Financial Planning and Control

Do you know what are the main purposes of financial planning and control?

Let's try estimating future needs, scoping out sources and uses of money, deciding how to financing, making course corrections on allocating funds. Does that about cover it?

Managing Accounts Receivable

Can your company have too much receivables? Yes! There is a cost for each sale, even if that cost is the labor needed to obtain it. Cash flow has to come in before money can be paid out, else the outgo’s have to be paid for by borrowings, or delayed compensation to sales staff and other employees, or by additional invested capital from owners.

In short, accounts receivable costs your company money. They are like interest free loans to customers covered by costs from the company. Cash flow problems from having too much money tied up in receivables can ruin a company.

Financial managers need to calculate the costs of new credit sales to the availability of cash to cover those sales. Sometimes, a company may need to hunker down and wait for the customers to pay up rather than incur more costs.

Managing Current Assets and Liabilities

Current assets are liquid enough that they can be converted into cash within a short period. Current liabilities are due within 1 year.

The key to managing these is to determine the minimum and maximum levels during the year. How will the debt payments be made? Where will the cash come from?

Comparing the current ratio from past years and to other companies of the same size in the same industry can help determine how your company is doing in this area.

Internal Rate of Return

Is a big investment worth the money? Well, what rate of return do you expect to realize from it?

Imagine that someone offers you an annuity of $5,000 for 5 years. How much should you pay for it?

The rate of return is similar in concept to the interest rate. You are putting out money for something and you want to know what you are going to get back out of it.

Here’s a test case: what is your rate of return for your social security? Hint: It’s lower than you think.

Financial Planning

This is the process of estimating future financing needs. We look both forwards and backwards. How were previous funds financed and for what purposes were they spent?

The management of a company can determine if the financing and spending patterns are in line with the company’s goals.

Looking ahead, management can budget timing and amounts of when funds will be needed and how they will be obtained.

The Permanent Portfolio

I am not sure what makes this portfolio (PRPFX) permanent other than the marketing gimmick, “the only investment allocation mix you will ever need,” but the mix is easy to grasp and anyone can set up their own fund for themselves. Here’s the formula:

• 15% Aggressive growth stocks
• 35% U.S. government bonds, bills, and notes
• 20% Gold
• 5% Silver
• 10% Swiss Franc assets
• 15% Real estate and natural asset stocks

Source: Permanent Portfolio Funds.

This is a conservative mix which outperforms other mutuals in bad times but lags behind in good times.

The problems are: 1) the 35% in government bonds and 2) the 25% in gold and silver.

Bonds usually get a lower rate of return than stocks. You pay for the security. If you believe the future to be mostly bad, then by all means invest in bonds. Despite the recent downturn, the past history of the 20th. century and the first decade of the 21st. have been mostly good.

Gold simply does not keep pace with either stocks or bonds. Despite all the booming in conservative circles, the numbers don’t lie. Between 1802 and 2006, the value of gold has barely doubled. That’s pathetic.

To sum up, last October, when the financial markets imploded, and you saw on your TV John McCain wanting to cancel a Presidential Debate in order to deal with “the crisis”, it would have been a good time to have dumped your regular funds and bought into this one. Once it looks like the economy is coming out of the recession, then it may be a good idea to move your money back.

Source: The Motely Fool.

How to Read a Quarterly Report

The Securities and Exchange Commission requires reports to be filed (form 10-K). At a minimum, these reports must provide information on sales, net income, taxes, nonrecurring revenues and expenses, accounting changes, contingencies (like lawsuits) , additions or deletions of business segments, and material changes in financial position.

Read these together with the last audited annual report. Prior year data provides a basis for comparison.