Inflation And Business – Precautionary Steps

A sudden rise in inflation could be dangerous for your business. Your margin of profit might hardly make any sense to you and you might have to increase the prices of your products and services in order to keep your business afloat. While the government will try their best to control inflation, you, as an entrepreneur will have to arrange for a foolproof plan to ensure that your business is not affected. Here are some ways and methods that you could adopt.

Planning and assessment

Honestly speaking, it is impossible to plan for inflation. It often comes unannounced and leaves you hankering for ways to ensure that your business does not run out of funds. However, there are warning signs that could convey that inflation is around the corner. If you sense as much, try controlling cash flow and keep a tab on productivity to ensure that it goes as planned.

Assess your risk level

Since different businesses have a different impact as far as inflation is concerned, it is important to assess the risk level that your business might have. Tend to pending tasks immediately and ensure that your employees are psychologically and financially prepared to handle inflation.

Update cash flow

Ensuring that your company’s financial information is updated and your accounts are managed is the first step towards preparing it for a potential rise in inflation. You should also keep your cash flow forecast updated. Ask yourself if there is enough money in the company’s account and whether your account has everything to offer when need be.

Looking out for alternative funding

If inflation does hit your company, the most dangerous thing that could happen is losing your fund sources. Most financial lenders avoid lending money during inflation because they try to save their own setup from being sold out to inflation. In such circumstances, the most badly affected are the businesses that depend on external sources for funding. They are either forced to shut down their business or borrow money from other lending sources that charge exorbitant rates of interest. The end result is always negative for them because inflation takes time to be resolved. It is not a matter of a few weeks or months. This is precisely why you should keep your options open and flexible so that when the time comes, you have more than a lender to bail you out.

Like parenting, inflation is also unpredictable and cannot be planned for but just like the former, you can keep your basics sorted.

Understanding Capital Budgeting

Capital budgeting, also known as investment appraisal, is the method to plan the process and determine whether the long-term investments of the organization are with funding of cash through the capitalization structure of the firm which includes any retained earnings, debt or equity. The investments could be buying new machinery, new products or a new plant or spending money on research and development. The goal of a firm that is opting for capital budgeting is to increase the firm’s value to the shareholders.

The method uses the incremental cash flow from each of the project or investment. The techniques of accounting earnings and accounting rules are used sometimes. Some of the hybrid methods like payback period and discounted payback period methods are also used.

Identification and generation of project

The first step involves generating an investment proposal. There are many reasons why business needs investment. It could be because a new product is added or if the business line needs to be expanded. There could be other reasons too like increasing production or reducing the output costs.

Screening and valuation of the project

In this step, all the correct criteria are selected to justify that the process is desirable. This needs to match the firm’s objectives in order to maximize the market value. The time value of money is used in this step. The estimation of costs and benefits are also done at this stage. The total of cash inflow and the cash outflow along with any uncertainty and risk that is associated needs to be analyzed and there is also a need to do provisioning that is appropriate.

Selecting the project

There is no defined way to select the investment proposal as there are different businesses and each business could have a different requirement. This is the reason why the approval is done based on the criteria of selection and this is different for each firm. After this, there are alternatives ways to raise or acquire the funds and this step is known as preparing the capital budget.

Implementation

Money gets spent and the proposal gets implemented. The different steps of implementing the proposal, completing the project and reducing cost are allotted. Then the process of monitoring is done.

Review of performance

In the final stage, the actual result is compared with the standard one. The unfavorable ones are then identified and removed which helps in the future selection of the proposal and also its execution.

Business Valuation For Buyers

If you want to buy a business, whether a small family owned one or a large one, you need to look at every aspect before arriving at a price that you and the seller agree to. The owner may think of the business in different terms and his valuation may be exorbitantly high as understandably he would like to get the best possible price for his hard work that went into creating a tangible business.

So what are the options for a buyer?

You need to get a professional evaluator and that is only the first step towards buying a business. You cannot accept any value put forth by the seller or borrower for your approval. He will have a sentimental value attached to the business apart from the tangible assets and measurable estimates. The business should be worth your time and money according to the criteria that you set.

What should you do

There are many ways that you can assess a business but the first and the most important thing is to get a professional assessor and let him know your requirements. The assessment will begin by evaluating the tangible and intangible assets of a company. This will consist of the tools, equipment, inventory, finished goods and existing clients etc. and will also include the balance sheet that will provide a clear picture of the financial status of the company.

The next aspect that you will look at is the revenue of the company. Revenue does not mean profit and the two values are calculated separately. The future revenue is calculated based on the past revenues and sales. It has to take into account any unusual revenue inflows and expenditure due to certain events in the past. This will provide a clear picture of the profits that could accrue if everything remains the same even after the company is sold.

Conclusion

Now when a buyer looks at buying a business, he needs to look at the brand and loyalty of customers. This is significant for all sizes of companies. Large companies have well-recognized brands, while small businesses have some loyal customers who may not like to deal with the new owners. All these aspects need to be factored in while evaluating the value of the business.
The most popular assessment is through the Earning Value Approach, as you need to know how will you be benefitted from the business. When a reputed assessor concludes his valuation and gives you a complete picture that includes all the factors, well-defined figures with clear financial values assigned to them, then you can understand and decide whether the business is worth your time and money or not. Do not buy a business without a detailed valuation.

Arbitrage- Riskless Profit on Investment

What more can you ask for if your investments give you riskless profits? It becomes a very painful waiting for your invested stocks to give you returns in a short period of time. In a certain period of a market when the only one-sided moment is expected to increase/decrease as a smart investor with a good amount of liquidity should opt for more options. To take out the best out waiting is not the only solution, striking the right opportunity and making the best out of it is possible through Arbitrage schemes. Ways to get into Arbitrage trading

Striking the right cord

Arbitrage exists from time to time opportunities in the market. Assume that an X stock price is Rs. 100 in NSE and if its stock price is Rs. 107 in BSE then you buy in NSE and sell it in BSE. Rarely does there is a vast difference in those to markets. The difference is the profit gained or the breakeven. One who can study the market right and swim at the right time can derive the desired profits from these simultaneously changing markets.

Efficient returns from inefficient markets

The strategy of making profits through an inefficient market is Arbitrage. Big players with huge liquidity would not wait for the markets to move on its pace, it would rather eventually get into various other strategies to make the most out of its money. The investor will realize his profit on such trades when the prices move closer towards his forecasted price than from the market price. Arbitrageurs specialize in taking the advantage of the difference between two markets. With the high frequency in trading simultaneous markets, it has become very limited in trading.

On the flip side of Arbitrage trading, it can even cause an adverse effect on Long-Term Capital management. In order to play into a different market, it could pressurize the buying and selling orders and could interfere in policies exchange houses. But with increasing security policies and automated corrections, it minimizes such interventions and has increased the frequency of trading. It is a method to derive liquidity and but into the markets. With the ever-changing policies in taxation, the ministry may change arbitrage funds into taxed funds. So it may be taxed like any other debt funds which sold early will be treated as short-term capital gains according to the income tax slab.

 

 

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Working Capital- Yes and Nay things!

Running a business is though not a rocket science but needs constant attention and improvising action to stay thriving and climbing up the ladder. With huge competition and lot of opportunities, managing your finances is the first best and safest way to reach your dream goals.

The money that you hold in your hand, excluding your business expenses and all other payables, that is available to use for operational cost like paying for supplies and giving as salaries. So, managing this money is very crucial for your business. If you are an established one, then probably this might be a brush up of your knowledge. If you are a beginner, then this can be your support system, to further lead a better business model.

Know your limits and lines of threat:

Knowledge is surely power!! So, know all about your business, its working capital minimum necessity and your minimum expenses as a whole. Make a clear calculation of all the aspects of your business, as cash crunch can’t be avoided. Life is not always the expected dreamy one but only filled with most of the unexpected expenses and some sweet surprises too. So, prepare yourself for the best and the worst equally. Know where you may face a crunch, on what circumstances, what possibilities can create a cash crunch, and work towards it.

Keep a budget:

Yes, having a planned expense and saving is always appreciated and better for leading a better life. In business, you can probably save on basic recurring costs, and of course the basic salary issue by having a plan in place. The recurring costs like materials can be bought in bulk and saved, and the labours can be hired together in some approximate numbers that combine skills and talent of 2 people in one, so that when you have high workload the existing people can manage for a week or even a month without having the necessity to hire a new one. Only some extra perks can do the work, along with some rewards.

Have an alternate plan:

It’s nice that we plan something and expect it to happen accordingly. But, as we said earlier, nothing can happen as we expect. So, have another alternate plan, in case your plan fails. Sticking to only one single plan will lead to failure and helplessness at the crunch time, instead, keep an alternate plan and work on it, when the first one fails. This will help you in analyzing and working better.