Financial Course Blog - Update your financial strategy

Angel Investors - Financial Course

Ciprian — Sun, 28 Dec 2008 11:18:35 -0400

Angel investors are people who invest in startup businesses. The term "angel" comes from the practice in the early 1900's of wealthy businessmen investing in Broadway productions. Angels usually provide both money and knowledge to companies who are either starting up or expanding, and generally they want a higher rate of return from the companies due to the fact their type of investment is generally riskier.

Angel investors invest various sums, ranging generally from $25,000 to $100,000, but they can also gather in angel groups which can invest more in deserving companies, or in more companies at a time, thus dividing risk between various companies.

Angels often have similar financing criteria as venture capitalists, and they fill in the gap between money provided by family or friends, and venture capitalists. Angels want to see proprietary intellectual property, a large market size, management team members with expertise and experience and a current valuation that gives them a good return on investment.

Companies that want to find and attract angel investors should seek angel groups that are located in their region. When seeking individual angels it is very important to network in order to create personal connections between the yourself and the angel. It is a big plus if the angel has experience in your field so he/she can provide you with contacts and operational expertise besides the capital.

Useful links:
http://en.wikipedia.org/wiki/Angel_investor

What is the Enterprise Value of a Company - Financial Course

Ciprian — Thu, 09 Oct 2008 07:21:07 -0400

This is one of my articles in the line of financial ratios and this time I'll write about what's the Enterprise Value Financial Ratio. It's not about the Enterprise Starship from Star Trek hehe :p

Enterprise Value is a value that theoretically can tell you how much would and should someone pay for a company in order to buy it. It's what the name says. Enterprise Value is a quite accurate estimate of buying cost and is a better indicator of value than the other financial ratio called Market Capitalization because it takes into consideration more factors than the latter.

How is it calculated?
The calculation is very simple(first the theory :p)

Enterprise Value = Market Capitalization + Preferred stock + Outstanding Debt - Cash and Cash Equivalents

in other words, enterprise value is the amount of money you would pay to buy every single share of a company's common stock, preferred stock and outstanding debt. The reason the cash and cash equivalents is subtracted is after you buy the company you own the cash too. Sounds a little silly to buy cash with cash, but the cash that you pay goes to the owner/owners of the company, and the cash in the company is the cash needed for the company to run. You wouldn't want your newly bought company to have cash problems in the first day :p

What is the Market Capitalization(aka market cap, mkt cap or capitalized/capitalised value) ?
Market Capitalization is simply the result of the multiplication between the number of outstanding shares of common stock and the current price-per-share. Sounds complicated? Because of the terms used...

Try to follow this example: Company X has 1 million shares of stock outstanding and the current stock price is $130 per share, the company's market capitalization is then $130 million( 1 million shares x $130 per share = $130 million market cap).

What is the Preferred Stock ?
One definition is that Preferred Stock is the opposite of the common stock described above in the Market Capitalization calculus. Preferred stock is the participation of a larget investor in the company, investor which could require a fixed dividend or a share of the profits of the company.

What is Debt ?
If you acquire a business, you acquire it's debt also. If for example Company X has a market cap value of $130 million and a debt of $20 million, then you spend $150 million. $130 million needs to be paid now and you are now responsible to pay the $20 million in debt from the cash flow of the business or from other sources. That can affect the strategy of the company on short term or longer term. Preferably is for the debts to affect as little the company as possible and for as short of a term as possible.

What are Cash and Cash Equivalents ?
Once you acquired the business you own it's cash legally. After you own it, you can do whatever you want with it, take it and put it in your pocket, reinvest it in the company, pay the employees a bonus for buying the company, etcetera. Ofcourse the best thing to do is to use it to invest in the company further, but this varies from case to case. Basically it can also serve to reduce your acquisition price and because of that reason it is subtracted from the other components when calculating enterprise value.

What's the importance of Enterprise Value ?
There are investors who look at the enterprise value in relation to the cash flow to see if they're generating a lot of cash flow because that would mean there's little need if any to invest in the company, the company is moving alot of money from left to right on the products it sells and things run smoothly. These investors would then not be forced to reinvest the profits back into the company and they could use these profits to finance other investments.
Also a good application of Enterprise Value in relation with other ratios is to see if a company is overevaluated, evaluated properly or underevaluated.

External links:
Enterprise Value on Investopedia

Enterprise Value Gets Into Gear

Enterprise Value on Wikipedia(Very nice article but more technical)

Financial Ratios - Financial Course

Ciprian — Wed, 08 Oct 2008 05:50:38 -0400

If you are a stock market investor then you should know about indices and financial ratios,if not, still they're a good read and a good thing to know especially financial ratios and especially if you have a company. Some say if you are a prudent stock market investor, then you will not invest in a stock without understanding it's company financials. I'd say if you don't understand the company's financials then you shouldn't invest in stock market.

It's so important to know what a balance sheet is, and a cash flow statement or a profit & loss account that many investors base their investment decisions only on these statements. They do not bother to calculate the financial ratios, but I believe that is a mistake because financial ratios can indicate business trends and profitability. Also it's very useful to compare these financial ratios with the industry's standards to give some pretty good predicaments about where the company is going, to success or to bankruptcy.

The bottom line is that you need to work out financial ratios before you invest in a stock. For that you will find on this site, starting this week, some articles about financial ratios with short easy to grasp descriptions about how they can be calculated if they're missing and what purpose they can serve.

One very good external source for reading about financial ratios is wikipedia and you can find the page here:

http://en.wikipedia.org/wiki/Financial_ratio

or you can find an index of financial ratios here:

http://en.wikipedia.org/wiki/Category:Financial_ratios

Good Luck!

The perfect business - Financial Course

Ciprian — Mon, 29 Sep 2008 05:45:32 -0400

While I was surfind the net for nice interesting financial sites on the internet and interesting financial courses I found this movie in a squidoo lens and subsequently on youtube:

While this has the aura of a motivational movie and of an advertising movie to Robert Kiyosaki's programs(and it is) it's still a nice informational movie. Robert always gave me nice inspiration and gave me alot of ideas and he taught me a better way to think about money, and for that I'm grateful. Out of my appreciation for Robert I have an ad to his book "Rich Dad Poor Dad" on the left side of this blog. I highly recommend you go get it and read it through and start thinking what you learn from him and after that tell me what you think :)

Current sources of passive income

Ciprian — Sun, 21 Sep 2008 11:29:48 -0400

I think in my current situation of striving to financial freedom I need to identify the possible passive income sources and to work towards them.

They are the following:

1. Adsense advertising revenue: While this is not as it would be at the current moment, it is a good almost passive source of income, because sites do need work and subsequently this source of income is related to the amount of work you put into.

2. Stock market income/dividends: Given the current situation, an investment in the current market is a risk and noone knows if it's a win or a loss, but I believe that in the longer term it is a good source of income especially with the companies that offer you dividends.

3. Creating a business: This is not passive at all, I know. At least it's not passive at the beginning, but if you play your cards right and you manage your business right, in the long term this is the best source of passive income there could be because you're very likely to succeed no matter what you do and you're very likely to get employees that will work for you.

4. Real estate: I'm quite interested in this subject even though I am not able to buy real estate at the moment but I'm sure in the future I will so I already started my education in this field.

5. MLM networking: This seems to be quite a big business and good passive income but it requires more energy and time that is advertised. Basically once you get into a MLM scheme, if you wanna do it right and be sure you get real passive income and your structure will evolve without you in the future, you need to invest alot of your time and possibly quite alot of the income you get from the MLM business keeping in touch with the people you get into the business. It is a rewarding business but as a normal business, it's not passive at the beginning, and possibly not passive later due to the amount of work you will be requested to do to train your people and hold seminars and motivate people.

These are my five top passive income sources at the moment, maybe in the future things will change and will reorder themselves, who knows :)

Going to college? Then read this!

Ciprian — Wed, 03 Sep 2008 09:31:24 -0400

How to have a successful financial life in college if your mother and your father are not able to support you or don't want to support you? It's not as hard as you would think at first.

Of course it requires work from your part and planning but you must know that in the end it's you that's reaping the rewards.

Check this nice article at brokegradstudent.com for a very nice article list that gets you to many different blogs with various ideas to inspire you and give you practical steps.

http://www.brokegradstudent.com/50-tips-ideas-resources-on-saving-money-...

Happy reading!

Top 10 reasons people spend more than they earn

Ciprian — Mon, 01 Sep 2008 10:48:19 -0400

I just found this article on the Accumulating Money forum at the following address:
http://www.accumulatingmoney.com/top-10-reasons-people-spend-more-than-t...

and it discusses the top 10 reasons why people spend more than they earn. Please check it out, it may teach you a thing or two :)

In my opinion the biggest reasons why people spend more than they earn is the excessive use of the credit cards, the general lack of financial education(which is the biggest reason) and the ignorance to check your situation every now and then to see how good or bad you are.

According to one study, in US approx. 45% of the population spent more than they earned in 2007. That is a big number and certainly some companies make much money from this situation especially with the current recession and the possibility that many people will go bankrupt because they spend every paycheck and don't think about saving money.

Do you have other reasons why people spend more than they earn? If you I want to hear from you, tell me your opinions :)

Smoking kills and eats up your money - Financial Course

Ciprian — Fri, 29 Aug 2008 16:19:00 -0400

Did you know that if you smoke a pack of cigarettes per day at a price of $9 per pack and your age now is 30 by the time you reach 65 which is the age of retirement you could have $1,033,634.71 if you would invest that money in something that would get you a compounded interest of 10% per year? I know there's a lot to know and these numbers are not something you hear everday but still ... that's a lot of money! I repeat you don't spend a million dollars, you spend much less than that, and the exact sum is $113,400 but with the compounded interest(interest over interest year by year) your money goes up exponentially. I found this interesting smoking calculator on the following website: http://www.wheredoesallmymoneygo.com/smoking-a-pack-a-day-can-cost-you-m... and I just realized that this smoking habit is very unhealthy both for the body and for the wallet :) Pretty smokey math if you ask me :)

What you should learn your kids about money

Ciprian — Fri, 29 Aug 2008 15:17:04 -0400

Over at FMF there is an interesting article about what we should learn our kids about money and finances and I must say this is a very good topic to think of. Our kids need to understand how the money works, and why does money exist and how to use it.

Most importantly is to teach our kids how not to fall in the traps that money is associated with and those are greed, debt, crime, and others.

The main and best idea which says much about money is the following one:
Money is a great servant, but a terrible master.

Thanks FMF!

You can find the article here:
http://www.freemoneyfinance.com/2008/08/one-thing-i-wan.html

Savings and life

Ciprian — Mon, 25 Aug 2008 14:04:21 -0400

All great things come to those who save.

This quote is original as far as I know and it reflects something I really believe. It may not be all great things, but still savings are very very important, so important that they are a constant throughout the history of finance starting from the ancient Babylon city going till our days. In these times, we as normal people have more money than we had in all history and have greater possibilities to spend them them much faster than we make them. That is not necessarily a problem even though it's a thing to consider, but the fact that we have so many possibilities to spend the money made us at first ignore what we learned at home from our parents when we were young kids, and then to forget alltogether the fact that we should from time to time put some money aside in a piggy bank.

Now some people might say that if one puts $1000 in a bank due to the inflation rate and lately with our recession in one year from now, we'll have less than our interest could compensate, and I fully agree with those people. Putting money in a bank is not an investment, you're only gonna lose them. But then again you must create this essential habit, a habit of putting money aside, because even if you lose some of that money, it's better to have the rest, and not spend it all on various stuff. Another very important reason to learn this habit is that the right time will come when you'll have a small treasure and will be able to use that treasure for something you like, or invest it in something that will bring you more money like some stock actions with dividends or a house that you will rent, or who knows what other type of business or investment opportunity will find your way. Opportunities are always lurking and searching for people that are ready for them. In order to be ready, you have to be able to recognize an opportunity, but also to be able to take advantage of that opportunity. Otherwise, at the end of the day, you'll only gonna whine that so many opportunities passed right in front of you but you didn't have enough money to seize them. I don't know about you, but I feel so much joy when I see my small fortune getting bigger and bigger, but how much of our paycheck or general income should we start putting aside? Some say as much as you can, other say 10%, other say 30%, while even others say that you should start with 1%, and the list could go on. I say that 1% is good for making a habit, but very soon you're gonna want more :) 10% might be the perfect sum, and this number comes from very old times in the Babylonian era, in the form of pitoresque stories that describe how the city of Babylon became so rich and powerful in a world of instability and in the desert. At that time there were also very rich people and very poor people but The Richest Man in Babylon spread his teachings to 100 teachers which at their turn spread what they learned to even more people, but only in the city of Babylon. One of these teachings is to keep 10% of what you earn and live with the rest of 90% even though it might be harder, but to understand that your general living habits won't be affected that much. I tried and applied this strategy it worked pretty well :) I started praising my little treasure and as time passed I could think of nothing else than how to make money so that I can put 10% of that money in my treasure at home. Again I say, it's not important where you keep that money and with what interest if any. The idea is to develop a habit because we as humans are habit oriented. The strategy worked very well and my life didn't change a bit, I saw that everyone was right, my lifestyle didn't change at all, but there was a side effect. I wanted more. So I started saving more... I started saving 20% and 30% and you could say that that is not a biggie, after all there's more money in the piggy bank... Well the greed starts to come in and you want to save more and spend less. That thing alone can mess up your whole life. I learned this lesson fast and I'm glad. At one point I started to save 10% out of everything I spend, not out of everything I earn and that was also a good thing, but it makes things much more complicated than they need to be. My calculations were simple: If I save 10% out of everything I spend, if I have $1000 at the beginning of the month, and up till next month I spend $600, then I keep $60 plus the $340 that remain in my bank account anyway. This was futile and gave me so much to calculate and crunch every time I paid a dollar from my pocket. I started calculating every day how much money I spent that day and how much I needed to keep, and it happened that sometimes I didn't have enough money in my wallet to take out and put in the piggy bank, and I would leave that for the next day when I would go to the ATM to extract more and put it that evening in the piggy bank. This made my life so much complicated. Remember the point here is to develop a healthy habit and be paid while doing it and not to further complicate your life and for that sole purpose the 10% paid just when you receive the money, is the best strategy there is. After all, one should pay himself first and then the others. Some say that we should keep more than 10%, Robert Kiyosaki says we should keep 30%, 10% for savings, 10% for charity, and 10% for investments and he also emphasizes that the main idea is to get a good habit of paying ourselves first. Well this might be too much but for some people but also has the advantage to teach you that if you have enough to give away, then you have more than enough to live and that is a very good way of thinking. You might not have enough for everything you want to do, but you have enough to live and give away to your favorite charity, be it church or a hospital or anything else. Who knows, maybe you'll start a charity fund if you don't find one that you truly believe in. This amount of 30% might be too much at the beginning knowing that you already have other habits of spending your money month by month, but eventually you'll get to this amount or maybe more. Whatever amount you reach, I am strongly against saving more than 50% if it's a normal paycheck and not various passive incomes from various investments that you made over the time. An investment will only get you more money to save and to invest more, and by doing so you can take your cut and live off it, knowing that your cut will only get bigger with time and you'll only get more money while helping the world spin by doing smart investments. Savings are very important both for people and for businesses, a business can benefit widely especially in these times when the economy is heading for a serious slow down. Of course if everyone of us would save 10% or more day by day, the economy will suffer theoretically, but at the end of the day people will find themselves with more money at hand and being able to do more with the same money. One could buy more because he/she doesn't have to pay the bank with interest and actually use that interest. Also what happens when the unthinkable strikes? One could say that's what we have insurance for, and I agree, but you see insurance doesn't cover everything that could happen, and usually for the things that are riskier, insurance costs more. Financial education and knowledge are not easy to understand for the beginner, but as time passes and you evolve and learn more and apply what you learn you will see that this one pays and pays very well. Whatever you do, you must know that you should not break your lifestyle and concentrate more on making money rather than saving money, but still be able to pay yourself first and grow your treasure! Don't wait to save 10% when you'll make your million, start this healthy habit today!