today you have email, instant messenger, Twitter and LinkedIn. If you are like me, then you are getting your newspaper online and reading blogs for the latest trends. Now trends and ideas ripple through the economy or business community in days and weeks, not years!

Whereas, before if you had a business idea or strategy you had about three years before serious competition appeared. Now you are lucky to have six months head start before someone else adopts your ideas.

Consequently, the rapid exchange of information has resulted in violent shocks to the economy. These shocks are fast and the swings are extreme!

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changing business cycle

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