IT'S ALL ABOUT COMPANY

SALES AND TERRITORY PLAN

2012-01-26T06:57:00.000-08:00

Sales and Sales Planning

In sales, your goal is revenue-driven. How much money do you want to make? Or a better question: How much profit do you want to make? Then, how are you going to achieve that? Accurately forecasting your sales and building a sales plan or sales territory plan can help you to avoid unforeseen cash flow problems.

A sales or sales territory plan is more than having your sales force know their product pricing, features, and capabilities. In order to be successful in today's highly competitive sales world, a sales manager and individual sales person must have a plan. Our templates will help you define your own individual, territory, or regional plan, and help you define your sales team’s approach.

Your basic plan should start with a dollar amount and work backwards. If, for example, you want to gross $500,000 in sales this year, on average, how many sales would that be? What is your average sale? On average, how many prospects do you have to see or speak with to close one sale? So, how many prospects would you need to see or speak with to close the number of sales you would need to reach your goal of $500,000? What steps do you need to take to see or speak with that many prospects?

A sales forecast is an essential tool for managing a business of any size. It is a month-by-month forecast of the level of sales you expect to achieve. Most businesses draw up a sales forecast once a year. Armed with this information you can rapidly identify problems and opportunities - and do something about them.

While it's always wise to expect the unexpected, a well-constructed sales or sales territory plan, combined with accurate sales forecasting, can allow you to spend more time developing your business rather than responding to day-to-day developments in sales and marketing.

The following templates take you well on your way to developing your sales and sales territory plans and sales forecasts.

SALES CYCLE

2011-08-12T11:05:00.000-07:00

PEMBUKAAN/PENDEKATAN (OPENING)
PENJAJAKAN (PROBING)
PENDUKUNGAN (SUPPORTING)
MENGTASI KEBERATAN (HANDLING COMPLAIN)
PENUTUPAN (CLOSING)

TUJUAN: Untuk menyepakati apa saja yang akan di bahas atau di capai.

KAPAN : kETIKA Anda dan Prospek siap membicarakan bisnis.
CARANYA : Mengajukan Agenda, Menyatakan nilainya bagi calon pembeli, memeriksa penerimaan.

budget and sales forcast

2011-03-28T08:19:00.000-07:00

A pilot would never fly a plane from Los Angeles to San Francisco without a flight plan that explains how to get there. Yet all too often, small business people open their doors without clear plans to help them get where they want to go. One of the easiest ways to get there — wherever that is — is by creating a budget and sales forecast.

A budget doesn't have to be a restrictive plan that forces you to deprive yourself of what you want. In fact, a budget should be a guide, not a constraint. A reasonable budget allows you to do what you want. It allows you to use your resources where they're most needed, so your business will head in the right direction. Creating a financial plan lets you control your business's cash flow instead of it controlling you.

Creating a budget doesn't have to be a complicated or time-consuming task. Actually, in the beginning, it's best to keep things simple. The key is to determine how much you'll spend and earn in any given year, and then use that figure to project how you want to grow in subsequent years.

If you already own a business, it's simply a matter of digging through some records to see where the money went, and deciding where you actually want it to go. If you're a new entrepreneur, you'll need to do some homework and make realistic assumptions about your business. Either way, a budget is simply a tool that allows you to put your money where it can best be used.

To get started, answer the following questions:

How much can you realistically sell next year?
How much will you charge for your goods or services?
How much will it cost to produce your product?
How much are your operating expenses?
Do you need to hire employees? If so, how many, and how much will you pay them?
How much will you pay yourself?
How much payroll tax and unemployment tax will you pay?
How much money do you need to borrow, and how much will your monthly loan payments be?

The answers to these questions will form the basis of your budget and forecast. If you've already written a business plan, you should know the answers to many of these questions. If not, then this is a lot of information to try to forecast. In either case, answering these questions will help you determine two essential things — your projected income and your expenses.

In the income category, conservatively estimate how much sales revenue you'll have next year. Look at what you made last year, and extrapolate and forecast from that. New business owners without this kind of history should try to determine how much their competitors gross, and use that as a guide. Remember to be realistic. If you paint too rosy a picture, you can easily get in over your head and spend money that never materializes. If you make more than your projected income, great. But if you make less, watch out!

As far as expenses go, consider advertising, auto, insurance, rent, taxes, phone, utilities, equipment, payroll — in other words, any and all business expenses, whether you pay them now or incur them in the future.

Once you see your projected income and expenses on paper, you'll know exactly how much you need to make every month to keep things afloat, and how much you'll have left over for extra expenses. It will be far less tempting to spend money on business expenses that aren't part of your plan. And that's really what a budget is for — to ensure that your expenses aren't more than your income, so you can keep your company afloat. It's as simple as that.

DEMAND FORCASTING FOR COMPANY SUSTAINABILITY

2011-03-14T19:07:00.000-07:00

A thorough understanding customer preferences and price sensitivity is important in predicting how they will respond to a pricing policy. By understanding how price influences brand preference and choice, you will be able to more profitably capture a fair share of the value your products and services provide customers. SMD advocates an approach that includes 4 steps:
1). Segmentation: Generally the factors that influence price sensitivity will vary across different groups called segments. A failure to properly segment the market to account for customer heterogeneity may result in price sensitivity estimates that have poor predictive capabilities.
2). Preference Analysis: The key to effective preference analysis is to determine the product features or attributes that drive customer choice and then to determine how preference changes as price and other attributes change. There are three broad quantitative approaches to estimating customer price sensitivity.

Monetary Value to the Customer (MVC) Analysis: estimates price sensitivity based on factors that have a direct economic impact on customers, such as the cost of using or maintaining the product.
Survey-driven estimates: Typically some form of trade-off or conjoint analysis is used to estimate the importance of variations in a product's price and features. The result is a preference function that assigns a value (either in dollar or utility terms) that can be used to measure the attractiveness of different potential alternatives.
Revealed preference: When sufficient customer purchase data is available, customer sensitivities to changes in prices, product features, and marketing variables on the likelihood that a customer or market segment will choose a product from a specified set of alternatives based on their actual purchase behavior.When appropriate several of these techniques may be applied jointly. In the absence of survey or economically derived estimates, the judgments of product managers and sales representatives may be used as surrogate measures.

3). Preference-Driven Choice Modeling: The value or utility function that is estimated using the Preference Analysis is the used to predict a customer's choices from a specified set of alternatives. When market choice data is available, a Logit (discrete choice) procedure can be used to predict choices from a set of different alternatives. By observing how a segment's likelihood of choosing a specific alternative's price, it is possible to estimate a segment's price sensitivity for that alternative as well as their responses to changes in product attributes. Also, when feasible, it is useful to determine whether a customer's perceptions of product features correspond to objective measures of them. When they differ, choice should be based on the customer's perceptions.

4). Demand Modeling: In developing a market demand model the preference driven choice models are enhanced to account for marketing activities, distribution variables, and other factors that influence choice that are not readily measured in a preference analysis. Each respondent or segment is given a weight that reflects their impact on market sales and the choice model is calibrated to the best available market sales data. The resulting model can be used to predict how any firm's sales, market shares, and profits will vary with changes in price or another key attribute.

becoming a good salesman (tips part : II)

2011-03-07T06:02:00.000-08:00

"ATTITUDE WHEN TALKING TO THE CUSTOMERS"

Note and consider the customer conversation
don't ever interupt
show your understanding by giving comments
be patient and do not defend yourself, especially when responding to complaints and objections from customers.
show them that you are ready to help.
eye contact, relax and smile.

"MERCHANDISING PRINCIPLE"

Location

best position
easily seen
various place
affordable

2. Availability

1.5 x potential sales of between 2 times the flows to avoid running out of stock.
make sure that all of your products available in customer's store.

"CALCULATION OF THE POTENTIONAL SALES AND OFFER ENOUGH STOCK "

potentional sales
(customers) / current week = first stock (last week) (+ ) last week order ( - ) current stock

example :

last week stock : 3 packs
last week order : 7 packs
current stock : 2 packs

so, potentional sales in last week : (3+7) - 2 = 8 packs (potentional sales)
considerable amount of stock = 1.5 x8 = 12 packs
so, the amount of stock in the offer = (1.5x8) - = 10 packs / for this week

written by :

javarbenoit ramadhan

BECOMING A GOOD SALESMAN (TIPS)

2011-03-05T22:46:00.000-08:00

SALESMAN APPEARANCE STANDARD

Short and neatly combed hair
clean and not dull face
clothing must be clean, fragrant and neat
and of course don't forget your shoes

SALESMAN ATTITUDE

Confident, Polite, and friendly to everyone
Empathy to the Customers
able to actively listen to any complaints from customers
and helpful

INITIATING CONVERSATION

with loyal customers you should

say hello to the Customers
specify their name
face them with the warm handshake
don't forget to say : "How are you today?"
keep smile
and eye contact is important

2. with prospective Customers you should

say hello to the prospective customers
specify their name ( find it out first)
introduce your name and company that you represent
give a warm handshake
keep smile
and eye contact is always important

NOTE :
ALWAYS REMEMBER THAT : BEFORE YOU SELL A PRODUCT, "SELL" YOURSELF FIRST!

written by :
javarbenoit ramadhan

Before Searching for Business Ideas

2011-03-03T23:34:00.000-08:00

The starting point for developing new business ideas lies inside the prospective entrepreneur rather than in the marketplace, laboratory, business plan etc. You are the critical component - it is your strengths and weaknesses which should dictate the areas in which to seek ideas and the likely scale & scope of your business. At the end of the day, support for your business by financiers, suppliers, customers etc. will also be a vote of confidence in your abilities to make it successful.

You should build on your strengths and surmount or work around your weaknesses, and possibly cut your cloth to meet your main limitations. For example, there is little point in searching for capital-intensive or knowledge-based ideas if you have slim/no prospects of raising the necessary capital or if your educational background is unsuitable. OK, OK, we have all heard stories of garage-starts by school drops-out which attracted venture capital and eventually became mega-businesses, but we don't hear so much about the huge numbers of failures.

What angle are you coming from? Are you:

An inventor who has a product/service idea?
An innovator who has developed a new product/service?
Out of work and want to create a job for yourself?
An entrepreneur who wishes to create a business?
A manager who wishes to develop a business?

Be especially aware that inventors and innovators does not necessarily make good business people.
Areas where you should make honest assessments of your strengths and weaknesses include the following:
Educational background

Any (special) business or technical qualifications?
Do you have a knowledge of finance & marketing?
Are you up-to-date with business-related issues?

Financial strengths

Have you access to personal or family funds or finance from other sources?
How much, how easily, what conditions and when?
How long could you survive without any (regular) income while your business develops?

Commitment

Why do you really want to start a business?
Are you in reasonable health?
Have you any/many family commitments?
Does the family fully approve of your proposal to set up your own business?
Are you willing to relocate/commute in order to pursue a business possibility

Expertise & interests

Do you have insights into any business sectors or trades?
What are you good at or like doing?
Do you have a hobby/interest/talent which could become the basis of a business?

Personal qualities

Are you a resourceful, energetic and motivated person?
Have you a capacity to take lots of knocks and bounce back?
Are you realistic and practical? Are you a hard worker?
What do you dislike doing?

Prior experience

Where have you worked before?
Have you done anything special, exceptional or unusual?
What work-related skills or expertise do you have?

External contacts, resources etc.

What contacts have you in finance, business etc.
Have you or your family access to any under-utilized resources.
Do you know people who might help give you a start?

Don't be afraid to ask other people to help assess your strengths and weaknesses!!!!!!

Islamic banking – concepts and constraints

2011-03-03T05:32:00.000-08:00

Islam is not only concerned with the relationship between man and God but is also a system of beliefs. Justice, equity, fairness and morality are values which underpin the entire Islamic way of life, of which commerce is only a part. These beliefs are governed by the body of Islamic jurisprudence generally referred to as Shariah. This law is derived from various sources and is open to different interpretations. Accordingly, many financial institutions have a religious board or a Shariah adviser to ensure compliance with the principles of Shariah and to provide an opinion, or fatwa, when required.

These principles include:

Interest

The charging of any interest, or riba, is strictly prohibited – any return on money employed should be linked with the profits of an enterprise. The concept of riba extends beyond interest and usury, and although it was not given a precise definition by the Prophet Muhammad, it can perhaps best be described in terms of a prohibition of exploitation by one party who owns a product that includes money or capital and which another party wishes to acquire. Whilst interest is the classic example of this, it is probably better to think in terms of unfair exploitation.

Speculation

The Shariah does not permit speculation or gambling, or maisir. As a result, many Islamic financial institutions feel unable to enter into derivative transactions such as swaps, futures, options or contracts that insure for a profit.

Prohibited investments

Investments involving certain products, such as pork, alcohol or armaments, and activities such as gambling, are prohibited. Islamic institutions may (depending on the view taken by their Shariah committees) encounter difficulties with investments in businesses such as hotels and the entertainment industry.

Profit

Profit cannot be assured and an Islamic financial institution must assume at least part of the risk of a given transaction. There can be no guarantee of a fixed return. Equally, depositors with Islamic institutions may not invest on the basis of a guaranteed return. However, taking security is permitted in order to guard against negligence, wilful wrongdoing or breach of contract by parties to the contract.

Uncertainty

The existence of uncertainty, or gharar, in a contract is also prohibited as it requires the occurrence of an event which may not occur. When entering into a contractual relationship, there must be “full disclosure” by both parties because a transaction which is tainted with gharar will not be permitted. Any type of transaction where the subject matter, the price or both are not determined and fixed in advance will be viewed with suspicion under Shariah law.

Hoarding

Trade and enterprise, which can generate real wealth for the benefit of the community as a whole, are encouraged between partners sharing profits and losses. Hoarding money is improper; money is merely a means of exchange and should not be treated as a commodity.

Top 5 Customer Service Mistakes And How To Fix Them

2011-02-28T19:51:00.000-08:00

by Ingrid Cliff

Learn from these customer service mistakes and keep the heart of your business beating..

Caring for your customers and clients should be easy - after all, these are the people who pay your bills.

But many businesses struggle with the basics of customer care, appearing to act as if their businesses would run brilliantly as long as there were no
customers to stuff things up for them.

But customers are the lifeblood of your business, and with a little bit of care they will continue to keep the heart of your business beating.

So what are the 5 mistakes businesses make when caring for customers?

1. One hit wonders

These businesses go all out in attracting new customers. They spend a fortune on their marketing, with flashy websites and expensive ad campaigns.
They woo customers through the door and once they have the first sale, then they roll up their tent and move on to the next prospect.

When serving customers you need to always look at it as if you are building a lifetime relationship. Look at how you can help them with their second,
third and fourth sale. Look at ways of making each person feel valued and wanted. Get to know their names, extend the hand of friendship and find
out what makes them tick.

After all, it is much cheaper and easier to sell to someone who already knows you and likes what you offer, than trying to attract someone new.

2. Too much information

Then you have the businesses that understand the importance of keeping in touch with their customers, except they are like over-eager suitors.
These businesses send you three emails the first day, at least one or two the subsequent days and then keep up a daily stream of emails, texts and
other forms of contact. Their clients may feel flattered initially, but after a while, they burn out from all of the focus and attention.
Pull back a bit on the efforts to stay in touch. Allow customers to come to you through reading your blog or articles, with only a few direct contacts
thrown in, rather than constantly pushing your message onto them.

3. The silent treatment

Another mistake is the silent treatment. This is where a client may have an issue or a complaint and they contact the business with their concerns,
only to be met with the sound of crickets chirruping (or worse, a standardized "thank you for your feedback - your opinions are important to us"
letter).

If your customers take the time to contact you, whether it is via a letter, email, fax, phone or social media, and if you want to show you care, then
you need to personally respond to their comment. In these cases, silence is NOT golden.

4. Broken promises

If you promise to do something, or deliver something by a certain time or date, then caring for your customers means actually delivering on your
promises.
Many businesses come unstuck with this one by over-committing themselves in terms of appointment times, or over-promising their skills or
capabilities. Caring means being honest - and that means being honest about what you can or can't do.

5. You are all the same

The last common mistake of customer care is treating all clients and customers as if they are all the same.
So, for example, not taking into account people with disabilities, designing your layout for parents with prams or communicating with people of a
non-English speaking background. Simple things like the images used in your marketing can include or exclude people from using your services. How
you physically set up your business, or how you design your website, makes the difference between the customers you get and the sales you lose.
People are not all the same. They have different needs, wants, hopes and aspirations. Part of caring for your customers means understanding and
embracing these differences, and arranging ways to make it inclusive of all people.

Summing up

Take some time to look at your business with fresh eyes. Where are you treating clients as disposable objects or bombarding them with information?
Where are you giving them the silent treatment or breaking your word to them?

Finally, where are you treating your customers as if they are all the same? If you take the time to review and adjust your customer care strategy, you
will end up with more loyal customers, happier staff and better profits - not bad for simply caring more about your customers!.

About the Author

Ingrid Cliff is a Brisbane copywriter and the Chief Word Wizard of Heart Harmony - her writing services studio that helps put your business into words. Visit her website for a free copy of "Copywriting Secrets: Seven Secrets of Compelling Copy and Powerful Words"

Customer Service Is Dying — and I’m Not Feeling So Good Myself!

2011-02-28T05:22:00.000-08:00

Have you ever called a company and been greeted with the phrase

“Hold, please”?

How do they know you can hold? They don’t even know who you are. Maybe you can’t hold; maybe you have 10 seconds of juice left on your cell phone and your hair is on fire. Then you finally get someone on the phone, only to be told, “I can’t actually help you; I’m just paid to apologize, and I’m really sorry about that.”

Being frustrated, by a lack of customer service is nothing new. It just seems that in the last few years, companies have become more innovative when it comes to not helping you solve your problems. I recently asked a hotel employee to help me with my luggage. He told me to hold on and he would have someone look into it. I thought, “Hey, you’re someone—why can’t you look into it?”

I realize that we are as busy as we have ever been and that many younger people were not brought up in the traditional culture of customer service. But none of these excuses will protect your business in today’s challenging economy, where customers are questioning value even with companies they have known for years.

Maybe it’s time to get back to basics and make service a real priority. Sure, plenty of companies claim to offer great customer care. But raising your service standards requires more than a promise; you need to set concrete goals and establish effective procedures to meet them. Whether you own the company, handle key accounts or just accidentally encounter your customers, you’ll reap huge benefits by applying the following customer service goals:

On the Phone

Be friendly! No one wants to send a check to people who seem to be bothered by their call.
Ask permission before putting a caller on hold. If a customer is greeted with “Hold, please,” what the customer really hears is “Hang on! Someone much more important than you just called in.”
Keep it professional. Smoking cigarettes, slurping a drink, and playing the drums on your desk makes callers feel like they are getting advice from a guy in a bar.
Make sure that callers don’t have to repeat themselves. Someone who has explained a problem three times to three different people hangs up angry, whether or not the problem is solved.

All the Time

Create a positive image to attract business. Remember that squirrels are just rats with good publicity.
Display compassion for people who are upset. People who don’t think you care won’t value your solution.
Be very clear when you explain a process. When customers don’t know what you’re talking about, they assume you don’t either.
Do what you say you’re going to do. When you don’t follow through, people don’t think you have forgotten. They think you don’t care.
Know when to bring in someone else. When it becomes clear that the customer thinks you are the problem, set your ego aside and send in a fresh face.
Establish a simple, easy-to-implement customer service plan. When something is really complicated, it’s hard to tell if it’s working.

Well, I think will survive—and I feel better now that I’ve written this article—but it’s important that we help nurse that ailing to a full recovery, ensuring a healthy prognosis for today’s businesses.

The companies that attract and keep the best customers are usually the most effective at managing expectations and emotions. Successful companies train their people to anticipate customer needs and to solve problems before the customer knows they exist.

But before you can do any of this, you have to start with the basics. If you really want customers, set goals. Remember, if you don’t know where you’re going, any road will take you there.

What do you do when your value has no value?

2011-02-28T05:19:00.000-08:00

It seems we have a difficult time explaining value these days. We say things like “value-added service” and “more bang for the buck” and “we value you, our Clients” — but then we explain things in ways that do not show value to those we are trying to help. “If you buy five, the sixth one is free.” Wow! Now that’s definitely not value. How about those phone calls from credit card companies that tell you you’ve been preapproved? Technically, if we’re talking preapproval, doesn’t that mean you have not been approved yet? … which means they just pulled your name out of the phone book.

Value means customers are getting something that is definably worth more than they are paying (or asking) for. It means that the value is obvious and instantly understood. Value means you are giving more than they expected and whatever you’re giving had real value before you gave them more. There is nothing less valuable than giving someone more of something they thought was worthless to begin with. Consider this illustration: A friend of mine asked me if I wanted to go to a new restaurant. I asked whether the food was good. He said it was not really that good but the portions were huge. Great! It’s what I have always aspired to be: pudgy and average.

Top performers spend the time to create value propositions. A value proposition explains what the issue, problem or need is; describes the specifics of how you will deliver your solution; and explains how the solution will make money, make life easier or create a desired success. Each value proposition can be customized for each occasion, but it’s very important to have brief, clear, easily repeatable propositions that everyone can use.

The value proposition is not an elevator speech or a mission statement. It is focused directly on showing how value will occur when your product, service, idea, or leadership style is chosen.

Those of you who already do this well please tell the rest of the world so we can help put the value back in value.

The Secrets of Top Producers

2011-02-28T05:16:00.000-08:00

Results of our Three Year Survey completed on 5,000 top producers

Contrary to popular belief, the most successful salespeople were not those who made the most phone calls or were the best presenters and closers.

There seemed to be no common ground with best practices. We saw many top producers who had low closing ratios but set ten times more appointments and made more money than their competitors by being in front of more people.

Also, we saw many number-one salespeople who could not cold-call or even work their referrals that well. They went where their customers were: to networking meetings, golf courses, and so forth. They met face to face with fewer people but were very successful.

We saw people who managed their time well and many who did not, but who made up for it by what we can only refer to as “wasting their time with the right people.” What they had in common went beyond best practices. They focused on their strengths and were more competitive by getting better at what they already did well.

Wynnism: The key to success is doing very little of what you do badly.

We found a group we called the strugglers—people who work very hard to produce average results. They seemed to focus all their strength in areas where they just didn’t have any. We saw them working on their shortcomings over and over again, hoping for a different result.

As it turns out, hope is not a strategy. The difference is that the top producers used their strengths to improve a weakness.

Wynnism: If you do nothing but focus on your weaknesses, you will ultimately feel weak.
We did, however, uncover seven beyond-best practices that we believe may be the keys to sales success.

They explain the value of their service clearly
in about 20 seconds.
They develop simple and easy to maintain organizational processes that create client care.
They are able to stay persistent because they have
clearly defined outcomes.
They spend approximately 50% of their time building
relationships with top customers.
They leverage existing relationships by being a
solutions provider.
They survey their customers to find out what services they like best and then focus their offering in those areas.
They manage expectations and emotions by setting those expectations and making sure their customers feel heard.

Capital Structure: Perspectives

2011-02-19T02:59:00.000-08:00

Introduction

Capital has three forms: human, tangible, and financial. In this article, we focus on how financing choices influence the cost of financial capital and company value. Capital structure focuses on the sources of financial capital. The choice of structure affects firm value in some economies.¹

The seminal works of Nobel laureate Franco Modigliani conceived important relationships and issues in capital structure. Subsequently, researchers have nourished the development of capital structure theory and the related literature, and they have influenced practice. Many companies follow the prescriptions of capital structure theory, and create value for stockholders and society.²

We do not have the “perfect” capital markets described by economists, and key factors influence the choice of capital structure. For example, investors are concerned with the potential for, and cost of, bankruptcy. If a company disappoints investors by using too little or too much debt, its stock price will suffer. Understanding exactly how the use of some debt may add to company value is essential to understanding capital structure.

First, we will clarify the meaning of capital structure. Then we will address other issues.

Capital Structure

The decision on capital structure is the choice of how to finance a company. Capital structure represents the proportion of each source of financing relative to total financing. Types of financing fall into broad categories: equity, representing ownership; debt; and preferred financing. Interestingly, in some economies the concept of equity or ownership was unfamiliar until recently, as historically individuals did not enjoy the privilege of ownership.

Capital structure is about dividing up expected economic returns (not accounting returns) and risk, in exchange for providing capital. Those divisions are specific. For example, a pecking order exists amongst the different creditors. The “covenants” of debt arrangements, as well as precedent in practice and legal arrangements, address these relationships. For example, in practice “normal” trade credit is often not formalized, and the company routinely pays trade creditors.³

In the context of capital structure and an “ongoing enterprise,” equity ownership is last in line with a claim on what others have not claimed of the returns. Equity holders also bear the risks which the creditors and preferred shareholders (if present) have not accepted. In the event of financial distress or bankruptcy, in most economies very specific rules apply to dividing up the carcass.⁴

In Figure 1, the balance sheet depicts the “assets” and the source of financing, and, consequently, the claim on the assets. For simplicity, we will focus on financing with a combination of debt and equity, ignoring preferred shares as a source of capital. In fact, many firms do not have preferred shares.

capital structures

The choice of assets, how well we manage the assets, and the nature and success of our providing product/services to markets, taxes, and other factors determine the business risk of the company. The business risk influences the cost of equity capital. For a firm without debt, or an “unlevered” firm, the cost of equity equals the risk-free rate of interest plus a premium for business risk. Collectively, the business risk factors will determine the expected level and risk of cash flows that originate in the asset side of the company. These expected cash flows that come from the asset side of the company must service any debt. After debt service and the payment of taxes, the net remaining cash flows provide the expected returns to equity holders.

The higher the business risk of a company—and hence, the greater the uncertainty in cash flows from the asset side of the business—the less financial risk a company should have, and the lower the optimal D/E ratio.

Consequently, the more uncertain the environment, and the greater the sensitivity of the business side of the company to the economic environment, the more important it is that one select a capital structure with care. Companies with high sensitivity to the cyclical effects of the economy should consider a more conservative capital structure, and have a strategy to manage the structure across economic cycles.

For the purposes of discussion, Figure 1 shows four alternative financing arrangements. In financing alternative A, only equity holders provide capital. In finance jargon, situation A represents an unlevered firm. Each equity holder has a claim on the after-tax benefits of owning and operating the assets, as well as on the assets themselves. The proportion of total shares owned determines the claims of each. In some instances, different classes of equity exist, with the rights of each class defined accordingly.

Alternatives B and C represent different ways of financing the same assets, with C having a higher debt/equity ratio than B. Assuming that the nature of liabilities (discussed shortly) for B and C are the same, C, which has the higher debt/equity ratio, has greater financial risk. We will explain alternative D later in the chapter.

Relative Position and Risk

Capital structure does not involve sharing, but dividing and ordering. Deciding to use debt and/or preferred ownership entails dividing expected returns and risk, and ordering claims—both for “normal” times, as well as in the event of bankruptcy. Think of a line of people, an uncertain future, and expected benefits that may stem from the operation or sale of a company’s assets, or benefits that might arise from the financing of the company.

A metaphor helps in understanding the issues and relationships. Imagine an apple orchard. Uncertainty exists about future crops in terms of the size, and quality, of the apples. Variance in quality means not all apples in a crop have equal value. Let’s see how the ordered line works.

Governments are first in line, taking the most certain and best apples for taxes. Some taxes are ardent claims, which are due independent of the sufficiency of the crop. Equity holders bear this tax responsibility. However, tax circumstances also affect creditors and other providers of capital.

Fundamental Principle: The Division of Risk and Expected Return

A position first in line gives first access to the orchard, and the right to take the best apples. Others enter the orchard according to their order in the line, each taking the apples they are allowed—if apples are available. The average quality of the remaining apples declines with the successive removal of the best of the remaining crop, as those in line are careful and claim the best apples to which they are entitled. Remove the best, and the quality of what remains must be lower—and the risk that insufficient or no apples remain increases.

After the tax authorities, creditors are next in line, with multiple creditors each careful to specify and protect their position in the line. Sometimes creditors limit the number and/or magnitude of other credit claims in line. Preferred stockholders (if the company has any) have a position in line ahead of common stockholders, but behind creditors. A company may have different classes of stockholders, with the classes also ordered.

Equity holders are last in line, expecting to get the lower-quality (higher-risk) apples that are left, and having a claim on all that are left. Equity holders, last in line, have the most risk, but also the possibility of unlimited returns. Equity holders bear the risk that others have not accepted, and they get what is left over. Different classes of equity holders may exist, with these classes differentiated and “labeled,” for example, class A. The classification scheme specifies the positions, potential rights, and claims of each class.

With distress or bankruptcy, the provisions of the various sources of financing specify the relative position and claims of each party, but with one usual modification: tax liabilities, attorneys, and related costs often take first from the carcass. After that, an ordered picking over the corpse follows.

Motivation for Using Debt

A logical question surfaces: why would equity holders allow others to go ahead of them in the line? There are two main reasons for this: garnering incremental value; and/or issues of control.

Increased Value

Potential increases in value stem from “leveraging effects” (stockholders) and tax effects (total firm value). Capital structure theory generally focuses on the value that may originate in tax effects that result from the use of debt. This article focuses on capital structure, but we will first briefly comment on the classic financial leverage reasons for using debt.

Equally Clever Creditors and Stockholders Have Implications

The presence of astute creditors and stockholders will result in no bargains or favors in terms of dividing up expected returns and risks. Creditors will not give stockholders a bargain just to be nice. Absent control issues, capital structure is only important if interest on debt is tax-deductible, and dividend payments are not deductible.

Tax-Deductible Interest

In some economies, interest is tax-deductible. The expected deductibility of interest payments provides opportunity for value. The expected benefit of this deduction flows to stockholders, which is best illustrated with an example.

Example

A company borrows money at a fixed rate of 10%. The tax rate is 30%. The company expects to have sufficient pretax income to allow the deduction of the interest before calculating taxes. The net effects are:

Lenders expect payment of 10%, whether the company has taxable income or not.
If the company realizes the tax deduction, the after-tax cost = 10% (1 − 0.3) = 7%.
The expected benefit of the tax deduction goes to stockholders.
The stockholders have increased financial risk that stems from the borrowing—and letting creditors precede them in line.
Stockholders are astute. Increased risk increases the cost of equity capital.
However, if the expected value of the tax savings is attractive to stockholders relative to the added risk of borrowing, stockholders are happy, and the share price increases.
The right choice of capital structure will result in a reduction of the weighted cost of capital—even though the cost of both equity and debt capital increase with debt, as Table 1 illustrates, and we discuss below.

Importantly, the tax deduction and its benefit is an expected benefit, as the uncertain pretax income (EBIT or NOI in several economies) must be large enough to allow the interest deduction.

Tax Rate and Implications

Notice that the higher the tax rate, the greater the potential impact of the deductibility of interest on the after-tax cost of debt. For example, with the same 10% borrowing rate but a 40% tax rate, the after-tax cost is 10% (1 − 0.4) = 6%.

We take care not to confuse issues. We don’t benefit from higher tax rates. However, the higher the tax rate we endure, the more important becomes the choice of capital structure.

To reiterate, the tax benefits of using debt do not alter the promised cash flows in the form of interest or principle to creditors. Any tax benefits therefore precipitate to stockholders, and that is core to understanding how capital structure can create value.⁵

Asymmetry of Effects

The use of some debt in place of some equity will lever up (down) the expected returns to stockholders. If interest is tax-deductible, the potential good or bad leveraging effects are asymmetric. If the company has returns on its assets that exceed the cost of debt, a positive leveraging effect accrues to stockholders. If stockholders view these returns as attractive, given the financial risk of the added debt, the stock value increases.

If the EBIT for tax accounting is insufficient to allow the deduction of interest, stockholders must now bear the full cost of debt rather than benefit from a lower after-tax cost.⁶ This shift in tax impact results in a greater and adverse leveraging effect on returns to stockholders, as equity investors must now cover the full cost of debt, rather than the after-tax cost of debt. Using the original example above, the cost of debt rises from the after-tax 7% to the full 10%. The inability to realize the interest deduction results in an asymmetric effect on expected returns to stockholders.

Behavior of Weighted Cost of Capital

An example showing the behavior of the component costs of capital and the weighted cost of capital (WCOC) appears in Table 1. For simplification, we consider only equity and debt sources of capital. One might employ one or more models, or different forms of models, as well as alternative econometric procedures to estimate the costs of the components of capital for different levels of leverage.⁷

Table 1. Calculation of weighted cost of capital (WCOC)

Source of capital	Relative proportion	Cost of component	Weighted cost of component	Weighted cost of captial
Debt	0%	5.40%	0.00%
Equity	100%	13.00%	13.00%
				13.00%
Debt	10%	5.40%	0.54%
Equity	90%	13.40%	12.10%
				12.64%
Debt	20%	6.10%	1.22%
Equity	80%	13.90%	11.12%
				12.34%
Debt	30%	6.60%	1.98%
Equity	70%	14.50%	10.15%
				12.13%
Debt	40%	7.60%	3.04%
Equity	60%	15.50%	9.30%
				12.34%
Debt	50%	9.00%	4.50%
Equity	50%	17.20%	8.60%
				13.10%

Entries reflect the raising of money from debt and equity in different proportions. The more debt that is used as a proportion of the total, the less equity (and fewer shares). Costs are after-tax costs to the company. The cost of debt represents the weighted cost of debt, reflecting the fact that first-in-line creditors have lower risk, and the borrowing cost is lower. Creditors that follow in line have greater risk, and demand a higher rate. The chapter, “The Weighted Cost of Capital: Perspectives and Applications,” addresses issues related to the WCOC.

For all entries in this table, the company is getting the same amount of money. The values show the effects of getting this money in different proportions from debt and equity, which is the capital structure decision.

Choices of capital structure seek to increase the value of the firm. Hence, in Table 1 and all discussion in this chapter and the chapter, Capital Structure: A Strategy that Makes Sense, debt and equity refer to the market values of debt and equity. Hence, the D/E ratio we calculate uses the market values of the debt and equity.

Note in Table 1 that the weighted cost of capital (WCOC) at first decreases, reaching a minimum when about 30% of capital comes from debt and 70% from equity. Observe also that this decrease occurs even though the weighted cost of debt increases with the use of an increased proportion of debt capital. Recognize that successive increments of debt cost more, as successive creditors in the line of claimants demand higher expected returns to compensate for their higher risk.

With an increase in the use of debt, the cost of equity increases as well. Equity holders recognize the greater financial risk attendant with a higher D/E ratio, and demand increased expected returns.

Seemingly, the WCOC could not decline if the cost of components increased. The reason for the decline stems entirely from the expected tax-deductibility of debt, and equity holders think the value of the tax benefit is attractive compared to the added risk. As the D/E ratio increases, the amount of equity decreases because we are raising the same amount of capital everywhere in Table 1. If we raise more from debt, less comes from equity. The use of some debt rather than all equity amplifies the effect on a per-share basis, as the company needs fewer shares for the same amount of capital. The result is that with an increasing D/E the expected tax benefits increase, and these are spread over fewer shares.

In the example in Table 1, note that obtaining more than 30% of capital from debt results in an increase in the WCOC. Above 30% debt, stockholders do not think that the incremental tax benefits of more debt are attractive enough to compensate them for the incremental financial risk, and the uncertainty of realizing the tax benefits. Hence, the demanded rate of increase in the cost of equity and debt overpowers the effects on value of the expected incremental tax benefits of employing more debt.

Summary

Given a particular business risk of a company, determined by the asset side of the business and how well the company employs its assets, an optimal capital structure exists—optimal, as it lowers the WCOC of the company. For example, in Table 1, using about 30% from debt and 70% from equity will result in the lowest weighted cost of capital.⁸ Note in the table that the cost of components increases in a nonlinear manner as the use of debt increases. This behavior is related to several factors, including: the risk of realizing the expected tax benefit of debt; potential distress caused by excess debt, and its effects on operations as well as opportunities and investments; and possible bankruptcy with attendant loss.

Other Issues

The Nature of Liabilities and Optimal D/E

The nature of the liabilities influences the choice of capital structure. Let alternative D in Figure 1 represent the same capital structure as in alternative C. Suppose that certain characteristics of the liabilities for C and D differ. To illustrate, assume that the weighted maturity of liabilities in D is less than that in C, and/or that C represents borrowing at a fixed rate while some debt in D has a variable rate of interest.

Despite the same D/E ratio, the financial risk of D is greater than that of C because D is bearing interest-rate risk if the debt has a variable rate of interest, and D has more risk as it faces refunding of debt sooner. Less flexibility in the timing of refunding the debt is a potentially important issue, as capital market conditions vary over time. The developments and difficulty for firms of obtaining “replacement” credit in the 2008 crisis illustrate this refunding risk.

Logically, the nature of the liabilities therefore affects the optimal D/E ratio. For A, B, C, and D, the business risk is still the same. The use of liabilities with greater risk (in this scenario, maturity and interest rate risk) results in a lower optimal D/E, despite the same business risk on the asset side of the company. Thus, if the structure shown for C is optimal, the structure shown for D is incorrect. D should have a lower optimal D/E ratio than C, as the nature and structure of liabilities for D results in higher risk on the financing side of the company.

Conclusion

The tax deductibility of interest provides the opportunity to add to company value by employing the correct amount of debt relative to equity. The underlying relationships that cause this potential increment in value rest on the logical behavior of informed investors who agree to divide risks and expected returns. The deductibility of interest has expected economic benefits that flow to equity holders. Consequently, the use of debt is logical if interest is tax deductible and we expect to realize the benefit of that deduction. The higher the corporate tax rate we must endure, the greater the value of issuing debt.

The choice of how to finance the company, and its resulting debt/equity ratio, is the capital structure decision. Issues relating to the strategy and management of capital structure are discussed in the article, Capital Structure: A Strategy that Makes Sense.

Making It Happen

Remember that the expected tax deductibility of interest is the origin of any value that arises from the choice of capital structure.
In capital structure decisions, the examination focuses on the market value of debt and equity.
Changes in the tax rate will influence the optimal capital structure.
The greater the business risk, the lower the optimal D/E ratio.
The choice of capital structure will influence the cost of the individual sources of capital, and, in turn, the weighted cost of capital.
“Real world” considerations argue for a target capital structure, and a strategy to pursue that structure. The chapter, “Capital Structure: A Strategy that Makes Sense,” examines these issues and offers guidance on a strategy.

Notes

¹ Issues of control can influence choice of capital structure, for example, with current managers not willing to issue equity as the issuance would dilute management’s “personal” control percentage, or alter the distribution of shares in float.

² Actions that lower the cost of capital result in benefits to individuals in economies and societies. In contrast, in 2008 we have witnessed the adverse and spreading effects that result from interruptions in the availability and/or cost of capital in economies.

³ If suppliers perceive unnecessary risk or the likelihood of financial distress, suppliers may demand trade notes payable. Trade notes payable formalize trade credit, and seek to clearly identify the obligation. Hence, requiring formalization of obligation with trade notes payable clarifies as well as “perfects” the supplier’s interest, and relative claimant position. This formalization can alter the risks to the suppliers of receipt of payment, both during ongoing operations as well as in the case of bankruptcy. Normally, the existence of trade notes payable on a balance sheet signals concerns by trade creditors of the financial viability of the company.

⁴ Multiple classes of equity may exist, with specified relative claimant positions during normal operations as well as in bankruptcy.

⁵ In imperfect markets with multiple periods, and with certain tax rules, the risk of promised cash flows to creditors may be reduced by the tax-deductibility of interest in previous periods or by carry-back tax effects. These issues are beyond the scope of this article.

⁶ In some environments, differences exist in accounting for taxes, and accounting for financial reporting.

⁷ The most common approaches include several different model forms based on the capital asset pricing model, multi-factor models, discounted cash flow models, risk-premium models, and other pricing models.

⁸ This is an approximation. Estimating the WCOC curve and finding the minimum point is not a precise science.

There Is No "I" In Team (But there seems to be very little "team" in teamwork )

2011-02-18T07:23:00.000-08:00

By F. John Reh

The One-Man Show
I am amazed at how little the team seems to matter in a team sport like baseball. For the past several days, all we have seen in the sports news is Barry Bond's chase of Mark McGuire's record for most home runs in a season (congrats, Barry, on 73 at this moment) and Ricky Henderson's attempt to beat Ty Cobbs' record for most runs scored in a career (which he did).

Cal Ripken and Tony Gwynn retired at the end of the season amid heavy press coverage. Both have had distinguished individual careers in baseball. Ripken, was the "iron-man" whose string of 2,632 consecutive games played broke Lou Gehrig's record and is probably unbreakable. Gwynn was one of the purest hitters in the game. He won eight NL batting titles, had a .338 lifetime average and 3,141 hits, 17th on the all-time list.

Teamwork
While these individual records are impressive, the most team-oriented sports story in baseball this year is completely overlooked. This past week, the Seattle Mariners tied a record set only three years ago by the New York Yankees for most wins in a season by an American League team. Joe Torre, the Yankee manager, said at the time that someone would hit 80 home runs in a season before his club's win record would be broken.

One night later, the Mariners broke the Yankee record and set an new AL record for most games won in a season. Last night they tied the 1906 Chicago Cubs for the Major League record of most wins in a season with 116. Other than in Seattle itself, and on a few Internet forums of true baseball fans, these accomplishments were simply overlooked in favor of the individual records being chased.

This kind of news coverage reinforces our fascination with individual accomplishments, even in a team sport. That is not a good thing when you are trying to build up teamwork in the workplace.

Manage This Issue
Focus your team building on how the Mariners accomplished this feat, rather than on the lack of coverage it got in the press. That a team lost three super-stars (Randy Johnson, Ken Griffey, Jr., and Alex Rodriguez) in three consecutive years, yet came back to win more games than any pro baseball team ever, is powerful proof of what teamwork can do.

I saw a fan hang a banner in the Mariners' stadium that I think nicely sums up the power of teamwork "Every Night A Different Hero".

Management Accounting

2011-02-18T05:11:00.001-08:00

by: Aweng Moral-Basco

Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to assist management making decisions and managerial control functions.

Management accounting is also concerned with the process of identification, measurement and accumulation of product and service costs; preparation of statements relating to materials, labor and overheads; standard costs; budgeting for decision-making; and the communication of information used by management to plan, evaluate and control an entity to assure appropriate use of and accountability for its resources.

Management accounting also comprises of preparation of financial reports for non- management groups such as shareholders, creditors, regulatory agencies and tax authorities.

In the late 1980s, accounting practitioners and educators were heavily criticized on the grounds that management accounting practices (and, even more so, the curriculum taught to accounting students) had changed little over the preceding 60 years, despite radical changes in the business environment.

Professional accounting institutes, perhaps fearing that management accountants would increasingly be seen as superfluous in business organizations, subsequently devoted considerable resources to the development of a more innovative skills set for management accountants.

The distinction between ‘traditional' and ‘innovative' management accounting practices can be illustrated by reference to cost control techniques.

Traditionally, management accountants' principal technique was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period.

While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing, which are designed with specific aspects of the modern business environment in mind.

Life cycle costing recognizes that managers' ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product life cycle, since small changes to the product design may lead to significant savings in the cost of manufacturing the product.

Activity-based costing (ABC) recognizes that, in modern factories, most manufacturing costs are determined by the amount of ‘activities' and that the key to effective cost control is therefore optimizing the efficiency of these activities.

Activity-based accounting is also known as Cause and Effect accounting. Both life cycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events is of far greater importance than reducing the costs of raw materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs, such as the provision of a service or the production of a product component.

Management accounting plays a very vital role in the determination of product and service costs; the preparation of statements; budgeting; decision-making; and the communication of information.

To be successful in this field, we must address issues on product rates, causes of quality problems, profitable market segments, higher profit margins, delivery of goods and the costs of introducing new products.

COLD CALLING TIPS

2011-02-18T03:35:00.000-08:00

The obituary for cold calling is premature. While in the perfect world, your phone would be ringing off the hook all day with clients offering you business, the reality is that if you want business, you need to go after it, and cold calling is an effective sales tactic if it's done properly.
But many small business people would rather spend an entire day in a dentist's chair than go cold calling. Does the thought of cold calling makes your stomach drop to your toes? These cold calling tips won't eliminate your fear, but they will help you make cold calling a more successful experience.
1) Focus on the goal when cold calling.
Beginners tend to think that cold calling is about making the sale. It's not. It's about getting the chance to make the sale. Specifically, the purpose of a cold call is to set an appointment to make the pitch.
2) Research your markets and prospects.
You need to target your cold calling to the right audience. Use market research to focus on your target market. (See How to Find and Sell to Your Target Market.) Then find out as much as you possibly can about the company or individual you're going to cold call in advance. This gives you the huge advantage of being able to talk about their business and their needs when you call them.
3) Prepare an opening statement for your cold call.
This lets you organize your thoughts before cold calling, and helps you avoid common mistakes in the cold call opening that would give the person you're calling the chance to terminate the conversation. For instance, you should never ask, "Is this a good time to talk?" or "How are you today?" Don't read your opening statement into the phone, but use it as a framework to get the cold calling conversation off to a good start.
4) What should be in the opening statement of your cold call?
This organizational scheme for cold calling (from AllBusiness.com) works well: "Include a greeting and an introduction, a reference point (something about the prospect), the benefits of your product or service, and a transition to a question or dialogue. For example, 'Good afternoon, Ms. Marshall. This is Ken Brown with Green Works. I read in the local paper that you recently broke ground for a new office complex. We specialize in commercial landscape services that allow you to reduce in-house maintenance costs and comply with the city's new environmental regulations. I'd like to ask a few questions to determine whether one of our programs might meet your needs.'"

THE TOP 7 SALES BLUNDERS

2011-02-18T03:32:00.000-08:00

We all make mistakes when selling our product or service. Here are the most common sales mistakes people make. I have to admit I have made many of these mistakes, even though I have been teaching this stuff for almost a decade.

Sales Mistake # 1:

Allowing a prospect to lead the sales process. The best way to control the sales interaction is to ask questions. This is also the best way to learn whether or not your product or service meets the needs of your prospect. Quality questions that uncover specific issues, problems, or corporate objectives are essential in helping you establish yourself as an expert.

Sales Mistake # 2:

Not completing pre-meeting research. After several weeks of voice mail I finally connected with my prospect and scheduled a meeting. Unfortunately, I entered the meeting without first researching the company. Instead of presenting a solution to an existing problem, I spent the entire meeting learning fundamental information, which to senior executives, is a complete waste of their time. This approach is one of most common sales mistakes. Invest the time learning about your prospect before you call them and before you try to schedule a meeting.

Sales Mistake # 3:

Talking too much. Too many sales people talk too much during the sales interaction. They espouse about their product, its features, their service and so on. When I first bought carpet for my home I recall speaking to a sales person who told me how long he had been in the business, how smart he was, how good his carpets were, etc. But this dialogue did nothing to convince me that I should buy from him. Instead, I left the store thinking that he did not care about my specific needs. A friend of mine is in the advertising business and often talks to prospects who initially request a quote. Instead of talking at great length about the ad agency’s experience and qualifications, he gets the potential client talking about her business. By doing this he is able to determine the most effective strategy for that prospect.

Sales Mistake # 4:

Giving the prospect information that is irrelevant. When I worked in the corporate world I was subjected to countless presentations where the sales person shared information that was completely meaningless to me. I don’t care about your financial backing or who your clients are. Make the most of your presentation by telling me how I will benefit from your product or service until I know how your product or service relates to my specific situation.

Sales Mistake # 5:

Not being prepared. I remember calling a prospect expecting to receive his voice mail. That meant I was completely unprepared when he answered the call himself. Instead of asking him a series of qualifying questions I simply responded to his questions, allowing him to control the sale. Unfortunately, I didn’t progress any further than that initial call. When you make a cold call or attend a meeting with a prospect it is critical that you are prepared. This means having all relevant information at your fingertips including; pricing, testimonials, samples, and a list of questions you need to ask. I suggest creating a checklist of the vital information you will need and reviewing this list before you make your call. You have exactly one opportunity to make a great first impression and you will not make it if you are not prepared.

Sales Mistake # 6:

Neglecting to ask for the sale. I recall a participant in one of my workshops expressing interest in my book. I told him to look through it but at no time did I ask for the sale. Later, I heard him express this observation to other participants in the program. If you sell a product or service, you have the obligation to ask the customer for a commitment, particularly if you have invested time assessing their needs and know that your product or service will solve a problem. Many people are concerned with coming across as pushy but as long as you ask for the sale in a non-threatening, confident manner, people will usually respond favorably.

Sales Mistake # 7:

Failing to prospect. This is one of the most common mistakes independent business make. When business is good many people stop prospecting, thinking that the flow of business will continue. However, the most successful sales people prospect all the time. They schedule prospecting time in their agenda every week.

Even the most seasoned sales professional makes mistakes from time to time. Avoid these blunders and increase the likelihood of closing the sale.