While we keep talking about the capital, the money being spent, there is one thing that matters the most and that is the value of the business. Here we have, a list of the most popular situations where every business owner should get a business valuation done. But remember that you need not even wait for the need to arise to actually know about your business’ value.
Find more financial advices here
Are you planning to resell your company?
Resale might be part of the exit strategy for most business owners. Whether this really happens or not, every business owner would benefit from knowing the actual value the business would fetch if being resold. To you, your business might always be precious but the actual value it holds in the perspective of the other buyers is what a business valuation would tell you.
Would there be a merger or acquisition any time soon?
Whether there is something planned for the near future or whether you are just beginning to think about expanding or joining hands with other businesses, you would need to understand the true value of the business. When your company is being acquired by another firm, the business valuation would help you strike a good deal. For negotiations, you should know the strengths and the value of your business.
When you have to work on improving the profits
If you would like to know whether your business is on the right track, you should also be able to track the profits. And when you track the profits, if you find that there are gaps, then working on the business strategy would be important. When you know the worth of your business you would be able to set a benchmark and then work your way up and improve the profitability on the whole.
If you have never had a business valuation done ever!
If your company has never got a business valuation done in the past, then it gives you all the more reasons to get one done without a delay. The information collected from a business valuation report is, in fact, useful in several ways. When there are disputes in the partnership agreements when you are working on obtaining potential investors and in numerous other situations you would find a business valuation to be useful. It is a way for you to understand the worth of the business in the current market and gives you an idea about the future value of the business as well.
When we invest in an asset there are chances of having unfavorable movement in the price. To lower this risk and investment known as ‘Hedge’ is done on that asset. This hedge takes the position that is offset in that particular security similar to a Futures Contract.
Hedge In Depth
The insurance policy that we take is something that is comparable to hedging. For example: for instance let’s consider that you have taken a house in an area where there is often chances of earthquake striking, in this case, one would like to secure this asset as they have invested in this or we can also say that they want to hedge it. They can do so by taking an earthquake insurance policy on their house. When we do trading there is a ‘risk-reward tradeoff.’- meaning it is the proposition that if there is increased risk, there is an increase in the probable return as well and in hedging, there is a built-in risk. Since it reduces the possible risks it also takes away possible gains as well. Therefore we can say that hedging comes with the price. When we take insurance for an earthquake, the payments must be made every month, however, suppose the earthquake doesn’t occur the money they have paid is not given in return to them. But if you think of it losing little money is better than losing the entire asset is what many people believe in.
When a positions risk is completely eliminated it is known as a ‘Perfect Hedge.’ We can also say that hedging is fully or 100% inversely proportional to an asset that is vulnerable. This is something that is considered true and rather than in reality where the hedge is perfect hypothetically it is still not free. If the asset and the hedge do not move in the expected direction that is opposite direction it is referred to as basis risk and in this, the basis is nothing but the variation.
Hedging With Respect To Derivatives
Derivatives or contracts are financial assets that are tradable which make the movement in terms of the assets that are underlying which may be one or more than one. The securities may include the following
- Futures contracts
- Forward contract
And on the other hand, the underlying assets may include the following
- Interest rates
The relation between the underlying assets and derivatives is defined very clearly as derivatives can be considered as an effective way of hedging on their respective assets.
People need finance to meet the day to day expenses. Finance is quite essential for both productive and also nonproductive purposes. The requirement for business commencement, fixed capital, etc are the productive purposes whereas the funds required for meeting expenses incurred for marriages, education, litigation, etc are considered for nonproductive purposes. For meeting all these needs people need money. Microfinance helps the poor people to meet all the demands.
Now a day’s many countries around the world are promoting microfinance as a rural development initiative. Microfinance primarily gives credit and supports saving among the poor who do not have any access to any of the formal financial institutions. The purpose of microfinance is to promote the society’s welfare. It is a tool which has the power to empower the poor and address poverty thereby strengthening the society. It helps in creating social value which finally focuses on eradicating poverty, promotion of saving the money among poor so that they can minimize both the future and current risks and improving their livelihood opportunities.
Components of Microfinance
Microfinance consists of four components.
Microsavings- Microsavings are small savings accounts which help those people who wish to keep aside small amounts for future use. There is no need to maintain minimum balance requirements. It helps the people from lower households to save some money so that they could meet unexpected expenses in future.
Microcredit- Microcredit is a small amount of loan that the bank or other financial institutions lent to the clients. It does not require any collateral. It can be offered either through group lending or to an individual. The main aim of this loan is to offer credit to all the people who need it. These clients are street vendors, retail shops, artisanal manufacturer and so on.
Remittances- Remittances are transferring money from people who live in one place to people residing in some other place, normally across borders.
Key strategies of microfinance
It focuses exclusively on the poor people. A clear eligibility criterion has been established to select the target clients. All those who do not meet the requirements are ruled out. Also, priority has been given to women while delivering credit.
Loan conditions are listed below:
- Loans have to be repaid in installments weekly which is spread over one year
- Loans are given without accepting any collateral
- Focus on voluntary savings to minimize the future risks.
- Credit will be closely supervised
There are people who feel happy that they are saving for a rainy day. And finally the rainy day does arrive and they realize that they were not prepared or their umbrella had many holes in it. So what really goes wrong?
The reason could be a miscalculation on their part or a wrong choice of funds. In the larger scheme of the financial world, there are many things that may go wrong and people need to be aware of some basic facts before they start investing and do it in a systematic way.
Investment should beat inflation
The most important rule of investment is that it should beat the inflation. The inflation is a dynamic quantity and keeps fluctuating depending on the state of the economy in the country. it is, however, important to invest money in such instruments that get a rate of interest more than the rate of inflation. Otherwise, the value of money you have invested will keep decreasing day by day. For example, whatever you could buy for ten Dollars in the year 2000 can be bought today for 12 Dollars. So while saving keep the price index of things and inflation in mind and go for schemes that bring in more interest.
Why Mutual funds?
Mutual funds are investments that are managed by professionals. This ensures that the investments earn a better rate of interest and are invested in many more instruments than you could have managed alone. These funds have money from many people and invested in a diversified portfolio. These funds provide many advantages,
- As many people invest in these funds so the large pool of money guarantees safety and gets you the economies of the huge amount of money.
- Professional managers use their expertise to diversify and get better rates of interest across the market.
- These can be easily withdrawn or taken out when there is an emergency.
On the other hand, the investors have to pay some fees in order to use the expertise of the professional management of the funds.
What should you buy
There are many types of mutual funds, like fixed income, open-ended, equity or balanced funds etc. each one has some unique features and is suited for a particular type of investor profile. You can check online for the rankings of various Mutual fund companies and their instruments and their past performance as well. The final decision will be based upon your requirement of funds in future, the need for liquid assets and the appetite for risk.
Portfolio managers usually assess your financial health and recommend certain schemes that you can use easily. But you should be careful to not put all the eggs in the same basket. Diversify and be safe and beat the inflation by earning more from your investments.
Knowing what is working capital as the difference between a company’s current assets and current liabilities is not all that matters. There is much more to know about the various types of working capital to make a proper working capital management possible.
A deep note into the different types can be seen here:
1. Permanent working capital: this denotes the basic amount of investment which is required at all time to carry out the business. This value of current assets keeps increasing or decreasing over a period of time. But there is a minimum level of assets needed at all times. Only long-term funds are used for permanent working capital.
2. Temporary working capital: also know as fluctuating working capital or varied working capital. This is based on the production and sales of the company which is different throughout the year like more production and estimated production on forecasted demand. Such changes can alter the working capital. This is also termed as extra working capital.
3. Gross and Networking capital: gross working capital is a measure of the current assets invested in a business and networking capital is the measure of current assets over the measure of current liabilities in a business. But gross working capital is always [preferred as it helps in the immediate procurement of the resources.
4. Negative working capital: this is a rare case, where the current assets are lesser than the current liabilities which will fetch a negative amount of working capital which will indicate that the firm is soon going to face a financial crisis.
5. Reserve working capital: this is also known as cushion working capital. These refer to short-term availabilities made when a crisis or need arises. Every business operates with some amount of risks that are controllable and uncontrollable. Thus to recover from such uncontrollable risk this type of reserve working capital is maintained.
6. Regular Working capital: the amount of working capital which is maintained in a normal business cycle is termed as regular working capital.
7.Seasonal Working Capital: there are some products which have very high demand during certain seasons and for this period an amount if working capital is called seasonal.
8. Special working capital: certain special programs may be planned for business development purposes like advertisement campaigns, product development activities, sales promotion activities and expansion of markets. Thus this Special working capital is used to meet such special programmes of the company.
This completes the extensive study of the various types of working capital and the time of their need for a business.