Global Finances Hawk

Many of us (including yours truly) have used personal credit cards to finance the start up or growth of our business. It’s easy, fast, and available. The interest rates may be lower than business credit cards. And, you may have exhausted your business loans or lines of credit. But there are a few dangers in using your personal credit cards to finance your business, instead of using business credit cards or loans.

You can’t deduct the interest. If you mix personal & business expenses on your credit card, you can’t deduct the interest because some of the debt is due to personal expenses. If you are carrying a fair amount of debt, this could add up to hundreds of dollars each month.

You will miss deductions. If you are randomly using personal credit cards for business expenses, you will inevitably forget to enter all those receipts into your bookkeeping system. Which means that you will miss a tax deductions that you deserve to take.

You will be on “the hook” for what is really the business’ debts. If your business needs debt financing, the business (and its assets) should be responsible for paying off that debt financing, not your personal assets. If you are using personal credit cards then you are obviously personally liable for the loan, even if something happens to the business (you shut it down, for example).

You can’t accurately track the real expenses of the business. When you are analyzing the profits & loss statements of your business and creating your cash flow projections for upcoming months, you need accurate information about your historical expenses. If you have expenses “hiding” inside your personal credit card statements, you will not be able to analyze whether your business is actually making a good profit, or if your business has cash flow problems.

The business model of rewarding consumers for their credit card purchases is something most banks have adapted over the past two decades. In the U.S. the vast majority of cards on the market incentivize spending by giving the cardholder cash back, points, or airline miles for each dollar spent. While this may appear to benefit the consumer, in reality this practice may actually be hurting them.

Studies have demonstrated that consumers spend greater amounts when there is a sale, discount, or coupon involved. Credit card companies use this psychological principle to their advantage by offering higher rewards on specific categories of spending. In turn, these rewards encourage some people to buy more than they normally would. This cycle contributes to higher debt and lower savings rates.

Furthermore, the rules of the credit card reward programs are often far too confusing for the average consumer to decipher. Most programs have caps on the amount of cash back that can be earned in a given month or quarter. Many issuers further complicate matters by offering different tiers of rewards depending on the amount spent during a calendar year. Those that market credit cards only add to the problem. MSN.com’s credit cards listing fails to inform the consumer about any of the fine print. CreditCardForum.com’s dubious ranking of their best cash back credit cards in reality is nothing more than a collection of ads. There are a few reputable resources such as Kiplinger.com’s best cards for the way you spend article, but honest reviews like that are far and few between.

Last but not least, it is important to take into account the negative impact credit card processing fees have on businesses. A merchant typically pays anywhere from 1.5% to 3% of the total purchase price to the credit card companies. The business must raise prices in order to absorb these added costs. The end result is higher prices for consumers across the board. While the rewards cardholder may be earning a 1% rebate, it is obviously not enough to balance out the processing fees which run much higher.  ?

While car accidents on the road is not something that happens to people very often it is extremely important to drive carefully and avoid having ones altogether. This will allow you to get a lower car insurance rate and save some money in the process. As soon as you start driving your priority should be to avoid any accidents. Remember to stay alert to the situation on the road and control the speed of your vehicle. This way you can spare yourself the stigma of a reckless driver, and such drivers are always offered worse car insurance rates than careful drivers.

People who really want to save as much as possible on their car insurance are advised to examine car insurance quotes available online and browse through offers of different companies. This way you can find both a cheap car insurance policy as well as one that is perfectly tailored to your individual needs and expectations.

One of the simplest methods to save some money on your car insurance is to keep you policy up-to-date. It is important to inform your car insurance company about any changes that might affect your determining factors of a car insurance. Such changes involve things like buying a new car, getting married, etc.

Newlywed people are entitled to combining their insurance with the insurance of their spouse and as a result enjoy even more coverage and benefits. It usually provides you with a significant discount on your car insurance. And if you were able to attend and graduated in defensive driving, you can also be entitled to additional discounts. There is also the method of comparing various car insurance quotes online and selecting the best offer available on the market.

It is important to be clear about the difference between asset values and business values. The method used in this appendix has been to value a business as a going concern: that is to value a whole collection of assets, tangible and intangible, together as an entity in their current business use. Asset value alone is not the same as business value, because asset value alone can be more or less than the value of the business in which it is currently being used.

If the assets alone are worth more than the total business value, it is worth considering whether the business should sell its assets and close down, or whether some of the assets could be sold and the business continued without them.

Our approach here has been to value a whole business, or company. If one wished to arrive at the theoretical value of each share in the company, it is obvious that one could divide the total value of the company by the number of shares on issue. However, in private companies this does not necessarily hold true. A minority shareholding (or a minority parcel of shares) in a private company does not always have the same value pro rata as the value of the total shareholding

In the United Kingdom, current (2005) multiples for larger private companies are in the range from 4 to 9, whilst the P/Es for smaller companies range from 2 to 4. If you follow the steps suggested so far, you will probably come up with a figure for your business within this range.

Valuing a business using the P/E ratio method

Having established how to calculate the FMP and to choose the appropriate P/E ratio for your business, we will now look at how to value a business using this method. The steps involved are as follows:

Step 1: Establish the future maintainable profit (FMP) of the business after taxation.

Step 2: Select the appropriate P/E ratio (or capitalisation rate).

Step 3: Multiply the FMP by the P/E ratio multiple selected, to arrive at total business value.

Step 4: Add the value of surplus assets, if any, to arrive at total value.

Step 5: To value the goodwill, subtract the net tangible asset value from the total business value. (If the total value of the business does not exceed its net tangible asset value there will be no goodwill value. If total value is less than net tangible asset value there is ‘negative goodwill value’ and it can be assumed that the value of the assets in some other use exceeds the value of the assets in the business itself as a going concern.)

Most business markets around the world have a two-tiered structure with a large variance between private and public company P/E ratios. Private company valuations are, however, still influenced by public company sentiment because of a trickle-down effect to the private business sector. Generally speaking, private company valuations do not fluctuate as much as public company ones, except where a private company is about to be listed on the Stock Exchange when very high multiples can be applied to it if it is in a fashionable business sector.

Various bodies publish indices of historic P/E values. For example, you could refer to the EDO Stoy HaywardlThompson Financial Private Company Price Index, which gives year-on-year P/E ratios for larger private companies.

Flotations of Internet-related, and other high-tech companies in the late 1990s were based on values that obeyed few valuation rules. It was not only that P/E ratios were high but also that in many cases they did not even apply, because the businesses had never made a profit! In these cases the only rule of valuation that applied was to capitalise hopes and expectations. Here we must rely on the forecasting powers of City bankers, which are beyond the comprehension of mere business people.

A, Dewing in his Financial Policy of Corporations (1938J provides the following guidelines to choosing a P/E ratio for private businesses, based on after-tax profits. These multiples were used for companies in the United States some 70 years ago and are applicable to a time of low economic growth. This is, however, a useful guide to P/E ratios for smaller private companies in the United Kingdom, particularly now that inflation is low.

For old-established business, with large assets and excellent goodwill: a P/E ratio of 10.

Well-established business, but requiring considerable management skis: P/E ratio of 8.

Well-established business, but subject to shifts in general economic conditions and products vulnerable to depressions: P/E ratio of 7,

Business requiring small capital investment, but above average executive ability to manage: P/E ratio of 5.

Small Industrial business, highly competitive, relatively small capital (one which virtually anyone could run): P/E ratio of 4.

Business which depends on special, often unusual, skills of one, or a group of managers, small capital, highly competitive, high mortality: P/G ratio of 2.

Personal service businesses, requiring virtually no capital. Owner has special skills and intensive knowledge of business. Earnings reflect his skill and it is questionable whether it can continue without him: P/E ratio of 1.

The sixth concern to evaluate before determining if you should move forward with your project is if your item is consumable. By that, we do not mean that it is something to eat. We mean that it is something that gets used up or needs to be purchased repeatedly. If your invention is something that is disposable, or is a one or two time use item, the same people will buy your product frequently. You can multiply the number of people who are likely to buy your product by the number of times they will need to replace it within a certain time period in order to estimate the market size. Manufacturers love products that consumers will buy again and again.

The fifth criterion for your consideration is, again, a concern for the manufacturer/licensee and thereby a concern for you also. Manufacturers have a formula for determining whether it will be cost efficient to manufacture a particular product. The manufacturing cost should be no more than 1/5 to 1/4 of the retail-selling price. If your product does not fit this formula your chances of finding a licensing partner are greatly reduced. What this means is if your product can be manufactured for $1 it should retail for at least $4-$5 or it is unlikely that you can license it.

Do not pull the suggested retail selling price for your product out of thin air. Don’t base it on what your mother says she would be willing to pay for your product. You and your mother would probably pay more than any other person on earth for your product because you think it is such a great idea and your mother loves you. Too many inventors have an inflated opinion of what their product will sell for at retail. You will be exposed as an inexperienced product developer if you cannot make a logical argument for the price you suggest.

We once spoke to a woman who had invented a specialized eye glasses lens that was helpful to people who suffered from a very rare eye condition. She perfected and patented her invention. She had a limited run made of her lenses because they were very expensive to produce, then she took them around to show them to ophthalmologists who treated this rare condition. The doctors were universally enthusiastic about having the product available for their patients. The ophthalmologists encouraged her to take the lens to manufacturers of eyeglasses lenses to see if they would make them commercially available. She was over the moon with excitement. The lens worked and the ophthalmologists loved it! She thought she had a sure thing. She was wrong. Her lenses were so expensive to produce that none of the lens manufacturers wanted to take them on. The cost of making the lens would cause the retail-selling price to be so high that it would be cost prohibitive for the consumer to purchase. Even though it was a great product, they would not license it because it did not allow for a profit to be made on the manufacturing, wholesale and retail levels of sales. It simply would not be a profitable product. These were obstacles this inventor was not able to overcome. If she had done her diligent research before embarking on this project, she would have seen the potential problems. She could have saved herself the costs of developing, prototyping, and patenting an invention that had no chance of success. You can see from this example that sometimes a really great product will not make it to the marketplace because it does not allow for enough profit.