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Business Plan Financial Projections: Stop Worrying About Being Right…

Business plan financial projections seem daunting because
they are so uncertain. This very uncertainty, however, is
what makes preparing them easy because you can’t possibly be
right. You can’t predict the future. None of us can. All you
can be is competent in the way you prepare your business plan
projections.

Before you finalize your business plan this year, consider
these six caveats to preparing your business plan financial
projections:

1. Don’t offer pull-out-of-the-air, “conservative”
guesstimates about getting some percentage of the overall
market demand or year-over-year growth.

It is a mistake to assume that business investors will
appreciate your being conservative with your business plan
financial projections in the early years of your business.
Don’t think for a Wall Street minute that presenting
“conservative” business plan financial projections indicates
“realism” to prospective business investors. Business investors
invest for one reason: to earn a return on their money. How
long the money is invested influences the amount of the return
earned. Let’s say a business investor wants to triple an
investment. Well, if that investment triples in 3 years, the
return is 44%. If it triples in five years, the return is
25%. Adding just two years to the investment period nearly
halves the return! Now do you see why time is so important
to a business investor? Here are a few other examples: let’s
say a business investor wants to:

Make 5 times an investment in 3 years = 71% return

Make 5 times an investment in 5 years = 38% return

Make 7 times an investment in 3 years = 91% return

Make 7 times an investment in 5 years = 48% return

Make 10 times an investment in 3 years = 115% return

Make 10 times an investment in 5 years = 59% return

So, while you may find it attractive to figure out how to
make “just a living” until the business venture proves
itself, you now understand why business investors want sales
and earnings to grow absolutely as fast as possible, without
being deceived, in your business plan financial projections.
On the whole, business investors are risk averse only to the
extent that they don’t want to lose their money or tie it up
in a low return investment. Typically when you make the claim
that your business plan financial projections are “conservative”,
it usually just means that you have no idea how and why you’ll
achieve a certain level of sales within a certain time frame.
Interesting, these kinds of estimates, provided that you’ve
done some good thinking about market segments and overall
demand, often turn out to be too low. Remember, it’s just as
bad to underestimate your sales, as it is to overestimate
them.

2. Avoid calculating costs as a straight percentage of
revenues.

Sure it’s easier to do things this way, especially with
Excel and other business plan financial projection software.
Costs are real, however. You need to know what they are very
specifically. If you’ve done your homework in developing
your business plan, then you should already have this information,
or at least the basis of it. Just estimate and calculate your
costs on a product-by-product basis.

With these warnings in mind, use the following steps to
develop your business plan financial projections:

Think about what percentage of the overall market share your
competitors already own. Assume that they will continue
their present trends in growth. (Note: some competitors may
already be trending down and losing market share.) Temper
your market share estimates with some discussion of how your
entry into the market will affect these trends. Then,
estimate the percent of total, potential demand that remains
available to you.

Now, based on the limitations of your operations plans,
calculate how much of this remaining available demand you
can achieve. This is a very simple calculation. Start with
your overall productive unit capacity and factor it by the
expected yield of sellable product, then multiply these unit
sales by their respective selling prices and voila, you have
the revenue numbers for your business plan financial projections.

Let’s take an example.

Your research indicates that 2 out of every 10 females age
23 to 55 will under go some type of non-invasive cosmetic
treatment in your area. Your research also shows that this
number is expected to grow 20% each year over the next 5
years. There are 40,000 females in your target market. You
identified four competitors in your target market. These
four competitors currently handle on average 6 procedures a
day. You plan to start a non-invasive cosmetic treatment
center that uses the most advanced technology and is thus
capable of performing an average of 7 procedures a day.
Using this data you calculate the following statistics
about your market and market potential:

Total market 40,000 females x 20% = 8,000 procedures per
year

4 competitors x 6 procedures x 250 days = 6,000 procedures
per year

Available procedures: 8,000 less 6,000 = 2,000 per year

Your productive capacity: 7 procedures a day x 250 days =
1,750 or 21.875% of the total market. The average selling
price for a procedure is $400. Thus, the revenue for the first
year in your business plan financial projection would be 1,750
procedures times $400 or $700,000.

Now, let’s say you’re were projecting 2,200 procedures per
year. This would mean that you would have to alter your
operating plan to be able to perform 2,200 procedures. You
would also have to demonstrate how you would capture an
additional 200 procedures from your competitors.
Granted this is an over simplified example, but it should
give you a feel for how this process works.

Regarding price, in most cases you should have a clear idea
of how to price your product or service. There are usually
other, similar products or services out on the market.
Unless your competitive advantage is a cost reduction and/or
unless price is a critical basis of competition, just
estimate the value of your improvement and add it on to the
average price currently offered in the marketplace. In order
to make this estimate, you’ll have to be talking to
potential users. Find out what they pay now. Find out how
they feel about the current price. Ask them if they’d be
willing to pay more and how much more. If you ask enough
people, you’ll get a general idea.

3. Never determine price on the basis of a margin you think
is attractive.

The market will pay you only for the value you deliver,
which is determined by the consumer paying the final price.
It’s easy to make the mistake of thinking that a 20%, 40% or
even a 60% margin is great. Never considering that if the
product or service you’re offering provides a real
advantage. If you do this, you may be grossly
underestimating the price you can get in the marketplace and
underestimating your business plan financial projections.
Consumers don’t think in terms of margins. They could care
less about what you ought, “reasonably”, to get for your
product. That’s why you must find out the most that they’ll
pay. This is the value of your product or service. Come up
with some reasonable basis for determining this real value.
Keep in mind the obvious: If the consumer’s value on the
final product or service is less than your cost plus a
reasonable profit to keep your business growing, you’re in
trouble. Your business model will not be sustainable and your
business plan financial projections useless.

Now calculate the costs of manufacturing and distributing
your product. These costs flow directly from your revenues
estimates and operations plan. How much will it cost to
purchase what equipment and materials, hire what personnel,
engage in what selling efforts, pay what accountants and
lawyers, rent what kind of space and so forth, to achieve
the revenues you’re showing in your business plan financial
projections. You must be very specific. Project your costs
over time. Keep them tied to the units you need to sell to
achieve the revenues in your business plan financial
projections.

Obviously, costs and revenues work hand in hand.

4. Keep your fixed cost low.

Keep in mind that none of these revenues and the cost
estimates are going to be perfectly accurate, which means
the amount of profit or cash available to pay “fixed” cost
isn’t going to be accurate either. As a result, you can lose
your shirt trying to pay for equipment, a receptionist, or
other activities that don’t contribute to the sole objective
of making sales. Wherever possible, rent space, rent time on
equipment, answer your own phones, etc. To the extent that
you keep costs variable in your business plan financial
projections, you can cut back when sales are slower than
expected. It’s the worst situation to have a big,
well-furnished office with an expensive secretary who
needs the job, when the money isn’t coming in. High fixed
costs in your business plan financial projections also send
the wrong message to investors that you know more about the
“form” of doing business than about actually making money.

Now pull all your numbers together to prepare the financial
statements that summarize your business plan financial
projections. You need three basic statements: cash flow
analysis, income statements, and balance sheets. All of
these come directly from the above calculations. Your cash
flow analysis indicates when and what amounts of capital
infusion you’ll need to start and sustain your business plan.
Make your income and balance sheet projections on the
assumption that you’ll get the capital. For the first year
or two of your business plan financial projections, present
each of these statements on at least a quarterly basis.
Monthly is best. I suggest doing a 24- or 36-month projection
depending on your growth plans and changes in the industry that
you foresee. Follow these monthly or quarterly projections with
annual projections till you cover a span of 5 years.

Finally, run through some “what-if” scenarios or sensitivity
analysis. Though you business plan financial projections should
be based on your best, and best-supported estimates of costs
and revenues, you know you can’t be 100% right. That’s why it’s
important to identify those elements or assumptions of your
business plan financial projections that you feel are most
uncertain. Write out the nature of the uncertainty and the range
you think the estimates will fluctuate up or down. Then change
the estimates accordingly and re-run all your statements.
Pay close attention to how your business plan financial
projections, especially cash flows, change when you change
each assumption. This will help you determine how much
“cushion” you have available and, if business isn’t going
according to plan, at what point cash will become an issue.

5. Do not simply assume that costs and revenues may be
“off”, up or down, by some percentage.

Again, I know that Excel makes it easy to do this. For all
the same reasoning as above, stay focused on the assumptions
and details that make up your business plan financial projections.
It’s the details you need to examine for their sensitivity and
their impact on the bottom line. You only need to alter those
specific items that you’re most uncertain about. If it’s revenues
that you’re worried about, is it the price, the volume, or
both that concerns you most? How big a swing in the estimate
are you worried about, in what direction and why? If it’s
your cost projections that are keeping you awake at night,
which cost elements and why? Things like rents and labor
costs can be determined fairly accurately. But maybe you’re
unsure about materials or labor availability or how
efficiently you can produce your products or provide your
services. Maybe you’ll have to pay extra to ensure their
availability. This kind of thinking forms the basis for running
“what-if” or sensitivity analysis on your business plan financial
projections.

6.Do not include every possible business
plan financial projection scenario in your business plan.

Both you and your investors need to know what aspects of the
business plan financial projections are most uncertain,
represent the most risk, in what direction, why, and how
they affect the bottom line. Having hundreds of alternative
scenarios to sort through is like a man with two watches
showing two different times… he never knows what time it is.
Lots of alternative business plan financial projections also
indicate that you’re not too sure about anything. This is an
impossible way to communicate with business investors, manage
your business, or make important decisions. It’s much more
effective to identify the risky areas of your plan, tell why
and how they impact the bottom line and what actions you
plan to take if they occur. This helps you and your business
investors stay focused on the high impact areas and to think
clearly about whether other factors should be considered as
well. It also lends more credibility to your talents and
increases the likelihood of your plan’s success.

Finish this discussion with a summary of the critical
aspects of your plan and related contingency plans. If
you’ve followed all these steps, then you can figure out
what you’ll do if your actual performance turns out to be
different than your business plan financial projections.
Remember, you’re purpose is to demonstrate to business investors
that you’re competent; worrying about protecting their investment
and running a business, not just flying by the seat of your pants.

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Can You Trust Your Financial Adviser?

Heroes or villains?

“All industries have a few bad apples. I would say that 80% of financial advisers are either good or very good” or “It’s just 99% of financial advisers who give the rest of us a bad name”

Financial advisers, also called financial consultants, financial planners, retirement planners or wealth advisers, occupy a strange position amongst the ranks of those who would sell to us. With most other sellers, whether they are pushing cars, clothes, condos or condoms, we understand that they’re just doing a job and we accept that the more they sell to us, the more they should earn. But the proposition that financial advisers come with is unique. They claim, or at least intimate, that they can make our money grow by more than if we just shoved it into a long-term, high-interest bank account. If they couldn’t suggest they could find higher returns than a bank account, then there would be no point in us using them. Yet, if they really possessed the mysterious alchemy of getting money to grow, why would they tell us? Why wouldn’t they just keep their secrets to themselves in order to make themselves rich?

The answer, of course, is that most financial advisers are not expert horticulturalists able to grow money nor are they alchemists who can transform our savings into gold. The only way they can earn a crust is by taking a bit of everything we, their clients, save. Sadly for us, most financial advisers are just salespeople whose standard of living depends on how much of our money they can encourage us to put through their not always caring hands. And whatever portion of our money they take for themselves to pay for things like their mortgages, pensions, cars, holidays, golf club fees, restaurant meals and children’s education must inevitably make us poorer.

To make a reasonable living, a financial adviser will probably have costs of about £100,000 to £200,000 ($150,000 to $300,000) a year in salary, office expenses, secretarial support, travel costs, marketing, communications and other bits and pieces. So a financial adviser has to take in between £2,000 ($3,000) and £4,000 ($6,000) a week in fees and commissions, either as an employee or running their own business. I’m guessing that on average financial advisers will have between fifty and eighty clients. Of course, some successful ones will have many more and those who are struggling will have fewer. This means that each client will be losing somewhere between £1,250 ($2,000) and £4,000 ($6,000) a year from their investments and retirement savings either directly in upfront fees or else indirectly in commissions paid to the adviser by financial products suppliers. Advisers would probably claim that their specialist knowledge more than compensates for the amounts they squirrel away for themselves in commissions and fees. But numerous studies around the world, decades of financial products mis-selling scandals and the disappointing returns on many of our investments and pensions savings should serve as an almost deafening warning to any of us tempted to entrust our own and our family’s financial futures to someone trying to make a living by offering us financial advice.

Who gets rich – clients or advisers?

There are six main ways that financial advisers get paid:

1. Pay-Per Trade – The adviser takes a flat fee or a percentage fee every time the client buys, sells or invests. Most stockbrokers use this approach.

2. Fee only – There are a very small number of financial advisers (it varies from around five to ten percent in different countries) who charge an hourly fee for all the time they use advising us and helping to manage our money.

3. Commission-based – The large majority of advisers get paid mainly from commissions by the companies whose products they sell to us.

4. Fee-based – Over the years there has been quite a lot of concern about commission-based advisers pushing clients’ money into savings schemes which pay the biggest commissions and so are wonderful for advisers but may not give the best returns for savers. To overcome clients’ possible mistrust of their motives in making investment recommendations, many advisers now claim to be ‘fee-based’. However, some critics have called this a ‘finessing’ of the reality that they still make most of their money from commissions even if they do charge an often reduced hourly fee for their services.

5. Free! – If your bank finds out that you have money to invest, they will quickly usher you into the office of their in-house financial adviser. Here you will apparently get expert advice about where to put your money completely free of charge. But usually the bank is only offering a limited range of products from just a few financial services companies and the bank’s adviser is a commission-based salesperson. With both the bank and the adviser taking a cut for every product sold to you, that inevitably reduces your savings.

6. Performance-related – There are a few advisers who will accept to work for somewhere between ten and twenty per cent of the annual profits made on their clients’ investments. This is usually only available to wealthier clients with investment portfolios of over a million pounds.

Each of these payment methods has advantages and disadvantages for us.

1. With pay-per-trade we know exactly how much we will pay and we can decide how many or few trades we wish to do. The problem is, of course, that it is in the adviser’s interest that we make as many trades as possible and there may be an almost irresistible temptation for pay-per-trade advisers to encourage us to churn our investments – constantly buying and selling – so they can make money, rather than advising us to leave our money for several years in particular shares, unit trusts or other financial products.

2. Fee-only advisers usually charge about the same as a lawyer or surveyor – in the range of £100 ($150) to £200 ($300)) an hour, though many will have a minimum fee of about £3,000 ($4,500) a year. As with pay-per-trade, the investor should know exactly how much they will be paying. But anyone who has ever dealt with fee-based businesses – lawyers, accountants, surveyors, architects, management consultants, computer repair technicians and even car mechanics – will know that the amount of work supposedly done (and thus the size of the fee) will often inexplicably expand to what the fee-earner thinks can be reasonably extracted from the client almost regardless of the amount of real work actually needed or done.

3. The commission paid to commission-based advisers is generally split into two parts. The ‘upfront commission’ is paid by the financial product manufacturers to the advisers as soon as we invest, then every year after that the adviser will get a ‘trailing commission’. Upfront commissions on stock-market funds can range from three to four per cent, with trailing commissions of up to one per cent. On pension funds, the adviser could get anywhere from twenty to seventy five per cent of our first year’s or two years’ payments in upfront commission. Over the longer term, the trailing commission will fall to about a half a per cent. There are some pension plans which pay less in upfront commission. But for reasons which should need no explanation, these tend to be less popular with too many financial advisers. With commission-based advisers there are several risks for investors. The first is what’s called ‘commission bias’ – that advisers will extol the massive potential returns for us on those products which earn them the most money. So they will tend to encourage us to put our money into things like unit trusts, funds of funds, investment bonds and offshore tax-reduction wrappers – all products which pay generous commissions. They are less likely to mention things like index-tracker unit trusts and exchange traded funds as these pay little or no commissions but may be much better for our financial health. Moreover, by setting different commission levels on different products, it’s effectively the manufacturers who decide which products financial advisers energetically push and which they hold back on. Secondly, the huge difference between upfront and trailing commissions means that it’s massively in the advisers’ interest to keep our money moving into new investments. One very popular trick at the moment is for advisers to contact people who have been saving for many years into a pension fund and suggest we move our money. Pension fund management fees have dropped over the last ten to twenty years, so it’s easy for the adviser to sit a client down, show us the figures and convince us to transfer our pension savings to one of the newer, lower-cost pension products. When doing this, advisers can immediately pocket anywhere from three to over seven per cent of our total pension savings, yet most of us could complete the necessary paperwork ourselves in less than twenty minutes.

4. As many fee-based advisers actually earn most of their money from commissions, like commission-based advisers they can easily fall victim to commission bias when trying to decide which investments to propose to us.

5. Most of us will meet a bank’s apparently ‘free’ in-house adviser if we have a reasonable amount of money in our current account or if we ask about depositing our savings in a longer-term, higher interest account. Typically we’ll be encouraged by the front-desk staff to take a no-cost meeting with a supposed ‘finance and investment specialist’. Their job will be to first point out the excellent and competitively high interest rates offered by the bank, which are in fact rarely either high or competitive. But then they will tell us that we’re likely to get even better returns if we put our money into one of the investment products that they recommend. We will be given a choice of investment options and risk profiles. However, the bank will earn much more from us from the manufacturer’s commission selling us a product which is not guaranteed to return all our capital, than it would if we just chose to put our money in a virtually risk-free deposit account. A £50,000 ($75,000) investment, for example, could give the bank an immediate £1,500 ($2,250) to £2,000 ($3,000) in upfront commission plus at least 1% of your money each year in trailing commission – easy money for little effort.

6. Should you have over one million pounds, euros or dollars to invest, you might find an adviser willing to be paid according to the performance of your investments. One problem is that the adviser will be happy to share the pleasure of your profits in good years, but they’ll be reluctant to join you in the pain of your losses when times are tough. So, most will offer to take a hefty fee when the value of your investments rises and a reduced fee if you lose money. Yet they will generally not ever take a hit however much your investments go down in value. The benefit with performance pay for advisers is that they will be motivated to maximise your returns in order to maximise their earnings. The worry might be that they could take excessive risks, comfortable in the knowledge that even if you make a loss they’ll still get a basic fee.

Am I qualified? I’ve written a book!

One worrying feature with financial advisers is that it doesn’t seem to be terribly difficult to set yourself up as one. Of about 250,000 registered financial advisers in the USA, only about 56,500 have the most commonly-recognised qualification. Some of the others have other diplomas and awards, but the large majority don’t. One source suggested that there may be as many as 165,000 people in Britain calling themselves financial advisers. Of these about 28,000 are registered with the Financial Services Authority as independent financial advisers and will have some qualifications, often a diploma. But only 1,500 are fully qualified to give financial advice. The in-house financial advisers in banks will usually just have been through a few one-day or half-day internal training courses in how to sell the particular products that the bank wants to sell. So they will know a bit about the products recommended by that bank and the main arguments to convince us that putting our money into them is much more sensible than sticking it in a high-interest account. But they will probably not know much about anything else. Or, even if they are knowledgeable, they won’t give us any objective advice as they’ll have strict sales targets to meet to get their bonuses and promotion.

However in the world of financial advisers, not having any real qualifications is not the same as not having any real qualifications. There are quite a few training firms springing up which offer financial advisers two- to three-day training courses which will give attendees an impressive-looking diploma. Or if they can’t be bothered doing the course, advisers can just buy bogus financial-adviser qualifications on the Internet. A few of these on an office wall can do much to reassure a nervous investor that their money will be in safe and experienced hands. Moreover, financial advisers can also pay specialist marketing support companies to provide them with printed versions of learned articles about investing with the financial adviser’s name and photo on them as ostensibly being the author. A further scam, seen in the USA but probably not yet spread to other countries, is for a financial adviser to pay to have themselves featured as the supposed author of a book about investing, which can be given out to potential clients to demonstrate the adviser’s credentials. If we’re impressed by a few certificates on a wall, then we’re likely to be doubly so by apparently published articles and books. In one investigation, journalists found copies of the same book about safe investing for senior citizens ostensibly written by four quite different and unrelated advisers, each of whom would have paid several thousand dollars for the privilege of getting copies of the book they had not written with themselves featured as the author.

Of course, only a very small number of financial advisers would resort to tricks like fake qualifications, false articles and bogus books. But the main point here is that far too many of them may know a lot about a few specific products which they are highly incentivised to sell, but may be insufficiently qualified to offer us genuine financial advice suited to our particular circumstances.

Important Questions to Ask When Selecting a Credit Counselor For Debt Management Plan

A lot of Americans think that they are unable to solve their debt issues on their own. They prefer to look for credit counseling agencies or debt relief companies to assist them to manage their debts in a professional manner. For those who have no experience dealing with these agencies, it is important for them to learn some useful skills to evaluate the agencies so that they are able to find the best counselor in the market. There are some important questions they must ask the agencies.

Now, let’s see what important questions we should ask before making our final decision.

  • What kind of services the agencies offer?

In general, there is a wide range of services offered by these agencies. The services include budget counseling, education on debt management, problem solving, etc.

  • Are the agencies licensed or recognized to offer their services by the state government?

It is a MUST to look for organizations which are registered legally.

  • What are the qualifications of the professional credit counselors? Are they certified?

It is indeed important to ensure that the counselors are well trained and certified in consumer credit, money and debt management as well as budgeting.

  • How much is the service fee? Is there any upfront or monthly fee?

As a client, it is necessary for you to know the quotation of each service clearly. Hence, you are advised to get a detailed price quote in writing. Moreover, make comparison to make sure the fees quoted are reasonable and affordable.

  • How do the agencies handle clients’ financial information which is private and confidential?

The agencies must have the ability to handle and protect the privacy of the information.

  • Is there any service or information which is provided for free?

In common, all related information is complimentary. Never pay for it.

  • Is there any written agreement or contract between the clients and the agencies?

Never commit to appoint any agency over the phone. You are reminded to request for written contract. Make sure you read all the terms and conditions thoroughly before you sign.

Financial Freedom And Procrastination!

One of my many frustrations deals with people who say they want to achieve financial success but don’t seem to have the time to work it into their schedule. It can’t be both ways!

I have talked to many people who tell me that they are sick and tired of not getting ahead. They tell me that the financial world is against them and that the financial institutions do not operate in their best interest. They tell me that they want to achieve financial freedom and have their wealth work for them and not them working for it. It seems like these people are telling me what they think I want to hear, and not what they truly want for themselves.

If we accept them into our Personal Economic Coach process, after they profess to want to achieve financial success, it seems that these people are very attentive for the first few meetings. [Not everyone falls into this category.] They approach the process with great gusto but over time cannot continue to stay focused on the training necessary to become financially free.

Achieving financial freedom requires education and time to get it. We offer the tools and the resources for anyone to gain financial freedom. All anyone has to do is commit the time, without excuses. There is no question that ten percent of the people control ninety percent of the world’s wealth because they’re willing to take the time and educate themselves. This small group of people ranges from all walks of life, but the thing that separates them is their commitment to learning what they need to learn to become financially free. That is why they are wealthy!

Procrastination is a terrible disease! It afflicts ninety percent of the world’s population. There is no pill that you can take to get rid of it. The only way that it can be eliminated is when the individual that is afflicted with it, decides they have had enough. When people have realized financially that they have lost substantial amounts of money to the financial institutions, then they decide that they need to take action. This point is usually too late.

Financial liberty is something that everyone has been endowed with by their creator. But there are many people, out there in the world, who want to take these liberties away from individuals. People are losing their financial liberties all the time and they don’t know it. The financial institution, financial planners, and many accountants strip consumers from their financial liberties all day long.

Financial freedom and financial liberty go hand in hand, and everyone must work to protect it. Putting things off, and procrastinating, will always transfer your financial liberties to someone else. When they sense that you don’t know what you’re doing they will take advantage of you. When you show them that you do know what you’re doing they will leave you alone.

Personal Economic Coach allows individuals to learn how to recognize when someone is trying to take advantage of them. It teaches people how to recover dollars that are currently being extracted from them without their knowing it, and put them to growth. Everyone is losing huge amounts of money on a daily basis and they don’t know it. When these dollars are recovered and put the growth they will add millions of dollars to an individual’s bottom line, depending on the age of the individual.

Your freedoms and liberties are not just what we think about as they relate to our Bill of Rights. They translate into all walks of your life which includes your financial life as well. There are people around the world that are very interested in taking away your freedoms and liberties, as well as people within your own country. You need to protect these financial liberties and the best way to protect them is to learn as much as you can about them. This article is dealing in finance only so far our purposes we’re concerned about your financial freedoms and financial liberties as you can tell.

If you’re a financial procrastinator then you need to immediately take action and decide today that you want to protect your financial freedom and financial liberties through financial education. Through Personal Economic Coach you can achieve this goal. You don’t want to get to your later years and wonder where all of your hard earned money went. Whenever I work with a client who begins to start procrastinating, I bring this to their attention to see whether it is truly their desire to become financially free.

Andrew Carnegie, the wealthiest man in the world in the late eighteen hundreds and early nineteen hundreds, said “the problem with the American business person is lack of concentration”. This statement holds true today and probably is pretty safe to say will always be a problem.

The solution is at hand, and you can take action today by contacting us at Personal Economic Coach. What you contact us we will take over the only thing we require is a desire on your part to achieve financial freedom.

How to Sharpen Financial Competence for Directors and Executives

Financial competence is not a static variable, in that it is something that is ever-changing, and the skills associated with being financially competent must be sharpened consistently. The fact is that failure to have financially competent decision makers can be highly destructive to an organization. What is meant by “financially competent” goes well beyond being able to identify credits or debits or being able to properly read financial reports. Being financially competent should focus on one’s ability to break down the financial information provided in those reports and analyze how they should be used to determine the financial path of the organization going forward.

Furthermore, a person must be able to understand how risk factors into the financial decision making matrix and how that risk should affect the courses of action taken by the company. These are the things that separate competent financial management from incompetent financial management. This is likely a major reason why roughly 21% of all CEOs serve in a financial oversight position prior to becoming a CEO and why almost a third of CEOs have served in a financial capacity at some point in their careers. It is also important to realize that the outcome of certain situations has no bearing on the competence of the decisions that have been made. The fact is that poor financial leadership can still yield success from a periodic standpoint. In the same manner that an unskilled Poker player can have a run of “good luck” and win big in a night of gambling, so to can incompetent financial managers “GET LUCKY”.

The problem with depending on luck to manage the financial infrastructure of an organization is two-fold:

1. Luck does; and will always run out at some point in time
2. Financial management isn’t gambling; especially when considering what’s at stake whether it is the shareholders, the market, the employees, or the customers; there is simply too much at stake to make financial management a “Coin Flip.”

To ensure that the key decision-makers are financially competent it is incumbent upon management to analyze the knowledge of these individuals and provide opportunities for them to update and hone their skills as it relates to financial management. The good news is that most organizations generally select the financial decision-makers within their organization by doing a thorough search; this generally allows them the opportunity to select the person that they feel best can handle the position.

Furthermore, most organizations that utilize committees to help manage operations have a financial management committee (as it is considered to be the most common among companies with three or more committees). The problem is that many companies don’t understand the position enough to fully handle this search, so they end up hiring people that have had past success without determining whether the source of that success was luck or skill.

If the current global economic calamity has taught us anything; it has taught us this: When the economic climate is advantageous to organizations it is much easier to seem competent than when things go bad. In a good economic climate decision-makers can take huge risks and if they win they are superstars; if they lose there are generally opportunities to mitigate that loss (either by acquiring debt capital; increasing sales, or raising equity funds just to name a few).

In a bad market we have discovered that THE SAFETY NETS ARE GONE; and risky decisions have real consequences. In this market we are finally paying the price to learn that there is a real difference between corporate sponsored gambling and effective financial management. What we need to do now is train current and future financial decision-makers about what makes an executive financially competent, and what does not. This will produce more effective financial decision-makers and more importantly it will provide a future asset for companies that will assist them in diverse market situations; NOT JUST WHEN TIMES ARE GOOD.

The solution: The following are some of the steps that key decision-makers need to take in order to assist the company in building a more competent and more effective financial management infrastructure.

1) Your executive Finance team: To have a financially competent executive team; YOU NEED A TEAM; there is ALWAYS an inherent danger in leaving major financial decisions to a few individuals. The fact is that we are talking about money; and when that is the subject then many times self interest replaces corporate interest in the decision making hierarchy. Furthermore a company that has a properly chosen team of individuals to make decisions provides a system of checks and balances which mitigate the risks associated with these decisions.

2) Training Courses in Finance: Another conduit would be to get a day or two day workshop in financial training where current decision makers receive tutelage in financial decision making from an application standpoint instead of an academic or theoretical standpoint. Bringing in people that have a history of being competent financial managers will be helpful. But also teaching examples of how poor decisions have destroyed companies would be helpful as well. Many course offer sound coverage of financial topics of importance. However, it is important to check background, experience and credentials of the trainer before embarking on a course.

3) Get a Coach or Corporate Consultant: Coaching at executive level has proven to be popular in many parts of the world. Experts believe that the value an executive coach (whether it is a successful consultant, former executive, or entrepreneur) adds, significantly impacts progression and drives performance to a higher level. There are many coaches available but you need to ensure you get a coach who will listen to your concerns at the same time offer the right and relevant professional advice. With the advent of the internet, organizations also offer virtual coaching support.

4) Have self-analysis meetings: At least once a year all organizations should seek to have a meeting with all people involved in the financial decision making process (executives, senior financial/accounting personnel, board members, etc.) and simply have a brain-storming session that focuses on the direction of the organization; future financial needs, current financial position, etc. These meetings have a way of bringing issues to light that otherwise would stay in the dark; and furthermore you want all of these people to work well with each other, and this is a good platform to start from.

While most organizations believe that the decision making aspect of their financial infrastructure is at least competent; the fact is that many organizations aren’t aware of what constitutes competence as it relates to financial decision making. The fact is that, no matter where your organization is located, the WORLD HAS CHANGED for companies; to stay prosperous companies must focus on sustainability and not luck; they must focus on consistency and not major peaks. Financial competence has little to do with an education in finance, it has everything to do with how your executives can use that information and analyze the health and the future of the organization. Those that understand this are in an advantageous position; those that don’t are playing with fire.

CAUTION: While all the above (and others) may prove useful, the idea is not to micromanage and get bogged in deep financials. Keeping it simple is the message. I believe if boards can set criteria through Executive Policy Development from the onset, keeping it simple yet covering all financials of your organization is the way forward. Subsequent monitoring of the financial health at appropriate intervals will help you shape your organisation’s financial strength further. After all, it is all about accountability at board level.