Trigger 7: How to interpret financial data

 1.             What is balance sheet?

"The accounting balance sheet is one of the major financial statements used by accountants and business owners. (The other major financial statements are the income statement, statement of cash flows, and statement of stockholders' equity) The balance sheet is also referred to as the statement of financial position." 

http://www.accountingcoach.com/balance-sheet/explanation

• Includes: Assets

• Liabilities

• Owner's (Stockholders') Equity

Networth: Assets-liabilities= Equity

Creating a balance sheet:

First list current assets (to be used up in a year) than list investments, then property, plant and equipment, lastly list intangible assets, other assets. = ASSETS

Secondly list current liabilities (to be satisfied within a year), long term liabilities. Thirdly list stockholders’ equity = LIABILITIES + OWNERS EQUITY

 2.       Income statement

"The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary.

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).

People pay attention to the profitability of a company for many reasons. For example, if a company was not able to operate profitably—the bottom line of the income statement indicates a net loss—a banker/lender/creditor may be hesitant to extend additional credit to the company. On the other hand, a company that has operated profitably—the bottom line of the income statement indicates a net income—demonstrated its ability to use borrowed and invested funds in a successful manner. A company's ability to operate profitably is important to current lenders and investors, potential lenders and investors, company management, competitors, government agencies, labor unions, and others."

http://www.accountingcoach.com/income-statement/explanation

Revenue- Cost of goods sold (COGS)= Gross income

Non direct costs (rent, salaries, marketing) =Selling, General and Administrative costs (SG&A’s)

Gross income- SG&A’s= Operating income

Operating income -tax = Net income

Balance sheet vs Income statement

"The major difference between them is this: the balance sheet is essentially a snapshot, while the income statement is a movie. In other words, the balance sheet shows what you own (assets) and what you owe (liabilities) at a moment in time (most often as of December 31). The income statement shows what happens over a period of time (usually a year): what comes in, what goes out, and what’s left over at the end."

http://articles.bplans.com/how-to-read-an-income-statement/

 

3.       Ways to get familiar with business accounting:

There are numerous books about the subject, but I would recommend browsing the web. Youtube has over 90 000 results on the words “what is income statement”. The videos are higly educational and explain everything in a simple way. I have included some of the basic videos in the previous segments.

In addition to watching youtube, there are several sites that give info on how to do basic accounting. There are free courses and courses that are payed for.

When searching the web, it is always important to also learn about the legislation behind accounting in a specific country, in order to avoid any future problems.

Trigger 6: Financial, legal and accounting aspects to consider while starting business.

I decided to approach this problem from a Finnish point of view. As it is most likely, that one of us will create a business in Finland, under Finnish laws. Therefore, my apologies in advance, some of the sources are in Finnish. 

1. Legal Requirement for a start-up

As one can imagine, the laws vary a lot, depending on what kind of a start-up you are creating, Sole proprietor, partnership, LLC, S-corp or C-corp.

In Finland, the company forms are: 1.Sole proprietor (where you are personally responsible for the company, 2. Osakeyhtiö (LLC, with a capital stock of min. 2500 euro, you are responsible through your investment, board position, and possible security guarantee). These two options are suitable for those who create their startup alone. For those that create their startup with partners, there are a few options: 3. Avoin yhtiö (Partnership, at least two partners with joint responsibility), 4. Kommandiittiyhtiö (Limited partnership, at least one responsible partner and one silent partner), 5. Osuuskunta (Co-operative, with at least three partners)

https://www.yrittajat.fi/varsinais-suomen-yrittajat/loimaan-yrittajat/a/yrittajan-abc/perustietoa-yrittajyydesta/yrityksen-perustamisen-vaiheet-316210

Per the Finnish Business and Corporate Law, 1§-22§, the main legal stages of creating a business are as follows:

•        Choosing a company form
•        Is your business subject to notification or licensing? Apply for those if necessary
•        Make a notion of the start up to the YTJ Business Information System
•        Register as VAT-obligated,
•        Register to the Trade Register
•        Register to the Prepayment register
•        Register to the Employer register
•        Organize mandatory business Accounting and relevant insurances.

http://www.finlex.fi/fi/laki/ajantasa/2001/20010244

2.  Basic of Business Accounting

Accounting is often seen as difficult, due to the many complicated terms used for the systems. In this link you will find the terms listed and explained: http://www.rasmussen.edu/degrees/business/blog/basic-accounting-terms-acronyms-and-abbreviations-students-should/

The ABC of accounting can be found here in Finnish: https://taloushallintoliitto.fi/kirjanpidon-abc

Assets= liabilities + equity

Assets= cash, accounts receivable, inventory, property or equipment

Liabilities= loans, accounts payable

Equity= own investments

Total Debits= Total Credits

By using the Double Entry System, you will keep the Debits and Credits equal.

http://www.accountingcoach.com/accounting-basics/explanation

Accounting systems:

Account charts à Journals à General Ledgers à Trial Balances à Balance Sheet (Financial Statement)

Account charts: Charts of all existing Debit and Credit accounts

Journals: All transactions (debit and credit) are entered as Journal entries, where equal amounts of credit and debt are aggregated within different accounts, for ex. A Business trip costing 800 Euros, is a debit transaction of 800 euros from the Travel Expenses account, into an 800 euro credit transaction in the accounts payable account. Journal entries always have a description ie. Business trip to New York.

General Ledgers: All transactions posted into a particular account get added up in a General Ledger

Trial Balance: Listing of all balances in each of the General Ledgers, their total sum should be equal (Total Debits = Total Credits)

Balance Sheet: From the Trial Balance, the accounts are sorted into Assets, Liabilities and Equities.

https://www.youtube.com/watch?v=ii91oi0OpXM

3.Financial planning for startups

Financial plans should be completed at least once a year, and updated monthly. It gives you (and potential investors) a clear idea on short and long term prospects of your business, profit potential, SWOT, amount of financing needed to succeed.

https://images.template.net/wp-content/uploads/2016/01/11122955/Financial-Plan-for-Small-Business-Free-PDF-Template-Download.pdf

There are a few key elements to Financial Planning:

•   Estimate your costs, have at least 6 months in advance.
• One time costs vs. ongoing costs
• Essential vs. optional costs
• Fixed vs. variable costs 
•    Project your cashflow
• Figure out financing methods

http://www.businessnewsdaily.com/5-small-business-start-up-costs-options.html

Creating the Killer Business Plan: 

https://www.youtube.com/watch?v=x8qLEuf54IA&index=9&list=PL7x45KHuu46kGtrHZiobtpnkhi8YhfJ6w

Trigger 5: How does the change of the price affect demand in the market?

1.  How to create demand? 

Five strategies for generating demand


Consumer research, understand your customer, the market and trends
Produce quality information for the customer
Publish customer reviews and respond to bad reviews
One time offers, to introduce the product to potential customers
Reward loyal customers, make them feel special and exclusive

Pricing and demand:

"Customer value‐based pricing is increasingly recognised by academics and practitioners as the most effective approach to pricing for companies wishing to achieve increased profitability and sustained success. However, despite this apparent support for the implementation of value‐based pricing, the practical reality is that more than 80 percent of companies continue to price their products and services primarily on the basis of costs and/or competitive price levels. 

Based on a survey of 81 executives representing a wide range of B2B and B2C industries in Germany, Austria, China, and the USA, five main obstacles to the implementation of value‐based pricing strategies have been identified: deficits in value assessment; deficits in value communication; lack of effective market segmentation; deficits in sales force management; and lack of support from senior management. "

2.       How to identify demand?

“By assessing all forces and factors, we can identify and capitalize on demand in its three forms: current,emerging and latent.

Current demand reflects expressed needs and wants. The opportunity lies in continuously improving your product to better meet consumer demands. As an example, Bud Light Lime, which was one of the most successful product launches of all time, emerged from research by Anheuser-Busch and The Cambridge Group showing that consumers desired slightly sweeter alcoholic beverages.

Emerging demand reflects needs that are just beginning to be articulated – those held by a small but growing consumer segment. For example, we helped a large dairy company capitalize on growing non-dairy beverage trends after it purchased a major soy milk brand.

Latent demand sits outside the box. It comprises unrealized needs that have yet to be articulated by consumers, yet are potentially disruptive and highly transformational.

By using our Customer Demand Analysis methodology, we can answer critical product and brand questions. For example:

·         What features or benefits should be added to a product?

·         Do opportunities exist for new brands?

·         What pricing structure would maximize profits?

·         Are there product lines that should be discontinued?

·         What competitive actions will best protect your portfolio?” 

Source: http://www.thecambridgegroup.com/approach/identify/

Identifying supply and demand to understand price action and vice versa. Tips for traders: 

3.       What are the factors involved in supply chain that affect the change of price?

·         Cost of production

·         Wanted profit

·         Market demand

·         Industry standards

·         Skill level

·         Experience

·         Your business strategy

·         Your service

·         Your client

·         Competition

·         Marketing methods

https://business.tutsplus.com/articles/nine-factors-to-consider-when-determining-your-price--fsw-98 and http://www.businessmanagementideas.com/pricing/price-determination-6-factors-affecting-price-determination-of-product/2267

Trigger 4: How do the external factors and resources affect national economy?

1. What kind of uncontrollable external factors affect the economy?

According to The Global Risk report 2016 there are a few issues that are highly risky for our future, our policies and the economy.  These are as follows: 

Top ten risks in terms of likelihood:

Large scale involuntary migration

Extreme weather events

Failure to stop climate change

Interstate conflicts

Natural catastrophes

Failure of national governance

Unemployment

Data fraud

Water crisis

Illicit trade

Top ten risks in terms of impact:

Failure of climate change mitigation

Weapons of mass destruction

Water crisis

Large scale involuntary migration

Energy price shock

Biodiversity loss

Fiscal prices

Infectious diseases

Asset bubble

Social instability

There are also trends in our society that will inevitably shape our economy: 

• Climate change,

• urbanisation,  

• environmental degradation, 

• growing middle class in rising economies, 

• increased mobility, 

• chronic disease, 

• cyber dependency, 

• aging population, 

• wealth disparity, 

• shift in power, 

• changing governance landscape, 

• nationalism, 

• polarization

Some other issues that are mentioned to effect a nation's economy are: 

• "Consumer confidence. Consumer and business confidence is very important for determining economic growth. If consumers are confident about the future they will be encouraged to borrow and spend. If they are pessimistic they will save and reduce spending.
• Asset prices. Rising house prices create a positive wealth effect. People can re-mortgage against the rising value of their home and this encourages more consumer spending. House prices are an important factor in the UK, because so many people are homeowners.
•  Real wages. Recently, the UK has experienced a situation of falling real wages. Inflation has been higher than nominal wage, causing a decline in real incomes. In this situation, consumers will have to cut back on spending – in particular reducing their purchase of luxury items.
• Value of exchange rate. If the Pound devalued, exports would become more competitive and imports more expensive. This would help to increase demand for domestic goods and services. A depreciation could cause inflation, but in the short term at least it can provide a boost to growth.
• Banking sector. The 2008 Credit crunch showed how influential the banking sector can be in determining investment and growth. If the banks lose money and no longer want to lend, it can make it very difficult for firms and consumers leading to a decline in investment."
  
• Interest rates. Lower interest rates would make borrowing cheaper and should encourage firms to invest and consumers to spend. People with mortgages will have lower monthly mortgage payments so more disposable income to spend. However, 2009-16 we had a period of very low interest rates, but due to low confidence and reluctant bank lending, economic growth was still sluggish."

2.How to effectively use country’s resources?

Resources are scars, each economy needs to make the most of their own resources, and make sure they do it in a sustainable way. 

Robert Constanza has researched ecological economics and has set out guidelines for a sustainable economy. Unfortunate Constanza's views are in my personal opinion a bit naive, for example Sustainability will never be the ultimate goal over GDP growth. 

“Assuring sustainability of ecological economic systems depends on our ability to make local and short-term goals (like local economic growth and private interest) consistent with global and long-term goals (like sustainability and welfare). “

Taboos, trial and error are no longer sufficient to ensure effective and sustainable use of resources.  

Economies need:

-A hierarchy of goals, where sustainability replaces GDP as the ultimate goal

-global ecological economic model

-Price adjustment based on sustainability

-Develop policies that do not lead to a decline in natural capital

 3. How does political environment affect national economy ?

Political systems and economic growth: 

It has long been thought in the Western world, that democracy equals economic growth. This is actually not always the case. Many countries that are less democratic are today growing at an impressive rate (for example China). Studies show, that it is in fact economic freedom, not political freedom, that leads to growth. A liberal economy will increases a nation’s GDP.

“If economic freedom can be established in a poor country, the growth would be encouraged, and the country would eventually tend to become more democratic on its own.” 

The Political system of Democracy is too bureaucratic, effecting nation’s economies, hindering rapid growth. For example the US isstruggling due to it’s political system.

4. What are the consequences of external factors affecting the economy?

Below I have presented all of the top ten things listed above bye the World Economic Forum, and their effects on the economy in short.

Migration: “where migration expands the workforce, aggregate GDP can be expected to grow. However, the situation is less clear when it comes to per capita GDP growth. “ 

-OECD

Extreme weather: “The empirical outcomes suggest that the budgetary impact of extreme weather events ranges between 0.23% and 1.1% of GDP depending on the country group and the measure for extreme weather events” 

-European Central Bank, 2009 

Climate Change: "Taken as a whole, the range of published evidence indicates that the net damage costs of climate change are likely to be significant and to increase over time."

- Intergovernmental Panel on Climate Change 

Interstate conflicts:  “Wars slow the economy. Estimates indicate that civil war reduces annual growth by .01 to .13 percentage points, and high-intensity interstate conflict reduces annual growth by .18 to 2.77 percentage points. On the other hand, lowintensity conflict slows growth much less than high-intensity conflict, and may slightly increase it. The detrimental effect of conflict on growth is intensified when examining nondemocracies, low income countries, and countries in Africa.”   

- Solomon W. Polachek Department of Economics and Department of Political Science State University of New York at Binghamton  

Natural catastrophes:  “Major natural disasters can and do have severe negative short-run economic impacts. Disasters also appear to have adverse longer-term consequences for economic growth, development and poverty reduction. “  

-Charlotte Benson, Edvard Clay, 2003

Unemployment: More social benefits needed, less taxpayers

-Investopedia 

Government failure: Government failure is a situation where government intervention in the economy to correct a market failure creates inefficiency and leads to a misallocation of scarce resources. 

-Economics Online 

Water crisis: “Right now, many companies already consider water resources when making decisions about where to invest or locate facilities. And they are giving preference to areas where water risks are lowest. These businesses understand what policymakers are now coming to realize: When water resources are unhealthy or unreliable, businesses cannot grow and cannot hire or sustain a workforce. Local commerce suffers, incomes decline, tax revenues fall. The effects are very real and they are felt immediately and acutely. “

-Growing Blue

Illicit trade: “Impact on the global economy of illicit trade and criminal activity – 8%-15% of global GDP – US$ 750 billion– US$ 1 billion in narcotics trafficking – US$ 650 billion in counterfeit goods – US$ 20 billion-40 billion in environmental crime”

 -OAS, Davos-Klosters 

Trigger 3 resarch. Value chain and growth

Research Trigger 3

Problem 
How to develop the company value chain and structure as a company grows? 

Learning objectives ·         
          
          What is value chain?
·         How does the internal process effect a company’s growth?
·         How do external factors affect the value chain?
 
 

1. What is value chain?

“The process or activities by which a company adds value to an article, including production, marketing, and the provision of after-sales service.”

 Video explaining value chain in 1,5 minutes. 

Breakdown of value chain: 
1.    inbound logistics (warehouse, inventory management) 
2.    Operations (raw material to finished product) 
3.    Outbound logistics (Warehouse, delivery, user)
4.    Marketing and sales (channel selection, advertising, pricing)
5.    Service (customer service and repair)
 

   

2. Internal Process and company growth

 By identifying the stages of the value chain, one can begin to expose shortcomings.

Differentiation comes from:

1. the way individual activities are performed
.2.  the way related activities link together
.3.  the way the entire value chain is structured
How can a company support differentiation advantages from key success factors to value chain activites. 

Individual activities --> customers:  “is there anything in the way we do this activity (or could do the activity) which creates special value for the customer?” 

http://www.differentiateyourbusiness.co.uk/using-value-chain-analysis-to-create-competitive-advantage 

Porter brings this into the next stage and identifies the ways to differentiate your company from competitors and  turn that knowledge into company strategy. 

Porter’s theory on competitive advantage: From Competitive advantage to corporate Strategyhttp://people.tamu.edu/~v-buenger/466/Comp_Adv_to_corp_strat.pdf 

Generic strategies:

 Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation" (creating uniquely desirable products and services) and "Focus" (offering a specialized service in a niche market). He then subdivided the Focus strategy into two parts: "Cost Focus" and "Differentiation Focus." These are shown in figure above.

3. External Factors effect on Value Chain

 External Opportunities and Threats"The external environment is even more diverse and complex than the internal environment. There are many effective models to discuss, measure, and analyze the external environment (such as Porter's Five Force, SWOT Analysis, PESTEL framework, etc.). 

• ·Markets (customers): Demographic and socio-cultural considerations, such as who the customers are and what they believe, are critical to capturing market share. Understanding the needs and preferences of the markets is essential to providing something that will have a demand.

• ·Competition: Knowing who else is competing and how they are strategically poised is also key to success. Consider the size, market share, branding strategy, quality, and strategy of all competitors to ensure a given organization can feasibly enter the market.

• ·Technology: Technological trajectories are also highly relevant to success. Does the manufacturing process of the product have new technologies which are more efficient? Has a disruptive technology filled the need that was currently being filled?

• Supplier markets: Suppliers have great power as they control the necessary inputs to an organization's operational process. For example, smartphones require rare earth materials; if these materials are increasingly scarce, the price points will rise.

• Labor markets: Acquiring key talent and satisfying employees (relative to the competition) is critical to success. This requires an understanding of unions and labor laws in regions of operation.

• The economy: Economic recessions and booms can change spending habits drastically, though not always as one might expect. While most industries suffer during recession, some industries thrive. It is important to know which economic factors are opportunities and which are threats.

• The regulatory environment: Environmental regulations, import/export tariffs, corporate taxes, and other regulatory concerns can poise high costs on an organization. Integrating this into a strategy ensures feasibility.

https://www.boundless.com/management/textbooks/boundless-management-textbook/strategic-management-12/strategic-management-86/the-impact-of-external-and-internal-factors-on-strategy-419-1549/ 

Porter’s five forces:

http://www.quickmba.com/strategy/porter.shtml