ASSET
DEFINITION
Asset in financial world is divided into two,
current and fixed asset. Current assets are easily convertible to cash, and
which economic life or value is not more than one financial year; like stocks,
debtors and cash. While fixed assets are those, which economic life or value
covers more than one financial year; like cars, furniture and fittings, and
buildings.
But to the average man, asset is any item of value; such as cars, electronics,
gold, jewelleries, shares, and houses. Some of these items are actually asset
for investment purposes, but some are not.
In the investment world, an asset is an item which brings in money, and has
positive cash flow. Positive cash flow means that, cash in-flow from an item
like, dividend, rent, and income, is more than cash out-flow from it, like cost
of maintenance, interest, and rent, and this implies that an item with negative
cash flow is a liability, even if it’s your house.
VALUATION
Generally people value their asset by its market price, but in the financial
world, they are valued based on the historical cost. There is a need for us to
understand the basis of these valuations.
Ordinarily Mr Peter would value his house by the market price as advised by a
professional, based on some factors and the forces of demand and supply. The
forces of demand and supply are the most important factor in any market price,
and it is based on emotion and sentiment of people, which is not consistent and
reliable. This means that any market price used by Mr Peter as value for his
property is not reliable.
If this type of asset was owned by Peter & Co Ltd, it would be valued at
its Net Book Value , which is historical cost less accumulated depreciation.
Historical cost is the price at which the property was acquired, "let say
about twenty years ago", and then less depreciation charged over the
years, to give us the Net Book Value.
But for investment purpose, the value of an asset is its net cash flow. Mr
Peter and Peter & Co Ltd, should value their asset, based on its net cash
flow, which is the excess of cash in-flow over cash out-flow.
MANAGEMENT
As defined earlier, asset is anything that brings cash into your pocket. The
main principle of asset management is to increase your net cash flow, and thus
increasing its value.
For most people their job is the first asset, “since it brings in money into
their pocket” that they really have, and it is the income from this, that they
will use to start building up other asset. The best way to manage this type of
asset is by acquiring more skills, not necessarily certificate, to be able to
solve more problems. And the more or bigger the problems you can solve, the
bigger your income.
But you need to be very careful here, and learn how to save
for wealth, because not every time that people have increase in salaries that
they save, and not all savings leads to wealth, some could leads to poverty,
please click here to read an article on savings to wealth.
For the purpose of easy understanding, we shall divide investment asset into
two groups, controllable and uncontrollable asset.
Uncontrollable Asset: These are assets which you cannot influence its cash flow
like, shares, mutual funds, and debenture. The best way to manage this type of
asset is to consider the expected returns before buying it. Some has fixed rate
of return like debenture and treasury bills, but shares and mutual fund do not
have a fixed rate of return.
Before investing in shares you need to consider
the quality of management, three to five years financial statement, and its
plan for the future. In considering the financial statement, ensure that they
have a strong earning Per share, and tradition of giving regular dividend and
bonus shares.
Controllable Asset: These are assets in which you can influence it cash
in-flow. Asset management as stated earlier, is all about maximizing your cash
in-flow and minimizing your cash out-flow.
The best asset anybody can have is a
good business that brings in constant cash flow, focusing on things that brings
in cash and not necessarily sales. This is because, not all sales result into
cash, likewise not all profit usually results into cash, and this is why so
many businesses looks good from their financial record but are still having big
problems.
Great sales/profit is important, without increase in sales/profit a
business is like an insane man, and business with increase in sales/profit is
like a healthy and sane man, but if a business has great increase in
sales/profit without adequate cash flow is like a man without blood, a dead
man. Cash makes sales/profit real; it is the reality on ground. So try to
increase sales and avoid some expenses you can differ, and review your credit
policy, to ensure that you have enough cash on ground.
Showing posts with label cash flow. Show all posts
Showing posts with label cash flow. Show all posts
Thursday, 19 January 2012
Wednesday, 18 January 2012
Savings to Wealth Or Poverty
INTRODUCTION
Savings is the act of putting aside, for some time certain portion or percentage of your income to either buy an item, prepare for some unexpected expenses, or for investment purposes. For the purpose of this write-up, we would be considering savings for investment purposes.
Most people would advise you to save up to 10% of your income, but taking a look at the biblical story of Joseph in Egypt, where he saved one fifth or 20% in the year of abundant, which was their saving grace in the year of famine. I believe there is a divine wisdom in paying yourself 20% of your income, if you can afford it.
WHY SHOULD YOU SAVE
Some people believe that their income is too small, and not sufficient to meet all their basic needs, so they use this as a reason not to save. This shows that they do not understand the commandment, you shall love your neighbour as yourself, and not you shall love your neighbour more than yourself.
Whenever you spend money, you are paying someone else, rent your landlord, transport fair the owner of the means of transport, school fees the proprietor and buying food or cloths the retailer. As you continue to do this, you are helping all those you paid financially, but when you spend all your income, you are not helping yourself. It is the little that you pay yourself by saving, that would empower you (enable) to take advantage of opportunities, when it comes.
It is the first step out of poverty and rat race. Many people believe that the first step to wealth is getting a good job or starting a good business. But what has been discovered overtime is that your expenses and taste will increase as your income increases, so the only way out is for you to put a certain portion of your income aside for investment purpose.
Do you know that a seed in your hands today can become a tree tomorrow, and a tree a forest? Likewise that small amount of money with you today has the potential of becoming millions and billions if, it is allowed to grow and multiply with time.
SAVINGS TO POVERTY
In as much that it is good to save, make sure that it does not exceed six month before you put it to productive use, if not, the effect of inflation would reduce the economic value of your savings. No matter how small your savings is, find something to invest in. All savings that are not made for investment purpose cannot empower you to create wealth.
SAVINGS TO WEALTH
SAVINGS + GOOD AND TIMELY INFORMATION + ACTION= WEALTH
Savings itself has a spirit, the spirit of being sensitive to investment opportunities. As you begin to save, you should become more interested in what in the stock market, real estate and so many other opportunities offline and on the Internet.
Seek for information, subscribe to some financial journals or site on stock, to get updated information on investment opportunities, and when necessary please be prepared paid for such information, proverb 4:7 Wisdom is supreme, therefore get wisdom, though it cost all you have, get understanding. As you begin to gather and analyses information on difference investment opportunities, you will discover that there are some, in which you could start small, like buying into penny stock.
Please do not wait until you have about half of your monthly income, before you invest, start small. Continue to do this and watch your investment grow and grow, until it turns into a well, where you can always draw from.
CONCLUSION
Your real net-worth is the excess of what the economy gives you ( Cash inflow, income) over what you gave back to the economy (Cash outflow, expenses), within a particular period. This is your real value, what you have been able to save.
Savings is the act of putting aside, for some time certain portion or percentage of your income to either buy an item, prepare for some unexpected expenses, or for investment purposes. For the purpose of this write-up, we would be considering savings for investment purposes.
Most people would advise you to save up to 10% of your income, but taking a look at the biblical story of Joseph in Egypt, where he saved one fifth or 20% in the year of abundant, which was their saving grace in the year of famine. I believe there is a divine wisdom in paying yourself 20% of your income, if you can afford it.
WHY SHOULD YOU SAVE
Some people believe that their income is too small, and not sufficient to meet all their basic needs, so they use this as a reason not to save. This shows that they do not understand the commandment, you shall love your neighbour as yourself, and not you shall love your neighbour more than yourself.
Whenever you spend money, you are paying someone else, rent your landlord, transport fair the owner of the means of transport, school fees the proprietor and buying food or cloths the retailer. As you continue to do this, you are helping all those you paid financially, but when you spend all your income, you are not helping yourself. It is the little that you pay yourself by saving, that would empower you (enable) to take advantage of opportunities, when it comes.
It is the first step out of poverty and rat race. Many people believe that the first step to wealth is getting a good job or starting a good business. But what has been discovered overtime is that your expenses and taste will increase as your income increases, so the only way out is for you to put a certain portion of your income aside for investment purpose.
Do you know that a seed in your hands today can become a tree tomorrow, and a tree a forest? Likewise that small amount of money with you today has the potential of becoming millions and billions if, it is allowed to grow and multiply with time.
SAVINGS TO POVERTY
In as much that it is good to save, make sure that it does not exceed six month before you put it to productive use, if not, the effect of inflation would reduce the economic value of your savings. No matter how small your savings is, find something to invest in. All savings that are not made for investment purpose cannot empower you to create wealth.
SAVINGS TO WEALTH
SAVINGS + GOOD AND TIMELY INFORMATION + ACTION= WEALTH
Savings itself has a spirit, the spirit of being sensitive to investment opportunities. As you begin to save, you should become more interested in what in the stock market, real estate and so many other opportunities offline and on the Internet.
Seek for information, subscribe to some financial journals or site on stock, to get updated information on investment opportunities, and when necessary please be prepared paid for such information, proverb 4:7 Wisdom is supreme, therefore get wisdom, though it cost all you have, get understanding. As you begin to gather and analyses information on difference investment opportunities, you will discover that there are some, in which you could start small, like buying into penny stock.
Please do not wait until you have about half of your monthly income, before you invest, start small. Continue to do this and watch your investment grow and grow, until it turns into a well, where you can always draw from.
CONCLUSION
Your real net-worth is the excess of what the economy gives you ( Cash inflow, income) over what you gave back to the economy (Cash outflow, expenses), within a particular period. This is your real value, what you have been able to save.
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