By Timothy Dzurilla
Corporations use intelligence gathering techniques to create propaganda, protect and extract trade secrets, and manipulate public debates.
Corporate information gathering techniques are once again being reexamined after what is being called the Wal-Mart spy scandal. The following is an extremely brief summary of the philosophy and techniques of corporate spying throughout the 20th and 21st centuries.
Sun Tzu’s Art of War
This is the basis of a lot of business theories and practices because many business school students are required to read Sun Tzu’s Art of War, especially in Japan. In these ancient tomes come some of the first recorded thinking about intelligence gathering.
“If you know both yourself and your enemy, you will come out of one hundred battles with one hundred victories. Therefore, one hundred victories in one hundred battles is not the most skillful. Seizing the enemy without fighting is the most skillful.” - Sun Tzu
Edward Bernays’ Propaganda
One of the modern creators of our understanding of propaganda and how we think about public relations and manipulation, Bernays lays out some of the techniques for understanding and forming mass opinion. His scientific approach to propaganda is called “engineering consent” and based on his fundamental question: “If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our wills?”
For example, he made women’s smoking fashionable in the 20’s by equating smoking to freedom and independence. He called cigarettes “torches of freedom” because of information gathering about the target audience of suffragette woman.
At this point in time, information gathering was focused on consumers and other industry competitors to bend both the market and the policies surrounding those markets.
In his book, Propaganda, Bernays writes:
“The conscious and intellectual manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. It is they who pull the wires which control the public mind.”
70’s and 80’s
There is a shift in the 70’s and 80’s in corporate intelligence gathering from examining consumers and competitors, to targeting dissenting organizations and anticipating future problem in the social and political spectrums, both domestically and internationally.
Academic Judith Richter summarizes this period of corporate information gathering into three components:
- intelligence gathering and assessment of socio-political climate
- attempts to manipulate public debate through: delay, depoliticize, divert, and fudge
- attempts to exclude antagonistic voices from debate through character attacks and division among critical groups
Building on Bernays’ ideas of propaganda and in reaction to dissenting organizations corporations form departments or hire consultants for gathering information and manipulating the public debates on corporate practices.
With the proliferation of PR consulting and corporate information gathering firms and the ease of access to information through digital communications technologies, the US Congress passes legislature to protect corporate information systems.
Economic Espionage Act of 1996
a) criminalizes theft of trade secrets to benefit foreign powers
b) criminalizes theft of trade secrets for commercial or economic purposes
Information Age Information Gathering
As made public by Bruce Gabbard in the Wal-Mart spy scandal, corporations are using techniques of phone and email screening and recording, watch-dogs trotting the globe to follow employees, through programs designed and run by former CIA and FBI agents. Programs track the activities of not only consumers, dissident organizations, and competitors, but also employees and shareholders with increasingly sophisticated technologies.
By Ken Little, About.com
You may have heard the term “asset class” in the media and wondered exactly what was meant. Financial professionals generally agree there are four broad classes of assets.
The classes are:
- Stocks or equities
- Fixed Income or bonds
- Money market or cash equivalents
- Real estate or other tangible assets
These are the classes of assets you have available to build a portfolio.
You might notice that all stocks are lumped together, when individual stocks (or mutual funds for that matter) can be quite different. For example, a small-cap stock is not going to act the same way as General Electric.
However, stocks are grouped together because they will, as a group, react more alike than any of the other three classes. The same thing is true for the other three classes.
The purpose of having all four asset classes represented in your portfolio is to take advantage of the different strengths of each class.
The whole theory of asset allocation is based on diversifying your portfolio by asset class. Read an introduction to asset allocation for more information.
Many people use Real Estate Investment Trusts and other more liquid investments to satisfy the real estate leg of the asset class tool Read an article on REITs.
A portfolio that only contains one or two asset classes is not diversified and may not be prepared to take advantage of all the swings the market can throw at you.
Michael Boone has over 15 years experience in investments and securities. He is a Certified Financial Planner and a Chartered Financial Analyst. He does public speaking on financial matters, and has written for or been featured in many publications.
CNN: Good afternoon Michael Boone and welcome to CNN.com Newsroom.
BOONE: Hello! This is going to be fun — a new format for me.
CNN: What’s the very first piece of advice you would offer to any Powerball winner?
BOONE: I think the first thing would be “congratulations!” From a financial standpoint, I’d try to separate the emotional excitement of winning the prize from the actual decision-making phase of deciding what to do with the money.
CHAT PARTICIPANT: I’m sure you advise investment of the Powerball winnings, but how much would you leave for fun money?
BOONE: It really depends on the size of the award. It’s going to be a percentage we’ll work from, and it will depend on the person’s financial situation. It’s important to remember that this is exciting and fun, but my role as an advisor is not to make this into a drudgery where you feel like a kid put on an allowance. But it’s important to not make major mistakes by being caught up in the excitement of the winning. So, let’s say for instance that someone won $40 million. Nearly half that money may disappear in taxes to the federal and state governments. So, we’re really talking about slightly over half of that money available.
Now, I would recommend taking a fairly significant amount, which may be $10,000 for some people, and a $100,000 to others, and dedicate that to just having a fantastic time doing something you’ve always dreamed of doing. In any case, $100,000 is a small percentage of the roughly $20-25 million that is left after taxes. One of the valuable tools that we use in early planning after coming into a large sum of money is to help people spend enough to get that sense of remorse that comes with maybe spending a little too much money. We find that’s really useful to get to that stage early, where people say, “Okay, I’ve really gone through more money than I could possibly imagine in a short period of time, so I need to start being responsible with the rest of the money.”
CHAT PARTICIPANT: What are the regulations on depositing such large amounts into financial instruments: banks, stock funds, etc.?
BOONE: Typically a large transaction like this will be handled by wire order. It will be worked out between the actual issuer of the check, in this case a consortium of states. So I’m not sure who issues the check, but it’s worked out between the issuer and the bank on the other side that agrees to accept the money. I use the term bank, but it could also be an investment brokerage firm as well. A transaction of this size is something a bank has to be willing to accept, and the state has to be willing to wire it to that organization.
CHAT PARTICIPANT: How does a winner handle all the requests from charities for money that come once their identity is known?
BOONE: That’s a great question. I mentioned that in my earlier piece on CNN. It’s really important that you don’t lose your personal values when you come into a large winning. One way to do that is to decide what charities you want to benefit and to plan this out as part of your overall plan of what to do with the money. Planning what charity you’d like to benefit is as important as selecting which house you want to buy, or which vacation you want to take with the money. So, where you donate the money needs to reflect whatever your personal values are.
Now, an interesting side fact is that not all charities are easily equipped to handle, say, a million dollar donation. The United Way, for instance, or a large national charity, knows exactly what to do with a million dollars. But your local church, synagogue or homeless shelter may have never seen a check that size. One thing that we do is work with the charities to help them maximize the value of the gift. This can be through giving the money over a period of time, through a pledge, or it can mean setting up a matching program to encourage gifts from other people.
CHAT PARTICIPANT: If you won would you go public or be anonymous?
BOONE: Well, it sure takes a lot of the pressure off to remain anonymous. Personally, if I won, I would remain anonymous, but that comes from the experience of living through people whose lives have been impacted in a negative way by the award, by the prize.
CHAT PARTICIPANT: Is it possible to remain anonymous?
BOONE: I don’t know the answer to that question. Many drawings and lotteries do not allow you to remain anonymous, because it is a great marketing exposure for them to be able to share the story of the winner. For instance, the gentleman who won one of the Powerball winners, who is unemployed and in need of money, will definitely spur people to believe they can win. An anonymous person in Iowa is not much of a motivator to buy a ticket.
CHAT PARTICIPANT: Which is usually the best way to go for people — a one lump sum payment or the multiple payment over a few years time?
BOONE: That’s a great question. In general, the best option is the lump sum. Imagine that you are Powerball, and you are guaranteeing a stream of income for a period of years. They have to invest that money, and set it aside to guarantee that stream of income they offer to you. In order to guarantee that money, they invest in government securities, or similarly safe investments. We calculate for our clients the exact rate of return required to beat that rate, offered by the lottery. In the case of Powerball, it is approximately 4.75 percent annually. We believe that even a conservative investor can beat that return over the long run. Thus, it is best to take the lump sum. In addition, you have the issue of control of the funds, so that you could choose to invest them or donate them immediately, rather than wait for a time period that may be longer than your life span.
CHAT PARTICIPANT: Mr. Boone, in your opinion what would be a wise investment for today?
BOONE: Initially, we start with Treasury securities, meaning U.S. bonds, bills and notes, which are government guaranteed investments. Because an amount the size of a Powerball winning is well above the federal insurance limit for banks, we try to invest the money immediately in U.S. government guaranteed investments. From there, the horizon opens dramatically. For a very affluent investor, typical investments are going to include stocks, tax-free bonds, real estate, both commercial and residential, and it even may include tangible investments like paintings, coins, rare cars, and manuscripts. We believe strongly in diversification to reduce investment risk.
CHAT PARTICIPANT: Michael what do the states do with their share of winnings?
BOONE: That depends upon the state. Different states have earmarked different areas for their proceeds from the lotteries. Some states have said areas such as education funding, or even transportation. Other states, it may just go to the general fund.
CHAT PARTICIPANT: Should winners quit regular jobs?
BOONE: That’s always one of the first questions people ask. My professional advice is, whatever you want to do. My experience shows me that you probably should quit your job in a pretty short period of time. Human nature is such that when you lack the necessary motivation to be going to work, it becomes a lot more drudgery than when you know you have to go there. I guess the way to look at it is if the boss makes you a little mad now, if you’re a little irritated at conditions today, $20 million in your bank account won’t make it any easier. Most people have a lot of other things they’d rather be doing with their time, if money wasn’t an issue.
CHAT PARTICIPANT: Should a winner put some money into trust for their children and grandchildren to avoid estate taxes if they die?
BOONE: Estate taxes are a huge issue, when you have well over a million dollars in assets. Estate taxes can take up to 60 percent of a deceased person’s estate. Let’s just run the numbers on this, to show the impact this can have. If you start with a $40 million lump sum, and then take away 40 percent in taxes to the federal government, and $3 million to the state government, you’re left with $21 million. If you were to die of a heart attack at the shock of being a winner, you’d have to pay nearly $13 million in estate taxes. This leaves $8 million for your heirs. Trusts can be a very useful tool in minimizing estate taxes. A trust must be irrevocable in order to have estate tax advantage. We would recommend using trusts to benefit your family over many generations.
CNN: Do you have any final thoughts for us today?
BOONE: Winning a lottery or receiving an inheritance can be an exciting and life-changing event. Many of the dreams, hopes, aspirations for yourself and your family can be realized. But it is also easy to lose track of who you are, what your values are, and the things that are truly most important to you. What we try to do is to help people have all of the good things, the benefits of winning and receiving the money, without losing themselves and their values in the process.
CNN: Thank you for joining us today, Michael Boone.
BOONE: You’re welcome!
Company (owned by Ethiopian and Indian partners) plans to cultivate mainly rice for export to the US with intensification system that uses less water. - Addis Fortune
Africa’s economic pulse has quickened, infusing the continent with a new commercial vibrancy. Real GDP rose by 4.9 percent a year from 2000 through 2008, more than twice its pace in the 1980s and ’90s. Telecommunications, banking, and retailing are flourishing. Construction is booming. Private-investment inflows are surging. — McKinsey Quarterly
Project Management Tools @ mindtools.com
Introduction to Project Management
What IS a project? What is project management? Get the basic definitions you need here.
Estimating Time Accurately
You know how things regularly take twice as long as you think they should? Learn how to ensure that YOUR time estimates are accurate when you’re planning a project.
Risk Impact/Probability Chart
To implement a project successfully, you need to manage risks well. This tool gives you a framework for prioritizing risks quickly and effectively.
Find out more
Scheduling Simple Projects
Simple projects don’t need formal project management, but they’ll still go more smoothly with appropriate planning. Find out what that involves.
Gantt charts are one of THE core of project management, and are often produced in Microsoft Project. But whilst this useful software makes constructing them reasonably simple, do you really understand these powerful diagrams fully?
Click here for more
Critical Path Analysis and PERT Charts
You’ve probably asked yourself “what if” questions before making a decision. Find out how to use this powerful form of questioning to analyze problems and improve your decisions.
Click here for more
Logframes, and the Logical Framework Approach
When you’re designing a project, how do you ensure that everything stays aligned with your main goal and objective? The Logical Framework Approach can help you quickly “see” the big picture and ensure your project plan achieves what it should.
Click here for more
Planning Large Projects and Programs
Learn more about PRINCE2 and PMBOK, sophisticated project management methodologies that help you manage the largest projects.
Click here for more
Kotter’s 8-Step Change Model
Impatience can often undermine the change process. Learn how to prepare for change thoroughly, and implement change powerfully and successfully.
Click here for more
Many people can influence your project, positively and negatively. Learn how to identify and prioritize these “stakeholders”, so that you can manage their influence.
Click here for more
Stakeholder Management and Planning
Learn how to manage stakeholders so that they engage positively and supportively with your project.
Click here for more
Who has the real power and control over your project’s success? Learn how to map relationships between key stakeholders to find out how they affect you… so that you can accomplish more.
Click here for more
Understanding Stocks and the Stock Market
Principles of Corporate Finance
Corporate Finance Demystified
The following articles from StockCharts.com describe how the charts are constructed and how they can be used to make better investing decisions.
- What Are Charts? - What charts are, how to pick timeframe’s, how charts are formed, and price scaling.
- Support and Resistance - What support and resistance are, where they are established, and methods used.
- Trend Lines - What trend lines are, scale settings, validation, angles, and more.
- Gaps and Gap Analysis - A gap is an area on a price chart in which there were no trades. Gaps show that something important has happened to the fundamentals of or the mass psychology surrounding a stock.
- Introduction to Chart Patterns - A brief review of what chart patterns are, and how to recognize them.
- Chart Patterns - A collection of articles describing common chart patterns.
- Andrews’ Pitchfork - Drawing, adjusting and interpreting this trend channel tool.
- Cycles - Steps to finding cycles and using the Cycle Lines Tool.
- Fibonacci Retracements - Defines Fibonacci retracements and shows how to use them to identify reversal zones.
- Fibonacci Arcs - Shows how Fibonacci Arcs can be used to find reversals.
- Fibonacci Fans - Explains what Fibonacci Fans are and how they can be used.
- Fibonacci Time Zones - Describes Fibonacci Time Zones and how they can be used.
- Quandrant Lines - Defines Quadrant Lines and shows how they can be used to find future support/resistance zones.
- Raff Regression Channel - A channel tool based on two equidistant trendlines on either side of a linear regression.
- Speed Resistance Lines - Shows how Speed Resistance Lines are used on charts.
A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the security is not considered. Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. They assume that market psychology influences trading in a way that enables predicting when a stock will rise or fall. For that reason, many of them are also market timers, who believe that technical analysis can be applied just as easily to the market as a whole as to an individual stock.
We set up Cash Flow Forecasts in the following stages:
- Setting out column headings for periods (normally months) during the forecast.
- Setting out three main groups of rows:
- Income rows, with a subtotal
- Expenditure rows, with a subtotal
- Period total and running total rows
- Entering values within cells: Ideally you should do this from real data, or from formal market research information. If this is not possible, then you will have to use the best estimates you can make.
Cash Flow Forecasting is a relatively simple technique for checking the viability of a project. Cost/Benefit Analysis is another. These are good techniques for decisions involving relatively small amounts of money. Where large sums are involved (for example, in financial market transactions), project evaluation can become a complex and sophisticated art, which uses more formal techniques. The fundamentals of this are explained in Principles of Corporate Finance by Richard Brealey and Stewart Myers.
A motor home enthusiast has decided that he wants to set up a motor home hire company. He has researched the costs of set up, and estimated the number of weeks of hire he can sell during the year. Note that he has been quite optimistic in hoping to sell all the weeks of holiday available during the high season of July and August. He will charge the same price as his competitors for a holiday. He works out the cash flow forecast below:
Click here to see the forecast
Looking at these figures, the enthusiast is very worried - although the business scheme he wants to set up will return a small profit of just under $10,000 at the end of the year, he will be nearly $18,000 in the red at the end of March. Unless he has this amount of spare cash of his own and is prepared to tie it up in the venture, or he is willing to arrange a loan or overdraft facility (which will incur further costs), his proposed business model is not viable.
He may just have saved a lot of time, money and stress by using a Cash Flow Forecast.
Share: one of the equal parts into which a company’s capital is divided, entitling the holder to a proportion of the profits : bought 33 shares of American Standard.
Shares represent a fraction of ownership in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares is documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares.
Stock: the capital raised by a business or corporation through the issue and subscription of shares: between 1982 and 1986, the value of the company’s stock rose by 86%.
The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value. The stock of a business is divided into shares, the total of which must be stated at the time of business formation. Given the total amount of money invested in the business, a share has a certain declared face value, commonly known as the par value of a share. The par value is the de minimis (minimum) amount of money that a business may issue and sell shares for in many jurisdictions and it is the value represented as capital in the accounting of the business.
Equity: the value of the shares issued by a company (or the value of an ownership interest in property, including shareholders’ equity in a business): he owns 62% of the group’s equity.
Private Equity: a stock in a privately held company—not publicly traded on a stock exchange.
A Stock Market or Equity Market: a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion USD at the beginning of October 2008. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives ‘cancel’ each other out (i.e., a derivative ‘bet’ on an event occurring is offset by a comparable derivative ‘bet’ on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.
Stock Valuation: the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall.
In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of their intrinsic value of the stock, based on predictions of the future cash flows and profitability of the business. Fundamental analysis may be replaced or augmented by market criteria – what the market will pay for the stock, without any necessary notion of intrinsic value. These can be combined as “predictions of future cash flows/profits (fundamental)”, together with “what will the market pay for these profits?”. These can be seen as “supply and demand” sides – what underlies the supply (of stock), and what drives the (market) demand for stock?
In the view of others, such as John Maynard Keynes, stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories.
Dividened: a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).
Bond: a certificate issued by a government or a public company promising to repay borrowed money at a fixed rate of interest at a specified time.
Security: a certificate attesting credit, the ownership of stocks or bonds, or the right to ownership connected with tradable derivatives.
Derivatives: an arrangement or instrument (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset: [as adj. ] the derivatives market.
Underlying Asset: a financial instrument on which derivatives value depends. This could be a stock, commodity future, currency, index, or a fixed-income or creditinstrument: For example, in a stock option to buy 100 shares of Nokia at EUR 50 in April 2010, the underlying is a Nokia share. In a futures contract to buy EUR 10 million 10 year German Government Bonds, the underlying are the German Government bonds. Other examples are stock market indexes such as the Dow Jones Industrial Average and Nikkei 225, for which the underlying are the common stocks of 30 large U.S. companies and 225 Japanese companies, respectively.
Asset: property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies : growth in net assets | [as adj. ] debiting the asset account. (Asset = Liabilities + Owner’s Equity, e.g., cash, account receivable, equipment) … you own.
Liability: claims by creditors to the property (assets) of a business until they are paid. (e.g. account payable, a debt or financial obligation) … you owe.
Owner’s Equity (Net Worth): Owner’s interest/residual claim in the business (Owner’s Equity = Beginning Capital + Revenue - Expenses Capital). What the business owes the owner. The good stuff left for the owner assuming all liabilities (amounts owed) have been paid. … the difference between what you own and what you owe. Example: Bought a $250k House (Asset). Borrowed from Bank $150k (Liability). $250k-$150k = $100k (Equity).
Cash Flow: the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used
- to determine a project’s rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return, and net present value.
- to determine problems with a business’s liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.
- as an alternate measure of a business’s profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance.
- cash flow can be used to evaluate the ‘quality’ of Income generated by accrual accounting. When Net Income is composed of large non-cash items it is considered low quality.
- to evaluate the risks within a financial product. E.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.
Cash flow is a generic term used differently depending on the context. It can refer to actual past flows, or to projected future flows. It can refer to the total of all the flows involved or to only a subset of those flows. Subset terms include ‘net cash flow’, operating cash flow and free cash flow.
Statement of cash flow in a business’s financials
The (total) net cash flow of a company over a period (typically a quarter or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow is the sum of cash flows that are classified in three areas:
- Operational cash flows: Cash received or expended as a result of the company’s internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent.
- Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets).
- Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments.
Ways Companies Can Augment Reported Cash Flow
Common methods include:
- Sales - Sell the receivables to a factor for instant cash. (leading)
- Inventory - Don’t pay your suppliers for an additional few weeks at period end. (lagging)
- Sales Commissions - Management can form a separate (but unrelated) company and act as its agent. The book of business can then be purchased quarterly as an investment.
- Wages - Remunerate with stock options.
- Maintenance - Contract with the predecessor company that you prepay five years worth for them to continue doing the work
- Equipment Leases - Buy it
- Rent - Buy the property (sale and lease back, for example).
- Oil Exploration costs - Replace reserves by buying another company’s.
- Research & Development - Wait for the product to be proven by a start-up lab; then buy the lab.
- Consulting Fees - Pay in shares from treasury.
- Interest - Issue convertible debt where the conversion rate changes with the unpaid interest.
- Taxes - Buy shelf companies with Tax Loss Carry Forward.
Cash Flow Forecasting: (1) in a corporate finance sense, the modeling of a company or asset’s future financial liquidity over a specific timeframe. Cash usually refers to the company’s total bank balances, but often what is forecast is treasury position which is cash plus short-term investments minus short-term debt. Cash flow is the change in cash or treasury position from one period to the next; (2) in the context of the entrepreneur or manager, forecasting what cash will come into the business or business unit in order to ensure that outgoing can be managed so as to avoid them exceeding cashflow coming in. If there is one thing entrepreneurs learn fast, it is to become very good at cashflow forecasting.
Methods (corporate finance)
The direct method of cash flow forecasting schedules the company’s cash receipts and disbursements (R&D). Receipts are primarily the collection of accounts receivable from recent sales, but also include sales of other assets, proceeds of financing, etc. Disbursements include, payroll, payment of accounts payable from recent purchases, dividends,debt service, etc. This direct, R&D method is best suited to the short-term forecasting horizon of 30 days or so because this is the period for which actual, as opposed to projected, data is available.
The three indirect methods are based on the company’s projected income statements and balance sheets. The adjusted net income (ANI) method starts with operating income (EBIT or EBITDA) and adds or subtracts changes in balance sheet accounts such as receivables, payables and inventories to project cash flow. The pro-forma balance sheet (PBS) method looks straight at the projected book cash account; if all the other balance sheet accounts have been correctly forecast, cash will be correct, too. Both the ANI and PBS methods are best suited to the medium-term (up to one year) and long-term (multiple years) forecasting horizons. Both are limited to the monthly or quarterly intervals of the financial plan, and need to be adjusted for the difference between accrual-accounting book cash and the often-significantly-different bank balances.
The third indirect approach is the accrual reversal method (ARM), which is similar to the ANI method. But instead of using projected balance sheet accounts, large accruals are reversed and cash effects are calculated based upon statistical distributions and algorithms. This allows the forecasting period to be weekly or even daily. It also eliminates the cumulative errors inherent in the direct, R&D method when it is extended beyond the short-term horizon. But because the ARM allocates both accrual reversals and cash effects to weeks or days, it is more complicated than the ANI or PBS indirect methods. The ARM is best suited to the medium-term forecasting horizon.
The simplest method is to have a spreadsheet that shows cash coming in from all sources out to at least 90 days, and all cash going out for the same period. This requires that the quantity and timings of receipts of cash from sales are reasonably accurate, which in turn requires judgement honed by experience of the industry concerned, because it is rare for cash receipts to match sales forecasts exactly, and it is also rare for suppliers all to pay on time. These principles remain constant whether the cash flow forecasting is done on a spreadsheet or on paper or on some other IT system.
A danger of using too much corporate finance theoretical methods in cash flow forecasting for managing a business is that there can be non cash items in the cashflow as reported under financial accounting standards. This goes to the heart of the difference between financial accounting and management accounting.
Uses (corporate finance)
A cash flow projection is an important input into valuation of assets, budgeting and determining appropriate capital structures in LBOs and leveraged recapitalizations.
The point of making the forecast of incoming cash is to manage the outflow of cash so that the business remains solvent (having assets in excess of liabilities; able to pay one’s debts). The section of the spreadsheet that shows cash out is thus the basis for what-if modeling, for instance, “what if we pay our suppliers 30 days later?”
Source: various online sources including Wikipedia.
A strategic management plan is a written document that outlines a specific future course for an organization or company. The plan lays out what the organization hopes to accomplish and how it will accomplish it. The plan is usually for a specified time—one, three, five, 10 or 20 years is common—and covers an entire organization rather than a specific product or division of the operation. There are several popular methods for writing a strategic plan, each of which is designed to address different types of challenges.
The Basic Strategic Plan
Basic strategic planning is a top down process that assumes organizational stability, accurate forecasting and few changes in the business environment. It may not be responsive enough for a fast-moving company in an aggressive, changing business environment. The basic approach begins with developing a mission statement and specific objectives that mark milestones toward achieving those goals. Strategies are formulated for meeting those objectives based on extensive analysis and market research. Activities are then created to implement the plan through marketing, research and development, procurement, production and the development of supporting human resource and information systems. Controls are developed as part of the plan to measure performance and steer the course of the organization toward its chosen goals.
Scenario planning is another strategic planning method designed to cope with a rapidly changing business environment through an action model that emphasizes a fast, flexible response to multiple contingencies. Scenario planners begin by setting a time frame and outlining the present positions of the company’s individual divisions, products or services as starting points for planned scenarios. Planners identify events that are likely to proceed from those starting points as a result of trends and driving forces in the economy and business environment. They develop best case, worst case, and nominal case scenarios for each potential driving factor and develop a response matrix. These responses are based on an analysis of what impact these factors will have on the organization. Scenario planning allows the company to explore in advance several approaches to a potential challenge so they can act proactively rather than simply reacting to a shifting organizational pressure.
Issue or Goal-Based Planning
This version of basic planning uses an internal/external assessment of strengths, weaknesses, opportunities and threats (SWOT). This approach has found acceptance in nonprofit organizations due to it’s similarity to the goal setting format of many state, federal and foundation grants. The organization conducts a strategic analysis of each of these elements and formulates goals, and strategies to address each factor identified in the SWOT analysis. An action plan is then developed to update the mission, vision and values statements. Planners then develop objectives and activities to address the organization’s goals and write an action plan that develops resources and identifies roles and responsibilities of those implementing the plan. From this point, budget development and operations plans follow logically.
Organizations that have identified a number of goals and strategies that are misdirected or simply not being achieved may use an alignment strategic planning model to identify what’s not working and respond. The alignment model reexamines the organization’s mission, goals, programs and action plans to adapt or fine-tune activities to better address the essential strategic goals of the organization.
Organic planning is a self-organizing strategy that is not linear, from general to specific or cause to effect, but rather develops a plan naturally in the same way that cultures respond to outside pressures and challenges. The organic planners first clarify and articulate the company’s cultural values. This involves articulating the leadership and staff’s vision for the organization’s future. Then they meet periodically to reevaluate the company’s activities to determine whether they are moving toward the shared vision. This approach is on-going and never ends. It can make group members and boards of directors who expect more linear approaches to strategic planning a bit uncomfortable. It tends to engage front line employees effectively and, done properly, leads to a bottom up planning process rather than top down. Selling the process to skeptics, who often are powerful figures in the organization, becomes a major task for leadership