Financial Memos Financial Memos-Accounting and Finance Community Mon, 03 Nov 2014 23:35:56 +0000 en-US hourly 1 Return On Equity Ratio (ROE) Formula, Analysis and Calculator Mon, 03 Nov 2014 21:59:33 +0000 Return on Equity (ROE) is a financial ratio that shows the profit generated by a company in a year compared to the shareholder funds available.

It therefore shows how much profit (attributable to the shareholders) in dollars (or any other currency) can be distributed to the shareholders for every dollar of common stock.

Return on Equity Formula

The formula to calculate the return on equity ratio is very simple. You will need two numbers, the net income available for distribution to the shareholders which can be found on the income statement and the shareholders equity which can be found on the balance sheet – statement of financial position.

The formula is: ( Net Income/Common Stock Equity)%

It is worth pointing out that in order to calculate ROE, the net income is after deducting any dividend that needs to be paid out to investors that hold redeemable preference shares. However, these dividends are already deducted before arriving to the net income, since redeemable preference is debt and the “dividend” is included in the finance expense line (on the profit and loss statement).

Return on Equity Example

The following example will help us calculate and understand the return on equity ratio. It’s a straightforward scenario for two different companies that have a different capitalization and different income.
Company ACompany B
Net Income$2,000,000$5,000,000
Shareholders’ Equity$15,000,000$50,000,000

Company A has a lower net income but also a significantly lower equity. At the same time, Company B has a higher net income but a significantly higher shareholders’ equity figure.

Therefore, the return on equity ratio for company A (2,000,000/15,000,000) is 13% while the ROE for Company B is 10% (5,000,000/50,000,000).

Return on Equity Analysis and Interpretation

Based on the example above, we can see that while Company B has a higher net income, ROE takes into account the “size” of equity too.

As a result, ROE for company A is higher than for Company B. This means that Company A has managed to generate more profit per dollar of equity than Company B.

Investors usually follow company that have a high ROE because it shows that the company is able to potentially pay out high dividend. However, high ROE and does not necessarily mean high dividends too. In other words, a company might be able to generate high profits compared to the equity funds used, but it might be choosing to either retaining them or re-investing them instead of distributing them.

Another point that is worth noting is that ROE can be manipulated by raising debt instead of capital. If a company used more debt, then the shareholders’ equity will be lower and therefore the ROE (return on equity) will be higher. However, higher debt also means higher interest expense (among other things).

Finally, a variation of the Return on Equity is the Return on Common Equity which excluded preference shares (both the dividend paid to preference shares but also the funds raised by issuing preference shares).

Return on Equity Online Calculator

The online calculator below can be used to calculate the return on equity. Just fill in the blanks!

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Accounts Receivable Management with ZenCash – A review Sat, 21 Dec 2013 23:50:21 +0000 Making the sale is unfortunately only the first step. The second, and by far the most important, is turning the sale into actual cash. Cash that you can use to pay your suppliers, pay your staff, invest in new opportunities and grow your business. There are customers that choose to forget that they have outstanding invoices but there also customers that fail to pay on time because they are simply not that organised.

Managing your accounts receivable and collecting on time can become a simple exercise if you run a big corporation. You allocate resources and you train them to invoice on time and collect your cash. What happens if you run a small business and your resources and time become limited? Do you afford to spend more time collecting and getting your invoices paid instead of providing services and generating new customers?

 There are plenty of cloud based accounting software that you can pick from and plenty of payroll service providers that you can outsource to. But what about accounts receivable management companies? Debt collector companies is definitely not something new but the service that ZenCash offers has a twist which I think adds value. 

Why Accounts Receivable Management is important?

Keeping a healthy level of working capital is vital for every business, new or well established. Two of the most important components of the working capital are the accounts receivable and the accounts payable balance. Your ultimate goal should be to collect fast and at the same time pay your suppliers as late as possible.

Sounds like a good plan but this pattern is something that all companies try to follow. In other words, your accounts receivable is someone else’s accounts payable. It might make sense at this point that quite a lot of companies face problems collecting money on time since everyone tries to pay as late as possible. In addition, this problem becomes bigger the smallest your company is. The reason for that is that you might end up spending more time trying to collect invoices rather than actually running your business.

What ZenCash is

First of all, let’s start by saying that ZenCash is not an accounting software and it’s not an invoicing software. ZenCash can be integrated with third party accounting  applications including quickbooks, xero, lessaccounting, blinksale and others and can be used to monitor your accounts receivable.

In other words, you integrate ZenCash with the accounting software that you use and you then setup what actions you want to take for your aged accounts receivable. For example, you can select to send a reminder letter 15 days after an invoice is past due. 

When you issue an invoice through your accounting application, the invoice is synchronized with ZenCash which you can then use to monitor what invoices are past due and what actions you can take.

How can ZenCash help a company?

ZenCash has “two levels” of actions that are available to you. The first level of actions are the usual follow up actions which include email reminders, printed reminders, phone calls etc.

When you see that your invoice is way past due and these reminders do not actually bring any results, you can than move to the second level of action which is basically a more formal debt collection service that works on a contingency basis.

ZenCash Pricing – How much does it cost?

ZenCash has two different pricing structures. The first structure has a more like pay as you use basis. You are charged when you actually initiate an action through the ZenCash dashboard using a standard and predefined pricing. For example, a phone call reminder costs around $3 so asking ZenCash to call three of your customers will cost around $9. If you don’t initiate such actions then you don’t pay anything.

The second method is to basically outsource the whole accounts receivable process to ZenCash and let them manage it for you. The price structure for this is not available which I think makes sense since it depends on the volume of your transactions and the volume of work ZenCash will need to perform on your behalf.

Apart from the standard accounts receivable management, ZenCash offers an invoice collections service which works on a contingent basis or in other words on a performance basis. What that means is that if the manage to collect any proceeds, then ZenCash will charge a fee (pricing available here). If they don’t manage to collect any cash, then you don’t get charged.

At this point, there is a two weeks trial period which can be used along with the pay-as-you-go option to try it out and see how useful it is for your business. 

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KashFlow Accounting Software Review Fri, 20 Dec 2013 18:52:34 +0000 KashFlow is a cloud-based accounting application focused on small business clients in the UK. There are several features that set it apart from the competition, making it a robust choice for SMEs in the UK. KashFlow offers all the features that you need to record your transactions, invoice your customers, create professional and detailed quotes, perform your bank reconciliations and recording the cash coming in your bank account and much more.

Built in features include one-time and recurring invoices, multi-currency reports, VAT returns with just a few clicks, credit control, automated invoices to late clients, basic inventory management and contacts management.

One of the most important features that KashFlow offers that is not very common in cloud based that are specialized for the UK market is the support for third party addons. I believe that companies that want to succeed in the SaaS industry should sooner or later realize that allowing third party apps to be integrated with your application is a smart move. KashFlow supports a variety of third party applications that span from CRM and inventory management software to payroll and marketing addons. Some of the addons that you can integrate include:

Dropbox Integration with KashFlow

This addon allows you to store files such as purchase orders, contracts and reports right on the cloud. DropBox is maybe the market leader when it comes to inexpensive (or even free) cloud storage.

GoCardless Integration with KashFlow

This is one of the newer third party apps. It permits you to collect customer payments via a direct debit system, allowing you to use it for recurring or one-off collections.

If those aren’t enough, you can integrate KashFlow with SagePay, PayPal and WorldPay, as well as Freshbooks and eCommerce. As mentioned,  you can integrate KashFlow with third party addons in order to track the time spent working on project or with a specific client.

KashFlow Updates

Successful companies and successful products are built based on customers feedback. If the client are not satisfied with something, the company should work to improve the product and make it more useful. KashFlow is improving its product almost on a monthly basis. That shows commitment! They recently changed the way that the bank reconciliation is performed based on customers’ feedback.

KashFlow for Accountants

KashFlow also has nice features for professional accountants. First of all, accountants can create a branded version with you own logo. This is a nice feature for accountants that believe that building their name online and developing a recognizable brand is important. 

Accountants can work with their clients, organize and analyze the information that you need to run reports that can help you monitor the performance and the financial position of your clients.

A very useful feature that Kasflow offers is the ability to track what has been uploaded (in terms of documents or information) by your client as well as the records that have been changed. It also allows you to lock the records and prevent your client from changing anything before you have finished properly recording the transactions that need to be recorded. 

KashFlow Pricing

When it comes to pricing, the structure of KashFlow couldn’t be simpler. You have one option, and at the time of this writing it costs GBP18. Flat pricing means that there no different versions, no different price structures and no features that become available before you spend a fortune. I believe that £18 is a very low price tag for the professional support that you can get, let alone the product itself.

The final verdict is that it is difficult to find a small business package that is better than KashFlow for UK clients for this price. If you believe that usability, third party integration and pricing are important features then KashFlow is a bargain. 

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Outright Accounting Software: A Review Tue, 17 Dec 2013 19:13:13 +0000 Cloud accounting applications and the pace that industry grows are two hot topics. The truth is that accounting packages have been slower to be taken to the cloud than software for other industries were. However, cloud-based accounting tools become more and more popular.

Xero, for example, claims approximately 22,000 members and says it adds 300 more on a daily basis. Outright is one of the newest cloud accounting applications, and it claims on its website that its features can help you “free yourself from accounting.” If you own a single-person LLC or a sole proprietorship, Outright is designed to meet your needs.

Small business owners never want to have to focus on the books. That’s not why they opened their businesses in the first place. Owners who are raking in a large profit can afford to hire an accountant. However, if you can’t, you’re stuck doing the books after a long day of promoting, operating, managing, training, and (hopefully) doing some selling. If you’re sitting in front of spreadsheets, you’re not out there growing your brand. The main benefit of Outright is that it frees the small business owner to get back out there and pursue his passion – his business.

Outright Functions

Outright automatically keeps track of expenses and income, and it even sorts your transactions to give you the best deductions when it’s time to report to the IRS and state taxation authorities. It assists with the preparation of estimated tax statements and yearly returns, so you can focus on your brand. A lot of small business owners don’t know all the tax deductions for which they qualify, which is why the automatic sorting feature is such a valuable one. It is worth noting that Outright only works for the U.S. tax system at this point.

How Outright Operates

First of all, Outright focuses and targets small businesses. Some people might wonder why an accounting application would limit itself to small businesses in this way. While this might seem shortsighted, the truth is that this permits the company to focus on this target group, develop a product that better serve it and establish it as a market leader.

For example, one small business that receives particular attention is the regular eBay seller. Outright has a few sections that are set aside for eBay resellers, making this the perfect application for people with eBay stores. That’s a clever move that can create a competitive advantage and help Outright stand out from the crowd.

Inside Outright

When you open Outright, there are tabs for taxes, expenses, income and reports. These tabs show you each category analysis and send you to reports that are user-friendly, showing you your loss or income at any given time. It also breaks down expenses and income by customer, vendor and category.

One interesting feature is that Outright contains a function allowing you to ask an accountant or bookkeeper to take a look at your records. This way if you run into an accounting issue that is over your head (and that of Outright), you can bring in a professional with a minimum of time spent bringing that person up to speed.

Outright Pricing

When Outright first came out, it was free for all users. However, now you only get to use it for free for a one-month trial. When that ends, it costs $9.95 a month to keep using it. However, the level of reporting and assistance that you receive makes it well worth the price. It will improve your productivity and that can be priced higher than $10.

Additional Features

How to Handle 1099 Forms

A Form 1099 needs to be prepared for every client that has spent over $600 during a year. Outright has come up with a way to send in your 1099s for you to the IRS. This costs extra ($5 per 1099), but the feature is so useful that it is well worth that minimal cost.

Recent News

Outright has been bought from GoDaddy, one of the biggest hosting companies worldwide. GoDaddy was reportedly trying to find an acquisition target to enter the SaaS industry. The good news is that GoDaddy is a big company with a very strong brand in the hosting marketing. 

Yes or No?

Given the extremely low price and the features that are available, Outright seems a reasonable choice. The fact that Outright by Godaddy also shows that it will be actively developed (hopefully). Signing up is easy and the cost to try it minimal. So, why not?

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You Need a Budget (YNAB) Budgeting Software Review Wed, 11 Dec 2013 15:41:48 +0000 You Need A Budget (YNAB) is one of the most user friendly accounting programs on the market. It has been around for almost a decade now and it has helped a lot of people to put their finances in order. People nowadays are busy and they tend to lose track of what they are earning and what they are spending. Using a personal finance (budgeting) software like YNAB is one of the most efficient ways to start saving and stop spending money on things that you don’t need.

The goal of YNAB

The goal of You Need a Budget is to help you rearrange your finances to such a point that you will be living on your previous months paycheck (claim from their website) rather than your latest income. This should provide you with a buffer in case of unexpected financial emergencies.

Installing YNAB

YNAB can be installed on multiple computers, regardless of whether it was purchased from the Mac App Store or Steam. This means that all members of your household can access the budget management benefits offered by the software. To ensure that you can access your budget from any device, YNAD encourages you to sync it with Dropbox. You simply need to feed details of your Dropbox account into the application and it will automatically manage the synchronization between different computers and any mobile Apps.

Using YNAB

YNAB comes with an in-built tutorial that that pops out as help windows to explain what different categories and boxes mean. What’s more, there are online live classes that can teach how to:

* Allocate a task for every dollar
* Have something saved for a rainy day
* Roll with the (financial) punches
* Strive to live on last month’s income.

The dashboard looks just like a corporate budget. At the top, you can check the amount that you have available to include in your budget and the balance that you have “overbudgeted” or “underbudgeted”.

You will need to insert estimates on how much cash you will spend on various things within the month. These categories include medical bills, living expenses, donations, etc. The software keeps prompting you till you’ve budgeted for every single dollar you have, including the cash you wish to set aside for emergency funds and savings.

Whenever you spend any money, you enter the amount into the application as a transaction. What’s more, you are allowed to enter recurring payments, which means that regular transactions such as your wages (incoming) and rent (outgoing) can be automated. These transactions will be marked “uncleared” till you approve them. These scheduled transactions are displayed in a separate screen too.

Separate columns are provided for each month’s planned budget, your actual expenditure and the difference between the two, which indicates whether your spending exceeds or not your budget and whether you should take any action to limit your expenses for this month. Your goal should be to keep your spending as close to the budgeted amount for each category as possible. Moreover, you don’t have to worry if at first, you find yourself wide off the mark – the program will talk you through all sorts of issues and show you how to manage them.

Flexibility is one of You Need A Budget’s greatest strengths. While inexperienced users get a lot of guidance from the program, it allows knowledgeable users to customize practically anything in the App. You can delete and create new categories, subcategories, add notes and generally futz with any feature. Other features include:

* The Phone App – The YNAB App is available on both the android and iOS platform and it allows you to log transactions on the go as they happen.
*Reports – This software has some nice inbuilt reporting tools. It provides spending trends similar to that are similar to ordinary budget breakdown percentages.

Cons of You Need a Budget

The learning curve – For least tech savvy users, being able to fully utilize the full potential that YNAB offers might be a challenge at first. But this con also has a pro, YNAB offers fantastic customer support. They offer on line classes almost on a daily basis that you can literally walk in out to learn how to bet use the software.

Another disadvantage is the price.  There are free alternatives like Mint but YNAB offers a level support that you would not expert from a free app. In addition, it might be a bit of a boring task for some users to record every single transaction that happens. However, if you want to get the benefits that an application like that offers, you will need to put some effort! 

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Top 5 Inventory Management Software Sun, 08 Dec 2013 14:30:00 +0000 With the SaaS industry increasingly growing, more and more SMEs are utilizing either cloud-based or self-hosted apps that can help them manager their business. Inventory Management apps is not something new but they have recently become more accessible to small companies that do not have large budgets to spend.  However, the options are endless so picking the right one might not be as easy as it initially seems to be. The title might be misleading and I am referring to the “Top 5″ part as there are other choices (probably some are more popular than the ones below but here are 5 inventory management software that you could consider:

1. InFlow Inventory

InFlow Inventory is available in three different versions – premium, regular and free. The free version, unlike other programs, is not a web-based solution. The user will still have to download and install the software, and he or she will be able to use it with up to one hundred products. This software allows users to easily track and manage your stock. With a few clicks of the mouse, purchase orders, invoices, sales orders, shipping documents and receipts can be easily created.

They can all be customized to suit your business needs. The user-friendly interface has an intuitive dashboard which shows outstanding orders with a customization graph which allows users to view profit, costs and cash flow. This software offers users a look into their complete product movement history with full support. The only negative thing is that the software does not have an iOS version.

2. POS Maid

The POS Maid is a great first-time software for small and medium businesses. It is very easy to use and offers an intuitive user-friendly system. The inventory control manager software will allow businesses to fill in forms so that they can keep track of their stocks. Features such as account management, low stock alerts and employee management are some of the things that POS Maid has to offer. This software is best for retail and general merchandise.

It has simple and easy to use basic features that all small to medium businesses need. While building an inventory is made easy with this software, it is not recommended for big businesses.

3. Inventoria

This inventory control software’s main feature is that it allows lot and serial number creation for control. This helps businesses keep track of their goods without having to physically count their stock (although regular stock counts is something that businesses should perform for other reasons). The Inventory stock manager feature can be configured manually or by using a simple wizard.

This gives business owners full control of how they want to keep track of their products. With Inventoria small to large businesses will be able to monitor things such as recurring orders, stock costs and receipts. Although Inventoria offers a wide array of features, it does not support multiple languages.

4. iMagic Inventory

This powerful inventory software comes with a handful of templates. This makes it easier for business owners to create receipts, invoices, purchase orders and other important documents. It has a user-friendly interface with a document creation wizard. This helps businesses keep track of their orders, shipping and stocks. iMagic Inventory can help small to medium businesses deliver the right goods to their customers without all the guesswork, keeping your customers happy and improving their loyalty.

This software is perfect for any growing business that has never used an inventory management software. The important functions are easily accessible on the dashboard, and the latest information will be displayed on the user interface. Another great feature is that the software has a multi-user interface which allows businesses to keep track of the cashier or person in charge of the task. The only negative thing is that to access the multi-user feature, a heavy download is required.

5. ABC Inventory Software

ABC Inventory Software was created by Almyta Systems, it is perfect for small and medium businesses. This software allows growing companies to execute all management tasks like a professional. It comes with a variety of features that can help make a lot of tasks much easier. The complete inventory track with barcode feature is something that a lot of companies find very useful.

Along with that extra feature, it also comes with purchase order management, automatic stock report generation, mailing labels and a variety of other tools that can assist businesses when it comes to inventory management. One of the negative things about this software is that it comes with a hefty price tag. 

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Top 5 Cloud Based Accounting Tools for SMEs Thu, 05 Dec 2013 19:34:56 +0000 Small to medium enterprises have started moving their data to the cloud as more and more web-based accounting tools become available. The options are endless and the competition in this industry fierce. There are definitely more than 5 solutions that stand out from the crowd. However, cloud based accounting tools that are worth mentioning are the following:

1. FreshBooks

FreshBooks is a simple cloud-based solution that helps business owners track their expenses, record their sales and invoice their customers. It’s a complete and robust accounting software. Above all, it’s a software that allows you to integrate it with popular third party addons that span from CRM software, inventory tracking software and many more.

It is a cloud-based accounting service that users can access through any mobile device or desktop computer. The financial data for companies is backed-up and is securely stored on the cloud. 

Users can create customized invoices, send payment reminders and manage multiple projects. FreshBooks is used by over 5 million small to medium enterprises worldwide. The interface is very easy to use and it focuses on the users.

2. QuickBooks

QuickBooks has long been a favorite accounting tool for many small businesses across the globe. While a number of companies use the self-hosted and standalone versions, QuickBooks Online is an excellent tool that can handle any SME’s accounting needs. Its competitive pricing is something that makes it very attractive.

It becomes a more attractive solution for the small business owner due to 30-day risk-free trial where users can get a feel of the accounting tool. It allows users to create invoices, download banking transactions, track sales, generate reports and so much more. This web-based program can also export data to Microsoft Excel for presentations and reports. QuickBooks also allows you to utilize addons such as project management addons, customer support addons, payment gateways and others.

3. Xero

Xero is an accounting software package that currently has over 200,000 users. It is available in the United States, United Kingdom, Australia and New Zealand (where the company is also listed). This cross-platform product is available at a very competitive price. It is very easy to use which is also the main reason that it became so popular for small to medium enterprises as well as freelancers.

It offers all the standard features users would expect of cloud-based accounting software such as easy invoice wizards, multiple currency support and bank reconciliations. This software also has the ability to pay bills on time and track company expenses. There are a set of financial tools available on the user dashboard that allow businesses to create documents with the help of step-by-step wizards. These financial reporting tools are available for users who are constantly on-the-go as they can access their documents on any smartphone, tablet or computer.

4. Crunch

The first great thing customers will notice about this accounting package is the tagline which is “love accounting”. Crunch lives up to this catch phrase as it makes accounting tasks very simple. It has a user-friendly interface that offers modern accounting solutions for small and medium enterprises.

The intuitive dashboard allows users to manage all their documents so that everything stays organized. This interface is perfect for freelancers, contract workers or small businesses who want to take advantage of the cloud. This package is available in a mobile iOS version and can be downloaded for a limited free trial. Please note that crunch is available only in the UK.

5. Kashoo

Kashoo is a cloud accounting service that is also very simple. Users can access their dashboard through any apple device or web browser. This accounting app is best for small businesses who do not have a lot of transactions to manage and want to limit the time they spend to record transactions on a daily basis. The features included in this app are professional invoice wizards, ability to connect to credit cards and online bank accounts, options to categorize cash flow and tax reporting.

Small businesses who want to use this app can share their business data with an accountant over the internet in a secure environment. Kashoo is known for top-notch transaction security. Users are required to pass a double-entry barrier in order to access documents such as financial statements and bank reconciliation. The attractive thing about this accounting package is that it comes at a very low price. 

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6 Things to have in mind when implementing an ERP System Tue, 03 Dec 2013 22:26:53 +0000 There is no doubt that implementing an ERP System has benefits. These benefits include increased productivity and better margins. An ERP system can also help your company get things in order and be able to easier identify the key operational risks it faces and find ways to manage them.

However, there is also no doubt that  implementing an ERP system is not the easiest of the things to do. It’s not just the scale and the size of the company that can increase the complexity of this exercise.  Just think about the things you expect an ERP system to be able to do. An ERP system is expected to help you monitor and manage your stock, record your transactions, build and assess budgets, monitor and evaluate your employees and so many other things. It’s therefore reasonable that implementing a system like this that does all these things could not be but a complex task.

The list that is below is not exhaustive. In fact, every case is expected to be different and probably require a different and unique approach. However, some points that should be considered in most cases are:

1. It will be helpful (and can actually save you money despite the cost) before considering implementing to talk to an expert. There are companies that specialize in ERP implementation and have a very sound knowledge and understanding of the ERP market and the products available. They can help you see the benefits and compare them with the costs. Performing a cost benefit analysis should be help you understand whether implementing an ERP system is worthwhile in the first place. An ERP system is supposed to help your company be more efficient and more profitable so assessing and quantifying the benefit from implementing an ERP system is vital.

2. Choosing the right product is also expected to be a hard decision to make. There are so many choices and so many very good products. The market appears to be segmented but the key players are not that many. In addition, you should look into products that are designed specifically for the industry your company operates in. Two examples are the ERP systems for manufacturing companies and the ERP system for companies that offer services instead of products. Manufacturing companies would be more interested in an ERP system that focuses on Inventory (Work in Progress), budgets and expenses while a company that sells services and not products will not have physical stock and will probably not have a particular interest in fixed assets modules either.

3. Bespoke vs off-the-shelf is another dilemma that is more applicable and valid for large companies. SMEs might not have the financial resources to choose a bespoke solution. However, there are pros and cons for both choices. The only thing that I think it’s worth mentioning here is one risk that is associated with a bespoke software. Ordering a bespoke ERP System has risks that are associated with the supplier. You should audit the supplier and evaluate (in depth) the level of support you will be getting and whether this supplier will be available to work with you to overcome any difficulties you will be facing. 

4. The implementation of an ERP System is not just a task for the IT department. I am not saying that the IT department need not be involved. It’s just that they are waiting for you to set the expectations, guide them to install  and make the system functional. Installing an ERP system is one problem and integrating it with the rest of your systems is another. This is an area where an expert can be also helpful.

5. Data Migration is another significant risk that you should evaluate in depth. Think about the things that can go wrong and try to find solutions to overcome any potential difficulty. Things to consider include having backup of your data and having a contingency plan that involves being able to return to your previous system (for example) in order to be able to operate with minimal “downtime”.

6. Implementing an ERP system is only the first step. You should train your staff so that you can fully utilize the system you have at your disposal. Training might sound easy but consider the scenario where you have to train a lot of people in more than locations. It’s costly and might be also be difficult in practice.

As already mentioned above, this list is not exhaustive. ERP systems are fantastic tools that can help your company grow. There are also costs and risks that an ERP implementation has so analyze them and manage them in advance is highly recommended.

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QuickBooks Online Accounting Software – A Review Mon, 02 Dec 2013 22:32:16 +0000 Intuit is a strong brand in the SaaS industry that has also produced the very well known desktop software QuickBooks Pro. This accounting tool is used by small to medium enterprises all around the world and has been around for almost 15 years. 

QuickBooks Online can be now used from your iphone, your Ipad or your android phone. This move was expected since most cloud-based accounting app providers are enhancing their software by focusing on social media and on the ability of the users to access the apps on the go.

QuickBooks Online Cloud-Based Accounting Software

The problem with QuickBooks Pro is that it’s a desktop software that you need to install on your computer, maintain it, update it and run it only locally. With the evolution of cloud-computing and the rise of the professional apps that are now offers as cloud-based, Intuit launched the QuickBooks Online Accounting.

QuickBooks Online Interface

The recently revamped QuickBooks Online user interface has sleek design. It has a left-hand side bar which allows users to view all their reports, transactions, supplier and employee information. The developers have carefully selected functions that are most frequently used and have placed shortcuts for them right on the front page of dashboard. In addition, you can view the details of your company’s account with just one click of the mouse. Your income, expenses, profit and loss will be visible in the form of charts and graphs for easy viewing. On the right-hand side of the screen, a bar with the break-down of bank account details as well as activities can be seen.

The re-engineering of QuickBooks Online can help business owners see an overview of the recent activity, record transactions faster and eventually spend less time recording their day to day operations and more time running their business. There are notifications for pending payments, taxes and other important tasks that need to be completed.

QuickBooks Online is therefore easy to navigate around, and the interface is designed to also suit touchscreen devices. Larger buttons and a clear navigation bar has been placed so that all the reports and important documents are within reach. The main navigation bar allows users to access the basic accounting features that all small businesses perform on a daily basis.

QuickBooks Online on the go

Users who wish to view their accounts through a mobile browser either on a tablet or smartphone can do so with ease. QuickBooks Online even allows users to perform basic accounting tasks such as create invoices and raise quotes through the iOS and Android version apps. This means that business owners can now take care of their accounting while on-the go. By being able to view all their financial reports through a mobile device, small business owners will be able to make informed decisions even when they are away from the office, visiting a client or while travelling.

QuickBooks Online Versions Available

The new online web-based solution comes in a standard, an essential and a plus version. The plus version offers more than the basic accounting features, it can integrate different tools with your inventory and help you track your products, cash-flow and other aspects of your business. It’s worth noting that although cloud computing can help businesses keep track of their accounting while on-the-go, the online version does not yet offer all the features that QuickBooks Pro offer.

QuickBooks Online Development

Since the first release of QuickBooks Online, some of the quirks in the system have been addressed. Now, users will be able to move their documents from the desktop to the online version using an addon. Stock and inventory control can also be added along with a payroll system. Although cloud-based accounting solutions are still being developed, QuickBooks Online is a helpful tool that can allow small business owners to complete accounting tasks with ease, whether they are at home, in the office or on-the-go.

QuickBooks Online Versions Comparison

First of all, the three version allow 1 user for the Basic Version, 3 users for the Essentials and 5 users for the Pro. I don’t know what’s the rationale behind this decision but limiting the users to 5 for the PRO might be a disadvantage. It’s true that most small companies do not have more than 5 people that record transactions but still, I don’t see the reason for this limit.

A very important feature that all versions offer is that you can give free access to your accountant that can tidy your books, do your taxes, record transactions or generate reports to monitor the performance for company. That’s a fantastic feature and a great idea that other cloud-based accounting software providers should implement.

The standard version allow you to record transactions, raise invoices and perform other day to day accounting operations. The next step is the Essentials that includes some additional features such as the ability to generate reports that show your financial performance and manage your supplier payments.

Finally, the pro version allow you to track stock levels and also be able to record your employees’ time that has been spent on a client which can be then used to directly bill this client. That’s a fantastic feature for professional services firms.

I think that the QuickBooks Online is a robust solution for small business owners and a rather inexpensive one. It’s been around for quite some time now (taking into account the desktop version as well) so it’s a tested product offered by a tested company. The only comment that I would make is that the three different versions might need to have the features balanced in a better way. I think the Essentials version should have the ability to track your stock and all versions should have the time recording feature as a standard one since more and more companies are billing per hour nowadays. 

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FreshBooks Review- A Cloud-Based Accounting Software Fri, 29 Nov 2013 23:36:25 +0000 FreshBooks is one of many cloud accounting apps that have entered the market over the past few years. While cloud accounting has not grown as quickly as cloud solutions have in other industries, recent arrivals on the market show that the trend is definitely upward. After Quickbooks Online, FreshBooks is the most popular cloud-based accounting software in North America with nearly 5 millions users. 

When it comes to usability and based on online reviews, FreshBooks has one of the cleanest interfaces. The navigation is right on the top of the screen and I have to admit that the designers have done a fantastic job.  The frontpage shows the recent activity and includes shortcuts that you can use to create invoices, record expenses, track time spent on projects, export financial reports and much more.

But enough with the way that FreshBooks looks! If you are a small business owner, an accountant that is serving a client or a bookkeeper, it’s the functionality that you would be most interested in. So, what can FreshBooks offer to you?

There are so many software solutions, both cloud-based and self hosted, that can create invoice and track whether there are payments that are due. However, that’s not what a complete accounting package should be limited to.

Freshbooks is much more than just an invoicing solution. You can of course invoice your customers, receive and record payments but you can also perform other tasks such as expense tracking, reports generation, tax calculation and much more.  

You can connect FreshBooks with your bank or your credit card and start tracking and recording your expenses automatically. That’s something useful for the small business owners that do their own bookkeeping and prefer to spend more time running their business than record transactions all day long.

FreshBooks Time Tracking Feature Review

One of the most useful features that FreshBooks offers is the time tracking. I think it’s a fantastic tool since it allows companies that offer services for example to track how much time each member of a team spends on a project and compare the cost incurred to the revenue that the client generates. You can understand that this is very crucial since accepting loss making jobs can not be part of a long term strategy. Freshbooks also offers the opportunity to directly charge and invoice a client based on the billable hours spent on a project. That is a fantastic feature for accountants, designers, lawyers and many other professionals that sell services and charge by the hour.

Financial Reports and Taxes

Another important feature that Freshbook offers is the ability to generate reports that should included in the analysis of every small business owner. You can run monthly income statement reports and track sales and expenses, understand your margins and be able to see what expenses you should be cutting.

Speaking of expenses, FreshBooks can also run an expenses report so that you can save them in excel files, plot graphs or create pivot tables to see how much you are spending and where.

Another report that you can generate is the aging report. The debtor aging report can basically tell you how much your clients owe to you and if there are amounts that are past their due date (and how long). You should be keeping track of such things and you should never let your sales turn into bad debt. The best thing to do is invoice fast and cash in faster!

FreshBooks and Third Party Addons

In my opinion, what sets FreshBooks apart from other accounting cloud-based software is the ability to integrate it with third party professional software. The list of addons that are supported is endless but briefly, you can integrate FreshBooks with CRM software such HighRise or Batchbook, specialized time-tracking software such as ChronoMate, marketing tools such as MailChip, workforce management tools, project management software and the list goes on!

Finally, something that every business owner should be looking (actually before looking into anything else) relates to data security. FreshBooks is a cloud-based software which means that you have no control over the way that your data are stored on the FreshBooks servers. The goods news is that you can export your data. In addition, FreshBooks creates backups and stores them in different locations. They use RackSpace (a big name in the hosting industry) with very big clients such as GE and Cisco so that you can be sure that your data will be safely stored.


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Inflow Inventory Review – Is Inflow the solution Right for You? Fri, 29 Nov 2013 23:36:09 +0000 A good inventory software is vital especially for companies that are struggling to manager their inventory levels, that sell physical goods that are fragile or become obsolete from one day to another or for companies that rely on customer satisfaction to create a competitive advantage.

Finding a software that can make your day more productive, help your company grow faster and easier, increase your profitability and help you satisfy your customers and turn them into loyal supporters, is not an easy task. The truth is that are so many accounting software (including inventory software) solutions being launched every month that makes the whole process of choosing the right software a nightmare.

However, Inflow seems to be a very good option. First of all, it is a product that has been around for around 7 years with continuous support and updates. 

Why inFlow?

No better place to start our Inflow review than by taking a look at what this inventory software offers. Then we can see how well Inflow lives up to those promises.

The main focus of inFlow is keeping track of your inventory, customers and vendors. What does that mean? Being able to know exactly your stock levels, being able to track what is coming in and is leaving your premises can make the difference between a succesful company and a company that will not be able to survive. That’s the area Inflow tries to help you to improve.

inFlow’s Inventory Features

Being able to track inventory over multiple locations is the first thing that I think is worth mentioning. There are so many companies that have more than one warehouse and are trying to centralize the work and control everything from one place. Well, Inflow can help you do that. I can see how this feature will save both money and headaches for companies that ship products from different locations. 

Inventory can be tracked both by lot and serial number. You can also utilize the barcode scanner feature, import and track products easier and faster. 

In addition, another very important feature is ability to take the orders your company has received, mark items as shipped and also raise purchase orders when your stock levels run low. That’s is a fantastic flow of information that can help you keep track of what’s is being sold, produce shipping documents and raise purchase orders easier than ever.

Another feature that inFlow has is the ability to use exchange rates, translate the cost of your stock and your sales price and exporting and using graphs that can help you understand the performance of your company.

Miscellaneous Features

Apart from the two areas of inventory and financial features that are probably most important to business owners. inFlow is packed with other features as well, that are worth mentioning.

It allows you to set access passwords and permissions for up to five other users. Since you probably don’t want everyone to have complete access to your files these different accounts can be set up exactly how you choose. Unlike to a few other inventory software programs that come to mind, this was very easy to set up. No need to call in a computer expert to have set it up at all, which is a big relief.

inFlow Ease of Use and Price

I’ve covered it already, but let me stress the point that inFlow is generally pretty easy to use. The learning curve is small, for the most part, and you can realistically be working it and having it work for you the same day you install it. Some of the features, like I mentioned above, may take longer to master. However, inFlow hosts an online forum and offers video tutorials for its users.

The price point for inFlow is right around $300 and this is certainly on the low end for inventory software. The features may warrant this, but still for a small business just getting started the price tag is still a hard pill to swallow. Hopefully, with time, inFlow will drop this down to more affordable levels since this is one of the few disadvantages of making the choice of going with their product for small businesses.

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Disadvantages of Converting a Traditional IRA To A Roth IRA Fri, 29 Nov 2013 23:35:24 +0000 Converting from a traditional IRA to a Roth IRA seems like a simple idea at first. Simply transfer the money from your traditional IRA to your Roth IRA, pay some taxes and you are ready to start receiving tax-free income from your Roth IRA throughout your retirement. Everybody loves the idea of tax-free income. However, there are some major disadvantages and some risks the can actually reduce your wealth rather than increase it. The tax situation is not as simple as it seems to be.

All of the money that you transfer from your traditional IRA to your Roth IRA gets added to your ordinary income for the current tax year. This can increase your marginal federal and state tax brackets subjecting any additional income you earn this year to a higher level of taxation. The odds are that you will be in a much higher tax bracket in the current year than you will be later on when you’re taking distributions from your IRA. 

I was looking at an IRA Account at Schwab and I was trying to compare the benefits of a ROTH IRA vs the Traditional IRA. It turns out that the conversion is not always a no-brainer as most people believe.  People often overlook the risk that the increase to your adjusted gross income can also eliminate your eligibility for many tax credits and reduce your itemized deductions. The AGI increase can also reduce or eliminate any subsidies available to you under the Affordable Healthcare Act. This could cost you thousands of dollars. 

You need to look at all of these factors in order to determine what the real cost of the transfer is to you in the current year. This task practically requires you to do your entire tax return in advance just to figure out how much it’s really going to cost you. 

Once you have a good idea of what your tax cost will be, you need to do some present value calculations to make sure that the transfer actually increases your total after-tax return over time. There are a number of online calculators the can help you with this mathematics. The problem is that there a lot of variables and you are playing a giant guessing game. You have no real idea what your tax situation is going to be like in the future. Often, the results of these calculations are that you only end up with more money if you keep working hard and stay in a high tax bracket.

Another major variable and thus another major risk, is the government. The government could change the rules of the game at any point in time. They could:

1) Eliminate or reduce the tax-free status of the Roth IRA.

2) Reform taxes so that all the tax brackets are lower.

3) Eliminate the income tax entirely and replace it with a consumption tax.

You really have no idea of what is going to happen.

Conversely, you can assume that government inertia will continue and things will stay pretty much the same as they are now. Plus, there is just as much chance of marginal tax rates going up as there is of them coming down. Under this scenario, there are a few benefits to converting from a traditional IRA to a Roth IRA.

One would be income flexibility. Maybe you are still working but would like some extra money to use to purchase a second home or take a special vacation. The tax-free funds from your Roth IRA are perfect for that purpose.

Tax-free withdraws from your Roth account will not increase your adjusted gross income. Thus, enabling you to take extra advantage of tax deductions and subsidies at a time when they are of more value to you. Also, unlike with a traditional IRA, withdraws are never mandatory so your money can keep growing tax-free for as long as you want.

You are probably starting to wonder why with all the risks and uncertainties you would want any kind of IRA. The answer to that has nothing to do with taxes. The number one benefit of any kind of IRA is asset protection. An IRA is the safest place to protect your money from lawyers, bill collectors, and tax collectors. Even bankruptcy judges can’t touch the first $1,000,000.

Regarding conversions, you need to look at all of the factors and decide what is best for you as both forms have their advantages and disadvantages. Most financial planners counsel their clients to have money in both types of plans. So, maybe you want to convert some or all of your current traditional IRA into a Roth IRA now but continue making tax deductible contributions to a traditional IRA. This will give you the ultimate flexibility when you need it most.

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Read the Fine Print within your Guaranteed Life Insurance Fri, 29 Nov 2013 23:27:50 +0000 People who wait too long to buy life insurance sometimes end up being driven to the only type of insurance available to them during a crisis: the guaranteed life insurance. On the face of it, it’s incredibly attractive – there are no medical tests required! But there are caveats to the policy that you should know about before you buy in. 

What is Guaranteed Life Insurance?

I was reading the blog of an insurance comparison website ( which had an article of the things that people don’t know about the guaranteed life insurance policies. First of all,  People that have bought guaranteed life insurance are bound to get payouts, regardless of any medical conditions they may have (as long as they pay their premiums in a timely way!).

There are no medical questionnaires or blood tests involved when you sign up for a guaranteed life insurance. All you have to do is fill up a form and you’re good to go. And insurance companies will approve your application, though some have a few restrictions. It’s also useful to know that this type of life insurance may be temporary or permanent, though term policies are most common. 

Sounds too good to be true? There are a few hidden catches under the fine-print that policy buyers often fail to realize. But before we take a look at the hidden fine-print surprises, let’s take a look at the types of people that usually buy this insurance.

Who Buys Guaranteed Life Insurance? 

Because there are no restrictions on applicants for guaranteed life insurance, it is the most common choice for people who are unable to get other types of life insurance. So, applicants generally include people with terminal illness, serious disabilities, life-threatening diseases, seniors and other high-risk conditions. Standard life insurance that is affordable may be hard to find under these circumstances, so guaranteed life insurance is the only option. It is also used by the elderly looking to be able to pay their burial expenses. The policy is not without age limits though. It is usually available for people between 45 and 85 years of age. 

What You Should Know About the Fine Print of Guaranteed Life Insurance

Premiums are usually higher as compared to standard life insurance! Premium rates can vary for a guaranteed policy, but it is usually on the higher side because of the additional mortality risk charge claimed by the company in exchange for the medical test waiver. Sometimes the premiums can be as much as 5 times that of a comparable standard policy. In a desperate last-ditch attempt to get the protection you need, you may decide that it’s okay to pay that much. 

But don’t be so sure that it’s the best option. It’s wiser to shop around a little more for standard insurance at other companies. You might find insurers willing to cover you. Because insurance companies actually calculate risks and your life expectancy through different algorithms, there may be some company that doesn’t find your profile ineligible for their standard insurance.

Most policies have a minimum term before payout. 

This means that from the time your insurance policy goes live, you may have to wait a stipulated period of 2 or 3 years before you can start receiving your payouts. During the waiting period, you receive minimal benefits. For instance, if you die within the period, your beneficiary will either receive just the premiums paid out so far or nothing at all. 

This graded payout applies to most such guaranteed life insurance policies. Only once the policy lapses will you receive the full death benefits. This fine print stricture is a way for the insurers to protect themselves against having to immediately pay out in case of the death of a high risk policy holder. 

This stipulation is a problem, because you are most likely buying the policy because you are a high-risk candidate. But you don’t want to end up paying out with no gains for your beneficiaries. So it is wise to thoroughly evaluate your situation before you decide to sign the application form. 

Death benefits are not particularly high

For the premium that you are paying and taking into consideration factors like your sex and age, you will find that the death benefits offered by guaranteed life policies are quite low. For instance, for a 50-year old woman looking to pay for funeral expenses (which may cost anything between $7000 and $10,000 today) and other bills may pay out $60 to $100 a month for a maximum benefit of only $15,000. And insurance companies usually have limits on the maximum death benefits that they pay out. 

If you are about to sign away a few thousand dollars of your money in premiums, it is wise to go about it with the full knowledge of how much you will get back. Keep in mind these fine-print stipulations that insurance companies don’t usually tell you about. They should help you steer clear of bad choices that benefit no one but the insurers. You may also be spurred on to renew your search for more mainstream insurance policies that some companies may be willing to offer you. 

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Big Four Audit Firms and Non Audit Services Sun, 24 Nov 2013 23:43:20 +0000 I recently read two articles (here and here) about KPMG and a $100m Capital fund it created. Long story short, KPMG is trying to find a way to diversify its operations in the UK and expand its business by investing in new technology start-ups.  The article on bloomberg was obviously negative to something like that due to potential conflicts of interest.

I don’t see how this can be a surprise since all of the Big 4 audit firms mention in their latest annual reports that they are seeking to expand their operations (for example data security) and offer services beyond the usual audit and tax services.

It’s not something new either. Accenture was created as part of Arthur Andersen. Apart from that, the big four audit firms employ approximately 650,000 people worldwide or more people than the city that I currently live in. The markets are changing and the competition in the audit markets becomes stronger and stronger (resulting in lower margins for the audits). So it does make sense that big private companies like these four companies are trying to grow and expand beyond what one might call a saturated and competitive audit market.

It’s like the banks have not diversified their operations beyond the usual lending operations. Most banks nowadays offer fund administration services, insurances and other services or products that are not directly related to banking operations. They have also invested in other irrelevant (and not all of them profitable) things (see RBS or Lloyds in the UK).

A key question however is indeed whether a conflict of interest exists. A problem will arise when an audit firm audits a company it has invested in but as the KPMG Senior Partner mentions in this interview, KPMG could be able to provide advisory services.

One might argue that KPMG is so big that while the investment might exist, the engagement team might still be independent and that safeguards could put into place to offer non statutory audit services. However, the problem arises when KPMG audits a competitor of a start-up that KPMG has a invested in. I would say that it’s an interesting move and it might initiate a debate going forward. The timing is interesting as well with the Competition Commission in the UK having recently decided on the mandatory audit tenders every five years.


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6 Things your accountant can help you with! Sun, 24 Nov 2013 22:46:37 +0000 Most people believe that (chartered) accountants are only good at keeping books, file a tax return and do some random number crunching here and there . That might be true but there are also other things that an accountant can help you with. For example, in the UK, 84% of the FTSE 100 companies have at least one chartered accountant on their board. 

There are actually quite a few things a chartered accountant can help you with apart from all the usual stuff.  The list below is just a small sample.

1. Legal Structure of your company

A touch question to answer (especially when a company is about to be formed) relates to the legal structure. Should you choose to form a personal company, a limited company or a public company? Apart from the legal aspect of this “trilemma”, there are tax implications as well. Choosing the wrong legal structure will not only cost you on an annual basis but can also put your personal financial wealth at risk. Your accountant should be able to advice you about the costs and the benefits of choosing one legal form over the other.

2. Increased sales but profits remain stable

One of the most common problems that SME companies face is the uncontrollable discretionary expenses. Your sales might have increased but your profits remain stable. That’s an indication of uncontrollable costs, bad debts, inefficiencies or a combination of them all. 

Your accountant can work with you to identify what are the costs that can be cut, whether your working capital supports your day to day operations (and your goals for growth) and whether your company faces difficulties to turn the sales made into cash.

3. Tax inefficiencies

Tax inefficiencies can be a result of tax penalties or a result of tax claims that your company is not making. Are you sure you are claiming everything you can? In addition, the last thing you want is to be paying unnecessary penalties because you didn’t know what’s the deadline is to file a tax return. These are common things that cost companies on a daily basis.

4. Competitive Advantage and Growth Strategies

The common perception is that accountants are just bookkeepers. That is far from being true. An accountant (especially a chartered accountant) knows very well about bookkeeping but you don’t really have to be a chartered accountant to do a couple of credits and debits.

A chartered accountant can help you find what are the things that  your company is doing well, identify your key strengths and weaknesses and form a strategy that can help your company grow. A CPA (for the US) or a Chartered Accountant (for the UK) should be able to advise you about potential growth opportunities that will create synergies and add value.

5. Business Software Advice

Choosing the most suitable accounting software, ERP or CRM software is a tough decision. First of all, the options are endless. In addition, companies launch a product, support it for a couple of years and then decide to launch a different product and stop supporting the first one.

In addition, another hard choice to make is whether to choose to host your software on the cloud or not. Accountants are not IT experts but they do have experience when it comes to accounting software and they can contribute to such discussions.

6. Accounting Treatments 

Finally, accountants can help you put to your books in order by choosing the correct and prudent accounting treatments. They can of course process journal entries and file a tax return as well. I chose to list that last because I think that an accountant can help your company by doing more than just posting journals.

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Internal Rate of Return (IRR) – Calculation with Examples Sun, 24 Nov 2013 15:23:17 +0000 The Internal Rate of Return (IRR) is one of the most widely used methods for capital appraisal purposes and there is no doubt that it’s also considered as one of the most robust ones too. However, the internal rate of return has certain limitations and it’s advised that it should be used along with other methods and not as the only criteria to accept or to reject projects for reasons that are explained below. 

Definition of the Internal Rate of Return 

The internal rate of return is the discount rate which makes the costs to undertake a project equal the profits that this project will generate. In other words, the internal rate of return is the discount rate that gives a zero net present value.

The idea is that if the cost of capital which is also the interest rate that a company pays to borrow money is less than the internal rate of return, then the project can be accepted.

Internal Rate of Return Decision Rule

As noted above, if the internal rate of return is lower than the cost of capital then the project should be rejected since it costs more money for the company to invest in this project than the return that the project is expected to bring.

Internal Rate of Return Example

We will use one example in order to illustrate how the internal rate of return can be calculated and the approach is. Let’s say that company A uses the internal rate of return to evaluate investment opportunities and make a decision regarding the profitability and viability of a project.

There is one potential project that Company A wishes to appraise with the following characteristics:

-An initial investment of $50,000 is required during the first year.

-The project will last for four years and the cash inflows during these four years will be:

  • Year 1 : $15,000
  • Year 2: $20,000
  • Year 3: $25,000
  • Year 4: $18,000

The company has a cost of capital of 15% and wishes to appraise this project and decide whether to proceed or not.

How to Calculate the Internal Rate of Return

There are two different approaches that can be followed to calculate the internal rate of return.

Internal Rate of Return Calculation with Trial and Error

From the IRR definition, we know that the IRR is the discount rate that makes the present value of the cash flows become $nil. We can therefore use a trial and error approach and start increasing the discount rates until we get to a present value that is $nil.

The following table illustrates the calculations.

Time Cash Flow Discounted Cash Flows (10%)Discounted Cash Flows (15%)Discounted Cash Flows (19%)Discounted Cash Flows (20%)
Period 0-50,000.00
Period 115,000.00
Period 220,000.00
Period 325,000.00
Period 418,000.00
Net Present Value28,000.00

As we can see from this table, a discount rate of 19% gives around $500 NPV while a 20% discount rate gives a $-462 NPV. We can therefore understand that the IRR is somewhere in the middle or around 19.5%.

Internal Rate of Return Calculation using two discount rates

There is another approach we can use to calculate the internal rate of return (IRR) and involves a formula (see below). The idea is that we use two different discount rates for which one will give a positive net present value and another that we believe will result in a negative net present value. It might sound complicated but follow the example below which should help you understand what are the steps you should follow. 

Internal Rate of Return Formula

IRR= Ra + (NPVa/(NPVa-NPVb))*(Rb-Ra)


Ra is the discount rate that gives the positive net present value, NPVa is the positive NPV, NPVb is the negative NPV and Rb is the discount rate that gives the negative NPV.

Let’s proceed with a table that can illustrate what’s written above in an easier to follow way:

Time Cash Flow Discounted Cash Flows (10%)Discounted Cash Flows (20%)
Period 0-50,000.00
Period 115,000.00
Period 220,000.00
Period 325,000.00
Period 418,000.00
Net Present Value28,000.00

The table is part of the first table and we can see that a 10% discount rate gives a positive NPV and a 20% gives a negative NPV. We can therefore use the formula above and calculate IRR as:

IRR= 10+(11,242/(11,242+462))*(20-10)=19.6%

As you can see both methods will give the same IRR (more or less) but most people prefer to calculate IRR by using the second approach since it involves less calculations.

Limitations and Disadvantages of the Internal Rate of Return

The internal rate of return is a very robust capital appraisal method but there are certain limitations. For example:

  • When a project has positive cash flows, followed by negative and then followed by positive cash flows again, there will be more than one IRR (more than solution). 
  • IRR is not very reliable when comparing projects that have significantly different time horizons (i.e project A will last for 5 years while project B will last for 15 years). 
  • Due to the limitations explained above, IRR is mostly used a decision tool (accept or reject) and not as a comparison tool (project A vs project B).

Internal Rate of Return Advantages

There are however certain advantages that IRR has which make it one of the most preferred capital appraisal methods.

  • It’s an easy way to decide to accept or reject projects.
  • It’s a robust method that can be used to monitor how a project is performing based on the actuals vs the budgets and how that compares to the cost of capital.
  • It takes into account the time value of money compared to other methods (payback period for example) that do not.
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Discounted Payback Period Method – Calculation with Examples Sat, 23 Nov 2013 19:05:30 +0000 The discounted payback period method is exactly the same as that simple payback period method (which was explained in a different  post) apart from one thing. The discounted payback period method accounts for the time value of money. In other words, it allows us to discount the future cash inflows (or outflows) and calculate the present the value of them.

By doing that, we can calculate the payback period or the time that it takes for a project to break even by correctly accounting for the fact that having $1 now does not have the same value as having $1 in 5 years from now.

Discounted Payback Period Formula & Calculation

As explained above, the discounted payback period is used to calculate the time that it takes for a project to bring in enough profits to cover the initial investment (and other subsequent costs) or put it differently, how many years it takes to break even and recoup the initial investment.

Trying to give a single formula will complicate things but an example will help us understand how the payback period is calculated. Let’s assume that company ABC has the option to invest in a project that will initially cost $20,000. The project will run for 4 years and will bring the following profits during each one of these four years.

Year 1 =  $7,000

Year 2=  $9,000

Year 3=  $4,000

Year 4= $12,000

The company believes that the cost of capital that should be used to discount these cash flows is 10% since that’s the interest rate the bank charges Company ABC for the loan facility.

Company ABC uses the discounted payback period method (among other methods) to rank potential projects and choose the ones that will be undertaken. 

Discounted Payback Period Example

Using the example explained above, we will need to perform the following steps to calculate the discounted payback period.

-First Step : Calculate the discounted cash flow for each period by using the following formula :

Discounted Cash flows =  (Cash flows)/ (1+r)^n

where r is the cost of capital or 10% and n is the time (for this example we have 4 years so n spans from zero to four).

-Second Step: Calculate the cumulative discounted cash flows until we get a cumulative cash flow number that is greater than zero

-Third Step: When we get the first positive number we know that the project has started bringing profits so the discounted payback period can be now calculated. What we need to do is workout how many months from this last period we need to add in order for the project to make zero profit (neither a loss nor a profit).

Let’s see the above steps by using the example already provided. 

Time Cash Flow Discounted Cash FlowsCumulative Cash flows
Period 0($20,000)($20,000)($20,000)
Period 1$7,000$6,364

Period 2$9,000$7,438
Period 3$4,000$3,005($3,193)
Period 4$12,000$8,196$5,003

What we can see from the table above is that during the last period the cumulative cash flows become positive. We therefore know that the discounted payback period is somewhere between the third and the fourth period.

In order to find exactly what’s the discounted payback period is, we do the following simple math:

Discounted Cash flows for Last period = $8,196

Cumulative Cash flows for last period with negative number = $3,193

We will need the following number of months from the last period to break even:

Number of months = (3,193)/(8,196/12)= around 5 months. The discounted payback period is therefore 3 years and 5 months.

Discounted Payback Period vs Simple Payback Period 

As already noted, the difference between the discounted payback period method and the simple payback method is the fact that we can discount the cash flows and account for the time value of money which as explained above is the fact that having one dollar today is not the same as having one dollar in one year from now.

Apart from that, these two methods are exactly the same and have the same advantages and disadvantages.

Advantages of the Discounted Payback Period

In line with the advantages of the simple payback period, the discounted payback period has the following advantages:

  • It is an enhancement when compared to the simple payback period method since it accounts for the time value money
  • It’s a simple and easy way to screen a large number of projects and discard projects that take time to bring in some profits.

Disadvantages of the Discounted Payback Period

  • The discounted payback period also ignores what happens after the project has broken even. There is therefore a risk that we will reject projects that take more time to recoup our investment but will have significantly positive cash inflows after that.
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PayBack Period as a Capital Appraisal Method Sat, 23 Nov 2013 15:30:09 +0000 Payback Period is one of the capital appraisal methods that can be used to understand whether a project is worthwhile. The question that the Payback Period answers is how long it will take to recoup your initial investment. If you therefore spend $10,000 as an initial investment, the payback period method will help you calculate how long it will take to get the $10,000 back and break even. Based on the payback period, an investment is more attractive if it takes a shorter period of time to break even.

The Payback Period method is mainly an initial screening capital appraisal method and should not be used as the only method to make investment decisions. The reasons for that are explained below but for now, let’s see how the payback period is calculated and a couple of examples.

Payback Period Formula and Calculation

The payback period has two different formulas which are used depending on whether your cash flows are stable and equal throughout the duration of the project. What that means is that if you have a project with the same cash inflows during all periods, then the first formula can be used. On the other hand, if your cash flows are not the same, then the second approach is used.

Formula and Calculation for equal cashflows

First of all, if the project yield equal cash inflows for all the years that it will last, then the formula is simply:

Payback Period = (Investment at Period 0)/(Cash Inflow per period)

Remember that the payback period calculates the time it takes to break even (in years, months or anything you are using to count the periods). For example, if you have a project that will initially cost you $10,000 and you know that it will bring $5,000 per year, then the payback period is 2 years (see table below).

TimeCash Flow
Period 0($10,000)
Period 1$5,000
Period 2$5,000

Formula and Calculation for unequal cashflows

In the real world, you will rarely find a project that will bring the same amount of revenue throughout its duration. You will therefore find it useful to know how to calculate the payback period for more complex scenarios. An example might help:

The initial investment is again $10,000 but the cash inflows are not the same for none of the three periods. The first year the project will generate $3,000, the second $6,000 and the third $2,000. 

You might have noticed that we will manage to break even somewhere within the third year. So the payback period is not exactly 3 years but it’s 2.5 years.

Time Cash Flow
Period 0($10,000)
Period 1$3,000
Period 2$6,000
Period 3$2,000

Payback Period Examples

We will use two more examples to illustrate why the payback period should not be the only method that you will use to appraise a project. It can be used as an initial screening process but it’s not advised to be used on it’s own. The internal rate of return or the net present value methods will give you a more robust analysis. 

Payback Period Example 1

We have the following scenario: An initial $10,000 investment is required which will bring $3,000 in the first year, $7,000 in the second year and $200 residual cash inflows per year for three more years. It’s clear that the the payback period is 2 years.

TimeCash Flow
Period 0($10,000)
Period 1$3,000
Period 2$7,000
Period 3$200
Period 4$200
Period 5$200

Payback Period Example 2

Now let’s see another example that can help us understand what’s the biggest disadvantage of the payback period when it’s used to rank investments (from the most attractive to the least attractive). The initial investment in the example below are the same. The annual income generated differs and the payback period is 3 years and 2 months.

It’s clear that if we had to use the payback period to choose one of the these investments, we would pick the first since it has a lower payback period. However, having a second look can reveal that the second investment might take more time to break even but the total present value is higher. 

It will generate a total of $11,000 profit compared to the $600 profit that the first investment will generate. 

TimeCash Flow
Period 0($10,000)
Period 1$3,000
Period 2$3,000
Period 3$3,000
Period 4$6,000
Period 5$6,000

Payback Period vs IRR or ARR

It should be clear by now that the payback period method is not the most robust capital appraisal technique and should not be used on it’s own. The internal rate of return or even the accounting rate of return should be used to supplement your analysis.

In particular, the internal rate of return answers a different question (the cost of capital that is required to break even) but it takes into account the time value of money and it also takes into account the whole duration of the project and does not stop when the project has generated enough profits to help us break even.

Payback Period Advantages

However, while the payback period definitely has disadvantages, it also has some advantages which can be summarized as:

  • By using the payback period, we get to choose projects that will help us bring liquidity since the earliest a project breaks even, the highest it gets ranked based on the payback period.
  • The payback period is very straightforward and can be used with all the inputs that are used for a simple NPVcalculation.
  • By using the payback period, we hedge against the risk that the long term projects bring due to the uncertainty that the future has.

Payback Period Disadvantages

A summary of the disadvantages of the payback period is as follows:

  • The payback period does not account for the whole duration of the project since it stops at the time that a project breaks even.
  • It does not account for the time value of money.
  • It does not account for not quantitative characteristics (such as brand name or a project that will be loss making but will bring loyal customers). 
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Advantages and Strenghts of SWOT Analysis Wed, 20 Nov 2013 23:58:23 +0000 SWOT analysis is one of the tools that we have at our disposal to analyze a company or even a project. Together with other analytical tools such as the PEST(EL) analysis, SWOT analysis is being used by analysts, executives and managers. There is no doubt that conducting a SWOT analysis adds value as it offers a systematic way to understand your company identifying strengths, weaknesses, opportunities and threats.

Trying to list all the advantages and strengths that a SWOT analysis has (compared to other tools) is not an easy task since every company and therefore every case is unique. However, the most common advantages are:

Monitor and Benchmark

Conducting a SWOT analysis is not something that should be performed once. Both the markets and individual companies are dynamic and therefore evolve. A SWOT analysis should be performed to monitor your performance and measure your progress and it is something that needs to be updated frequently. SWOT analysis can help your company to identify measurable targets and monitor your progress against those targets.

In addition, a SWOT analysis  can help you understand your competitors and what are the steps that you should be taking to grow and grab market share. Analysis of the strengths and the weaknesses is performed by comparing what Company A is doing compared to the main competitors and a SWOT analysis is a great framework that can help you approach this task in a systematic way.

Risk Assessment

One of the key elements that a SWOT analysis includes is the “threats” element. Threats or Risks are key for every business and taking the necessary steps to understand the risks that your business is facing and what actions need to be taken to “hedge” against these risks are two vital tasks that a SWOT analysis can help you perform.

Competitive Advantage

Another element that a SWOT analysis includes is the “strengths” element which could be also (in the right context) be described as the competitive advantage. Identifying your strengths is key for every company that wants to grow. Competitive advantage is something that can and should be monetized by all companies. It can be your brand, your logistics, your customers loyalty or the fact that your company is big enough to have the necessary economies of scale to offer quality at prices that your competitors can not afford to offer.

Identifying these strengths is necessary to increase profitability, add diversity in your product portfolio and also work on the next element which is the weaknesses. 

Work on Weaknesses

There is no doubt that all companies have an Achilles’ heel  or if you prefer a more realistic and less poetic wording , weaknesses. A SWOT analysis can help you brainstorm weaknesses that cost you growth, sales and profits. Working on these weaknesses will help your company improve its position in the market.

Conducting a SWOT analysis is something that should be performed frequently by all companies, both SME and big companies. It is a helpful exercise that adds value by allowing you to identify key elements such as strengths, weaknesses, opportunities and threats and evaluate how your company performs against targets that are measurable.


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Gearing Ratio Formula, Calculation and Analysis with Examples Sun, 17 Nov 2013 16:20:38 +0000 The Gearing Ratio is one of the fundamental ratios that are used everyday by financial analysts, banks and investors to understand the capital structure of a company. The financial gearing shows how much debt a company has compared to the funds that the shareholders have injected. 

Shareholder funds are not interest bearing but they dilute the ownership of the company. In addition, investors expect some kind of return on their investment which usually takes the form of dividends.

On the other hand, debt does not dilute the ownership but it requires interest payments. In addition, debt holders come first when a company is being liquidated. Finally, debt usually requires a fixed or floating charge.

Gearing Ratio Formula

 There are two different formulas that can be used. Both of them are valid and as long as there is consistency, the results from your analysis should be comparable.

The first formula includes the interest bearing debt in the numerator and the share capital plus the retained earning in the denominator. So, the first formula for the gearing ratio is:

Gearing Ratio (%) = (Interest Bearing Short and Long Term Debt/Share Capital+Retained Earnings)  *100%

The second formula that can be used to calculate the gearing ratio is pretty much the same apart from the fact that the debt that is included  in the numerator is also added in the denominator.

In other words, the formula is:

Gearing Ratio (%) = (Interest Bearing Debt)/(Share Capital + Retained Earnings+Interest Bearing Debt)

 Where interest bearing debt one should include bank loans, overdraft facilities, loan notes issues and other forms of debt that has been issued.

Gearing Ratio Examples

 In order to understand the gearing ratio, two examples will be used. 

Gearing Ratio Example 1 

Company A has a $1,000,000 bank loan that is due in 5 years. In addition, the shareholders funds as per the latest statement of financial position appear to be $750,000. Similar companies in the industry usually have a gearing ratio of 40% to 50%.

Using the above formulas (the first one), we can calculate the gearing ratio for this company which is 75% (1,000,000/750,000). Apart from analyzing the historical data for the same company, it’s also useful to compare the results with similar companies in the sector. The reason for that is that different sectors have different characteristics. 

For this example, we can see that Company A has higher gearing since other companies in this sector have around 50% financial gearing. 

Gearing Ratio Example 2

Company B operates in the same sector with Company A. Company B has a $500,00 bank loan and $1,500,000 shareholder funds. Therefore, we can calculate the gearing ratio which is  33.33%.

Analyzing and Interpreting the Gearing Ratio

While for simplicity, we don’t use historical information for Company A and B, we can say that both companies could improve their financial leverage. 

For example, Company A is highly geared with the gearing ratio being higher than the industry average by 25%. At the same time, company B has a significantly lower than the industry financial leverage.

So what does that mean? For company A, a high gearing ratio means that the company will have to pay interest on an annual basis (higher than what’s normally paid by same companies in the sector), adhere to bank covenants and risk breaking these covenants when the financial results are not so good. Of course, all of the above are not ideal for a company.

Increased gearing ratios are risky and when a company is unable to repay it’s debt, it can lead to bankruptcy. 

At the same time, Company B has a very low gearing ratio when compared to other similar companies in the same industry. This is also not ideal since the cost of debt is lower than the cost of equity.

The cost of debt is cheaper because as already mentioned, debt holders are more secured then shareholders (in the event of a liquidation). Of course, as we saw from the first example, that does not mean that companies should only raise debt. This is also risky and can lead to unpleasant events.

Companies should find a balance that is in line with the needs of the company, the ability to raise debt or capital (creditworthiness), the needs and desires of its shareholders and also in line with the industry and market standards.

How to Increase the Gearing Ratio

As explained above, there are reasons for which a company might want to increase the gearing ratio. There are different ways to achieve that:

  • Raise additional debt (bank loans, loan notes, overdraft etc.)
  • Buy Back part of the shares that are issued
  • Pay Dividends from the retained earnings reserves

How to decrease the Gearing Ratio

Similarly, there are situations where a company might have to or want to lower the financial gearing which can be done by:

  • Repaying part of its interest bearing debt (by selling unused assets or by using cash reserves)
  • Issuing new shares which can be also used to repay bank loans or buy back loan notes which can be then cancelled.

Gearing Ratio Online Calculator

Finally, a gearing ratio online calculator is included below which can be used to calculate the financial gearing of a company using the first formula (debt/equity). 

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