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.
Inflation: How to protect your savings Photo: .Keith Leighton / Alamy
3:34PM BST 15 Aug 2011
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With inflation running far ahead of the Bank of England target, most savers are finding that their money is worth less by the day. But there are steps that savers can take to avoid what has been described as a "slow motion bank robbery" - with a number of new products launched that promise to "inflation proof" your savings and deliver a real return. Below we look at the most popular options
1. Inflation-linked bonds and accounts
With inflation a concern for many savers, some banks and building societies have launched inflation-linked products for those concerned about their cash losing value. However, it can be difficult to work out which ones are best for you, and some tie your money up for a long time.
The current bonds from National Savings & Investments have the advantage of not requiring you to pay tax on your interest, and offer 0.5pc above the RPI when held for five years. However, you can take your money out earlier and still get a return as long as you hold them for at least a year. You can put in £15,000 per issue. The bonds are available from www.nsandi.com.
Rival products include the Post Office's bond which pays 1.5pc over RPI over five years or 0.5pc over three years, but is subject to tax, and a new bond launched by the Cambridge Building Society which pays 1pc over RPI fixed for five years.
2. ISAs
For those who pay tax on their interest it is almost impossible to outrun inflation. Based on June's inflation figures, a basic rate taxpayer would require an account paying 5.63pc to beat the lower level of inflation (CPI), while a 40pc taxpayer would require an account paying 7.5pc to beat the same measure.
This makes it more important than ever to use your tax-free cash ISA allowance of £5,340 a year. The best rates are available to those who are willing to put their money away for five years, and include Northern Rock's fixed-rate Isa paying 4.26pc over five years, just below June's CPI figure. With inflation predicted to fall back from here in the coming months, this product should help your cash to maintain its value.
For many people this will be better than a top-paying savings account. However, you need to make sure that you do not fall foul of your lender's rules on overpayments. Some mortgages are fully flexible, allowing you to make overpayments and get them back freely, while others do not allow you to take overpayments back, or will charge you if you make too many.
If you are thinking about remortgaging and like this option you could consider an offset mortgage with a bank like First Direct. The bank is currently offering a two year fixed rate of 2.99pc for those looking for a 65pc mortgage, which has flexible features.
But investors might prefer to buy funds than invest in a spread of dividend–paying companies, which tend to be equity-income funds. These funds have had a tougher time than many over the past three years, but are starting to come into their own as dividends make a comeback. Equity income funds include Threadneedle UK equity Income, Rathbone Income and Newton Global Higher Income.
3. Mortgage overpayments
Once you have exhausted your tax-free savings options, there is one more option that can help you to outrun inflation, if you have a home loan. This is to make overpayments on your mortgage. By offsetting your savings against your debt, you effectively end up with an interest-free savings rate at whatever rate you are paying on your mortgage.For many people this will be better than a top-paying savings account. However, you need to make sure that you do not fall foul of your lender's rules on overpayments. Some mortgages are fully flexible, allowing you to make overpayments and get them back freely, while others do not allow you to take overpayments back, or will charge you if you make too many.
If you are thinking about remortgaging and like this option you could consider an offset mortgage with a bank like First Direct. The bank is currently offering a two year fixed rate of 2.99pc for those looking for a 65pc mortgage, which has flexible features.
4. Top paying savings account
If you want total security for your savings and have exhausted all other options and used your tax-free allowance, the best you can do is to find the best paying home for your money. You will get more interest if you tie up your money for longer, but the tax, if you have to pay it, is likely to take the total return way below inflation. Top accounts include a five year bond at 5pc from KRBS, and a similar product from Melton Mowbray building society paying 4.75pc.5. Low-risk investments
£If you are happy to take on more risk, a portfolio of dividend-paying shares can help you to outrun inflation. This is only an option for those with a diversified portfolio and who can withstand (both emotionally and financially) the ups and downs of stock markets. The good news is that after a dreadful couple of years, the number of companies increasing or reinstating dividends this year outnumbers those that cut or cancelled payouts in 2009.But investors might prefer to buy funds than invest in a spread of dividend–paying companies, which tend to be equity-income funds. These funds have had a tougher time than many over the past three years, but are starting to come into their own as dividends make a comeback. Equity income funds include Threadneedle UK equity Income, Rathbone Income and Newton Global Higher Income.