FINANCIAL LITERACY FOR ALL-COMPOUND INTEREST

It is reported that when Albert Einstein was asked what was the most powerful thing in the world? He said it was compound interest.

 “Because compound interest is a really marvellous invention, Albert Einstein called it the 8th Wonder - It can work for you, or against you. When you invest it works for you. When you borrow it works against you!”

“Albert Einstein called compound interest "the greatest mathematical discovery of all time”

It is great and more acceptable when a great mathematician and prodigy like, Albert acknowledges compounding as the most powerful thing in the world.

Investment is ventured into with the aim of getting returns. Most invest returns come in the form of compounding gains. Take for instance, when a farmer sows a seed of groundnut or peanut or maize and many more, he always reaps multiples of what was sown. This is pure compounding.

It’s mostly exactly with many investment products and schemes. When one takes an investment policy, one has to wait patiently like the farmer. The farmer would wait for days, months and years by weeding, applying fertilizers, watering, and incurring labour and other costs to get the returns in multiples. Farmers are arguably the greatest investors and again arguably the most emotionally intelligent investors. Investors in all the other areas mostly lack the spirit of the farmer, who would sow or plant, do everything necessary and wait for the results, good or bad. Like the farmer, the investor has to constantly monitor his investments to see if he is making gains or losses and take the necessarily action required as it is done in farming where the farmer prunes his plants and does other farming activities to keep his sown seeds or plants in check, so he could get good harvest.

Compound interests is counting not by the normal order of 1,2,3,4,5,etc, but counting say, 1, 3, 5,7,15, 200, 3,000, 90,000,etc. Investments grow by compounding when the interest earned is added to the principal amount and re-invested. It would therefore be out of place to think that investments do not grow faster and for that is a waste of time and money to take an investment action.

The power of compound interest enriches you surprisingly with a matter of time. You become rich once you have an investment plan and follow it and compound interest would compound your money for you.

The power of compound encourages you to invest even when you do not have enough on you. You do not need to be a millionaire before you start investing. In fact, investing is not meant for those, who are already rich, though they are the ones who really invest. No wonder, they continue getting richer.

It is better to have an investment plan and follow it consistently with little amounts and compound interest would multiple them for you than have no plan and put in a big amount once, stops and starts waiting to get plenty in multitude.

Mathematicians and investment experts have made the understanding of compound interest easier with what they call the rule of 72. They say to know how much your money will multiply in years, just divide the interest rate by 72. For instance, if a 91 day Treasury bill rate is say 12%, then 72/ 12 = 6 years to double.

 If a mutual fund, like the Gold Fund, or the Fortune Fund, or the Horizon Fund, or the Equity Fund, or the Campus Fund, or the iFund, or the First Fund, or the Heritage Fund, or the Bfund, or the Ark Fund, or the EPACK, etc (All these funds and many others operate in Ghana) is say 41%, then 72/41= 1.76 years to double.  

This simple calculation informs and advises you, where to invest and get more returns quickly. The pay-back-period (the time or period of getting back your investment with benefits) is easily determined by applying the 72 rule in investing.

Your investment would be doubled every six (6) years in the case of the Treasury Bill and approximately every two (2) years in the case of a mutual fund, provided the interest rates remain the same, though it is not practicable. The higher the interest rates, the higher the returns, the shorter the pay-back-period. The opposite is also true.  

Readers should take note that I’m not suggesting that mutual funds or unit trusts perform better than Treasury Bills or vice versa, they are used for the purposes of illustrations.  It’s also worth saying that last year, 2010, the mutual funds in Ghana performed far better than Treasury bills in Ghana.

Invest with the mind of utilizing the power of compound interest to multiply your investment for you.

©, 2011, Godwin-Xavier Ayeebo

Email: gayeebo@gmail.com

Blog: www.g-xavierayeebo.blogspot.com

BUSINESS LITERACY FOR ALL-BUYING A BUSINESS

It is very difficult to establish and run a business due to the frustrations one has to go through in the registration process and the hard time to come by start-up capital. These factors cause most ideas to forever remain ideas that never materialize into a viable business. There is however a way out in owning that dream business you are yearning to own. The option is buying an existing business since it already has the structure, the employees and existing customers in place to kick-start your business. I must be quick to add that you should not decide to buy an existing business instead of establishing one because you want to avoid the hustle and bustle of setting up your own. You must investigate the industry very well to know the players in there, the market share your new company owns and how profitable it would be if you should buy it. Decide whether or not you are convinced to buy the business and you are ready to make a commitment to that effect. If you are convinced to buy the business, then start talking to the owners of the business and explicitly stating your decision to buy their company. Negotiate with the management of the company you are seeking to buy and seek legal advice throughout the negotiation period. If you are someone interested in buying already established businesses, then talk to business opportunity brokers, read classified newspapers and go for business opportunity trade shows.

Take a very close look at whether environmental and other laws in the industry or country where the business is and whether the business has always adhered to these laws. It is equally essential to check the track record of the management of the company you wish to buy. The management of the business you want to buy should be studied and known, though it’s difficult to assess, it is still crucial to the future well-being of the business. Assess the expertise needed to keep the business going, if present management leaves and you have to hire your own new team.

Technology, if the business is an industry, where it demands IT for it to make high profits, it should be considered whether it can sustain the ever-fast-changing industry and still remain in business for the foreseeable future.

In your decision to buy a business, you would be dealing more with experts like accountants, attorneys, bankers, equipment suppliers and vendors amongst other experts but always remember it is your decision to buy that business. Don’t allow any expert to decide for you. But what would be helpful is that you ask them relevant and specific questions that would guide them in their recommendation to you.

Furthermore, your decision to buy a business should be dependent on facts and figures, industry analysis and objectively evaluation the future prospects of the business considering both macro and micro economic indicators. Most of the above information can be gotten from regulatory agencies of the company you are buying. 

There are source document that you can get from the accounts department of the company you are buying. Certain documents like the balance sheet, cash flow statement and income statements should be checked. Do not forget to always ask for an audited financial statement. Ask for verification documents for their receivables, payables and other lines items in their financial statements. Ask for the seller's personal and business tax returns. In some businesses, you can determine the income by analyzing utility bills or supplier's records. You should be quick to find out if the company has a pending case in court and analyze objectively their chances of winning or losing that case. Also verify to see if there are some outstanding financial obligations the business owes to other companies and find out if they are retrievable or recoverable. This affects the value of the firm as this would help you arrive at the cost of buying the business.

Reasons why you buy an existing business

• An existing business may be the only way to enter the industry.
• Location is an important factor. In some communities, certain types of business can no longer be built and an existing business will be the only way to enter the industry. Proximity to your home will also be a factor. 

Benefits to purchasing an existing business:

• The business has a track record of income and expenses
• Operating costs are often lower than in a new business
• The business will already have trained employees
• There may be true goodwill already built in
• The business may already dominate the market in the trade area

Now, you have an excellent idea of how to buy an existing business.  Direct all questions, comments and additions to: skteye@gmail.com 

©2011, Sophia Kafui Teye

Email: skteye@gmail.com

FINANCIAL LITERACY FOR ALL-HAVING A BUSNINESS

A business is any activity that generates income for you without your presence. In this write up, the word business would be used to describe all kinds of business like sole proprietorship, partnership, and corporation. Most of these businesses carry certain distinct features like legal entity distinct or different from its owners and can act on its own by utilizing its legitimate rights, power and authority. Sole proprietorship does not have the feature separate legal entity.

A business is able to serve a larger community than an individual and a business is expected to be a going concern or is expected to have a perpetual life. Sole proprietorship usually has the shortest going concern because the death of the sole proprietor can render the business closed. Under normal circumstances a business could be passed unto generations to run and serve society.

When one owns a business, one could relieve oneself from many expenses and one can enjoy many privileges from the business, provided the business attains a certain status and is really law abiding by meeting its tax obligations and other statutory responsibilities. You can set up a business yourself or buy an existing business. Whichever, a business is a business and what is important is that it exists and is capable of generating revenue for you and is serving its target market.

There are several things that are required for a business to be successful, human resource issues, cash flow and book keeping issues. Owners of businesses should employ the right people to stir the affairs of the business for it to function and continue to be a going concern.

The cash flow of the business should be a critical factor, because the business cannot exist without money to operate. There should be cash flow management measures in place and these measures should be adhered to and implemented. It is essential for business cash to be spent on budgeted items only and should be captured in the books of account.

Every business needs initial working capital, aside the fixed assets and human capital to operate effectively. Working capital is the cash needed for the day to day running of the business.

 If the business is an existing one, its working capital should be expanded and consolidated.  Without working capital, it is very likely to run into debts that could have been prevented, because things done on credit for the business would always be more expensive, especially when your suppliers know you might not be credit worthy, than when done with cash. Yes, it is better to transact businesses on credit but that would be after your business counterparts know you very well and believe you have a reputation and that you are really credit worthy.

Marketing of the organization’s products or services is crucial to the well-being of the organization and this could help sales flow in so the business could make some good cash. Without vigorous marketing and sales of the products or services, the business has no future. It’s expected that every entrepreneur should be able to sell his or her own products or services very well and hence should be able to hire people like him or her or better than he or she to make good sales for the business.

Every business should have very strong and robust internal controls to cater for administration, accounting and finance and other departmental needs. Approvals and authority levels clearly spelt out. Segregation of duties for employees is clearly done and allocated. That management is not overwriting its own rules and the integrity of management is not questionable.

Internal controls should be designed in such a way that they should help prevent, detect and correct fraud and similar instances.

If the business has no internal controls, it will not last and shall be closed down in no distant future.  The internal controls in fact are the tools intangible that would concretize and make it perpetual.

A business must be backed by a good legal system, meaning, it should protect itself against its competitors by having good lawyers to act for it and it should also be law-abiding to meet all its legal and statutory obligations.

All businesses in the world only exist when they have product(s) and or service(s) to offer to the world else, it is an impossibility to get from the world without giving it anything in return.

Once, again, there is nothing for something in the world.

The business must have a product or service to give to the world and get back from it. The business could increase its product or service lines as and when necessary after doing the necessary marketing survey and research. The product or service should be packaged well to be attractive, catchy, appealing, durable and trusted.

The privileges of having a business are:

·         The business could protect your assets for you

·         The business could bear all personal expenses for you

·         The business could serve a larger society than you doing it alone

·         The business generates income for you while you sleep

·         The business could pay tax in larger amounts than you would pay yourself to aid national development

·         The business could be passed unto your children

·         The business can contribute to environmental friendliness and sustainability development

·         The business opens many doors of opportunities and gives you the opportunity to meet many learned and prominent people

·         If you have your own business, you are your own boss and you not answerable to anybody

·         If you have your business, you can have time to attend to other important, personal matters and still make money

·         If you have a business, your money works for you, while you concentrate on other important matters

It is not only entrepreneurs, who should have businesses, employees could also have businesses and at the same working diligently for their employers.