adultthai: 2011

วันพุธที่ 26 มกราคม พ.ศ. 2554

จ้างคลิกลิ้งค์ รายละเอียดด้านใน

วันพฤหัสบดีที่ 20 มกราคม พ.ศ. 2554

How To Prepare A Business Plan That Guarantees Big Profits

How To Prepare A Business Plan That Guarantees Big Profits
By [http://ezinearticles.com/?expert=Julia_Tang]Julia Tang
It is always said "If you Fail to Plan, you Plan to Fail"
Success in business comes as a result of planning. You have to have a detailed, written plan that shows what the ultimate goal is, the reason for the goal, and each milestone that must be passed in order to reach your goal.
A business plan is written definition of, and operational plan for achieving your goal. You need a complete but success tool in order to define your basic product, income objectives and specific operating procedures. YOU HAVE TO HAVE A BUSINESS PLAN to attract investors, obtain financing and hold onto the confidence of your creditors, particularly in times of cash flow shortages--in this instance, the amount of money you have on hand compared with the expenses that must be met.
Aside from an overall directional policy for the production, sales effort and profit goals of your product--your basic "travel guide" to business success--the most important purpose your business plan will serve, will be the basis or foundation of any financial proposals you submit. Many entrepreneurs are under the mistaken impression that a business plan is the same as a financial proposal, or that a financial proposal constitutes a business plan. This is just a misunderstanding of the uses of these two separate and different business success aids.
The business plan is a long range "map" to guide your business to the goal you've set for it. The plan details the what, why, where, how and when, of your business--the success planning of your company.
Your financial proposal is a request for money based upon your business plan--your business history and objectives.
Understand the differences. They are closely related, but they are not interchangeable.
Writing and putting together a "winning" business plan takes study, research and time, so don't try to do it all in just one or two days.
The easiest way to start with a loose leaf notebook, plenty of paper, pencils, pencil sharpener, and several erasers. Once you get your mind "in gear" and begin thinking about your business plan, "10,000 thoughts and ideas per minute" will begin racing thru your mind...So, it's a good idea when you aren't actually working on your business plan, to carry a pocket notebook and jot down those business ideas as they come to you--ideas for sales promotion, recruiting distributors, and any other thoughts on how to operate and/or build your business.
Later, when you're actually working on your business plan, you can take out this "idea notebook" evaluate your ideas, rework them, refine them, and integrate them into the overall "big picture" of your business plan.
The best business plans for even the smallest businesses run 25 to 30 pages or more, so you'll need to "title" each page and arrange the different aspects of your business plan into "chapters." The format should pretty much run as follows:
Title Page Statement of Purpose Table of Contents Business Description Market Analysis Competition Business Location Management Current Financial Records Explanation of Plans For Growth Projected Profit & Loss/Operating Figures Explanation of Financing for Growth Documentation Summary of Business & Outlook for The Future Listing of Business & personal References
This is a logical organization of the information every business plan should cover. I'll explain each of these chapters titles in greater detail, but first, let me elaborate upon the reasons for proper organization of your business plan.
Having a set of "questions to answer" about your business forces you to take an objective and critical look at your ideas. Putting it all down on paper allows you to change, erase and refine everything to function in the manner of a smoothly oiled machine. You'll be able to spot weakness and strengthen them before they develop into major problems. Overall, you'll be developing an operating manual for your business--a valuable tool which will keep your business on track, and guide you in the profitable management of your business.
Because it's your idea, and your business, it's very important that YOU do the planning. This is YOUR business plan, so YOU develop it, and put it all down on paper just the way YOU want it to read. Seek out the advice of other people; talk with, listen to, and observe, other people running similar businesses; enlist the advice of your accountant and attorney--but at the bottom line, don't ever forget it has to be YOUR BUSINESS PLAN!
Remember too, that statistics show the greatest causes of business failure to be poor management and lack of planning--without a plan by which to operate, no one can manage; and without a direction in which to aim its efforts, no business can attain any real success.
On the very first page, which is the title page, put down the name of your business-ABC ACTION--with your business address underneath. Now, skip a couple of lines, and write it all in capital letters: PRINCIPAL OWNER--followed by your name if you're the principal owner. On your finished report, you would want to center this information on the page, with the words "principal owner" off-set to the left about five spaces.
Examples: ABC ACTION 1234 SW 5th Ave. Anywhere, USA 00000

PRINCIPAL OWNER: Your Name
That's all you'll have on this page except the page number -1-
Following your title page is the page for your statement purpose. This should be a simple statement of your primary business function, such as: We are a service business engaged in the business of selling business success manuals and other information by mail.
The title of the page should be in all capital letters across the top of the page, centered on your final draft--skip a few lines and write the statement of purpose. This should be direct, clear and short--never more than (2) sentences in length.
Then you should skip a few lines, and from the left hand margin of the paper, write out a sub-heading in all capital letters, such as: EXPLANATION OF PURPOSE.
From, and within this sub-heading you can briefly explain your statement of purpose, such as: Our surveys have found most entrepreneurs to be "sadly" lacking in basic information that will enable them to achieve success. This market is estimated at more than a 100 million persons, with at least half of these people actively "searching" for sources that provide the kind of information they want, and need.
With our business, advertising and publishing experience, it is our goal to capture at least half of this market of information seekers, with our publication. MONEY MAKING MAGIC! Our market research indicates we can achieve this goal and realize a profit of $1,000,000 per year within the next 5 years...
The above example is generally the way you should write your "explanation of purpose," and in subtle definition, why you need an explanation. Point to remember: Keep it short. Very few business purpose explanations justify more than a half page long.
Next comes your table of contents page. Don't really worry about this until you've got the entire plan completed and ready for final typing. It's a good idea though, to list the subject (chapter titles) as I have, and then check off each one as you complete that part of your plan.
By having a list of the points you want to cover, you'll also be able to skip around and work on each phase of your business plan as an idea or the interest in organizing that particular phase, stimulates you. In other words, you won't have to make your thinking or your planning conform to the chronological order of the "chapters" of your business plan--another reason for the loose leaf notebook.
In describing your business, it's best to begin where your statement purpose leaves off. Describe your product, the production process, who has responsibility for what, and most importantly, what makes your product or service unique--what gives it an edge in your market. You can briefly summarize your business beginnings, present position and potential for future success, as well.
Next, describe the buyers you're trying to reach--why they need and want or will buy your product--and the results of any tests or surveys you may have conducted. Once you've defined your market, go on to explain how you intend to reach that market--how you'll these prospects to your product or service and induce them to buy. You might want to break this chapter down into sections such as..publicity and promotions, advertising plans, direct sales force, and dealer/distributor programs. Each section would then be an outline of your plans and policies.
Moving into the next chapter on competition, identify who your competitors are--their weakness and strong points--explain how you intend to capitalize on those weaknesses and match or better the strong points. Talk to as many of your "indirect" competitors as possible--those operating in different cities and states.
One of the easiest ways of gathering a lot of useful information about your competitors is by developing a series of survey questions and sending these questionnaires out to each of them. Later on, you might want to compile the answers to these questionnaires into some form of directory or report on this type of business.
It's also advisable to contact the trade associations and publications serving your proposed type of business. For information on trade associations and specific trade publications, visit your public library, and after explaining what you want ask for the librarian's help.
The chapter on management should be an elaboration on the people operating the business. Those people that actually run the business, their job, titles, duties, responsibilities and background resume's. It's important that you "paint" a strong picture of your top management people because the people coming to work for you or investing in your business, will be "investing in these people" as much as your product ideas. Individual tenacity, mature judgement under fire, and innovative problem-solving have "won over" more people than all the AAA Credit Ratings and astronomical sales figures put together.
People becoming involved with any new venture want to know that the person in charge--the guy running the business knows what he's doing, will not lose his cool when problems arise, and has what it takes to make money for all of them> After showing the "muscle" of this person, go on to outline the other key positions within your business; who the persons are you've selected to handle those jobs and the sources as well as availability of any help you might need.
If you've been in business of any kind scale, the next chapter is a picture of your financial status--a review of your operating costs and income from the business to date. Generally, this is a listing of your profit & loss statements for the six months, plus copies of your business income tax records for each of the previous three years the business has been an entity.
The chapter on the explanation of your plans for the future growth of your business is just that--an explanation of how you plan to keep your business growing--a detailed guide of what you're going to do, and how you're going to increase your profits. These plans should show your goals for the coming year, two years, and three years. By breaking your objectives down into annual milestones, your plan will be accepted as more realistic and be more understandable as a part of your ultimate success.
Following this explanation, you'll need to itemize the projected cost and income figures of your three year plan. I'll take a lot of research, an undoubtedly a good deal of erasing, but it's very important that you list these figures based upon thorough investigation. You may have to adjust some of your plans downward, but once you've got these two chapters on paper, your whole business plan will fall into line and begin to make sense. You'll have a precise "map" of where you're headed, how much it's going to cost, when you can expect to start making money, and how much.
Now that you know where you're going, how much it's going to cost and how long it's going to be before you begin to recoup your investment, you're ready to talk about how and where you're going to get the money to finance your journey. Unless you're independently wealthy, you'll want to use this chapter to list the possibilities and alternatives. Make a list of friends you can approach, and perhaps induce to put up some money as silent partners. Make a list of those people you might be able to sell as stockholders in your company--in many cases you can sell up to $300,000 worth of stock on a "private issue" basis without filing papers with the Securities and Exchange Commission. Check with a corporate or tax attorney in your area for more details. Make a list of relatives and friends that might help you with an outright loan to furnish money for the development of your business.
Then search out and make a list of venture capital organizations. Visit the Small Business Administration office in your area--pick up the loan application papers they have--read them, study them, and even fill them out on a preliminary basis--and finally, check the costs, determine which business publications would be best to advertise in, if you were to advertise for a partner or investor, and write an ad you'd want to use if you did decide to advertise for monetary help.
With listing of all the options available to your needs, all that's left is the arranging of these options in the order you would want to use them when the time come to ask for money. When you're researching these money sources, you'll save time by noting the "contact" deal with when you want money, and whenever possible, by developing a working relationship with these people.
If your documentation section, you should have a credit report on yourself. Use the Yellow Pages or check at the credit department in your bank for the nearest credit reporting office. When you get your credit report, look it over and take whatever steps are necessary to eliminate any negative comments. Once these have been taken care of, ask for a revised copy of your report and include a copy of that in your business plan.
If you own any patents or copyrights, include copies of these. Any licenses to use someone else's patent or copyright should also be included. If you own the distribution, wholesale or exclusive sales rights to a product, include copies of this documentation. You should also include copies of any leases, special agreements or other legal papers that might be pertinent to your business.
In conclusion, write out a brief, overall summary of your business- when the business was started, the purpose of the business, what makes your business different, how you're going to gain a profitable share of the market, and your expected success during the coming 5 years..
The last page of your business plan is a "courtesy page" listing the names, addresses and phone numbers of personal and business references--persons who have known you closely for the past five years or longer--and companies or firms you've had business or credit dealings with during the past five years.
And, that's it--your complete business plan. Before you send it out for formal typing, read it over once a day for a week or ten days. Take care of any changes or corrections, and then have it reviewed by an attorney and then, an accountant. It would also be a good idea to have it reviewed by a business consultant serving the business community to which your business will be related. After these reviews, and any last-minute changes you want to make, I'll be ready for formal typing.
Type and print the entire plan on ordinary white bond paper. Make sure you proof-read it against the original. Check for any corrections and typographical errors--then one more time--read it through for clarity and the perfection you want of it.
Now you're ready to have it printed and published for whatever use you have planned for it--distribution amongst your partners or stockholders as the business plan for putting together a winning financial proposal, or as a business operating manual.
Take it to a quality printer in your area, and have three copies printed. Don't settle for photo-copying..Have it printed!
Photo-copying leaves a slight film on the paper, and will detract from the overall professionalism of your business plan, when presented to someone you're trying to impress. So, after going to all this work to put together properly, go all the way and have it duplicated properly.
Next, stop by a stationery store, variety store or even a dime store, and pick up an ordinary, inexpensive bind-in theme cover for each copy of your business plan. Have the holes punched in the pages of your business report to fit these binders and then slip each copy into a binder of its own.
Now, you can relax, take a break and feel good about yourself..You have a complete and detailed business plan with which to operate a successful business of your own. A plan you can use as a basis for any financing proposal you may want to submit..And a precise road-map for the attainment of real success...
You just complete one of the important steps to fulfill of all your dreams of success.
---------------------------------------------------------
Julia Tang publishes Smart Online Business Tips, a fresh
and informative newsletter dedicated to supporting people
like you! To find out the best online business opportunities,
and to discover hundreds more proven and practical internet
marketing secrets, plus FREE internet marketing products
worth over $200, visit: <a target="_new" href="http://www.best-internet-businesses.com%22%3ehttp//www.best-internet-businesses.com%3C/A>
----------------------------------------------------------
Note: Feel free to publish it with the resource box and content unchanged
Article Source: [http://EzineArticles.com/?How-To-Prepare-A-Business-Plan-That-Guarantees-Big-Profits&id=4269] How To Prepare A Business Plan That Guarantees Big Profits

Top 10 Business Plan Myths of Solo Entrepreneurs

Top 10 Business Plan Myths of Solo Entrepreneurs
By [http://ezinearticles.com/?expert=Terri_Zwierzynski]Terri Zwierzynski
Don't let these stop you from having a business plan for success!
A recent study of 29,000 business startups noted that 26,000 of them failed. Of those failures, 67% had no written business plan. Think that's a coincidence?
Here's the top 10 myths Solo Entrepreneurs often have about business plans-usually, the reasons why they don't have one. De-bunk the myths, and see how having a business plan for your solo business, can actually be easy and fun--and can jumpstart your success!
1. Myth: I don't need a business plan--it's just me!
Starting a business without a plan is like taking a trip in a foreign country without a map. You might have a lot of fun along the way, and meet a lot of friends, but you are likely to end up at a very different place than you originally set out for-and you might have to phone home for funds for your return ticket.
Solo Entrepreneur Reality: Successful Solo Entrepreneurs know that the exercise of creating a business plan, really helps them think through all the critical aspects of running a business, make better business decisions, and get to profitability sooner.

2. Myth: I have to buy business plan software before I can start.
Business plan software comes in many shapes and sizes, and prices. Many are more geared at small and growing businesses with employees.
Solo Entrepreneur Reality: Business plan software can be helpful-but it's not required. Software is more likely to help if you have a more traditional type business, like a restaurant or a typical consulting business.
3. Myth: I need to hire a consultant to write my business plan.
Consultants are an expensive way to have your business plan written.
Solo Entrepreneur Reality: Your business IS you-and you need to be intimately involved with the creation of your business plan. A better strategy, if you think you need professional help, is to hire a coach or mentor-someone who can guide you in what you need to do, not do it for you.
4. Myth: The business plan templates I've seen have all these complex-sounding sections to them-I guess I need all those?
The only time you need to follow a specific outline is if you are looking for funding.
Solo Entrepreneur Reality: Your business plan needs to answer ten basic questions-that's it! Don't make things more complicated than necessary.

5. Myth: My business plan needs to be perfect before I can start my business.
If you wait for everything to be perfectly detailed, you may never start.
Solo Entrepreneur Reality: If you have at least a first draft that answers those ten basic questions, you are ready to launch your business! Make your business plan a living, evolving document. In the startup stages, review and update your plan every 2-3 months. As you grow and stabilize, you can slow down the review cycle to every 6-12 months. All business plans should be reviewed and updated at least once a year.
6. Myth: I have to do everything I say I'm going to do in my business plan, or I'm a failure.
Many Solo Entrepreneurs never start because of this myth-which leaves them feeling that the success of their future business suddenly rides on each stroke of the pen or click of the keyboard!
Solo Entrepreneur Reality: Think of your business plan as a roadmap for a trip. Expect to take some detours for road construction. Be flexible enough to take some exciting, unplanned side trips. And don't be surprised if instead of visiting Mount Rushmore, you decide to go to Yellowstone, if that turns out to meet your vacation goals better!
7. Myth: A good business plan has a nice cover, is at least 40 pages long, must be typed and double-spaced...
Business plans intended for investors, such as a bank or venture capitalist, must meet certain requirements that such investors expect.
Solo Entrepreneur Reality: As a Solo Entrepreneur, your business plan need only satisfy YOU. It might be scribbled on a napkin, on stickie notes on your wall, or consist of a collage of pictures and captions. It might be all in one document or scattered among several mediums. As long as you know it in your head and heart without having to look at it, and and it is easily accessible to you when you have doubts, that's all that is necessary.
8. Myth: I don't need a loan-so I don't need a business plan.
YOU are the investor in your business-and would you invest in the stock of some company without seeing a prospectus?
Solo Entrepreneur Reality: Seeing your plan in black and white (or color, if you prefer!), can give a whole new view on the financial viability of your business. If "doing the numbers" seems overwhelming, remember you don't need fancy spreadsheets. Just lay out a budget that shows where all the money is coming from (and going), and have an accountant review it for additional perspective.
9. Myth: My business plan is in my head-that's good enough.
I don't know about you, but I sometimes can't remember what I planned yesterday to do tomorrow, if I don't write it down!
Solo Entrepreneur Reality: There is a real power in writing down your plans. Some schools of thought advocate that the act of writing a plan down triggers our subconscious to start working on how to manifest that plan. And, of course, it's a lot easier to remember when you have it in front of you. And a lot easier to share and get feedback from your non-mind reading supporters.
10. Myth: Friends and family are the best sources of feedback and advice on my business plan.
If your brother is an accountant and your best friend is a market research expert, then this might be true.
Solo Entrepreneur Reality: As well meaning as our friends and family can often be, they just aren't the best way to get honest, objective guidance. Instead, seek out folks that have specific knowledge that will help you, are willing to be candid with you, and that have a genuine interest in helping you succeed. A business coach is one resource to consider!
Copyright 2004, Terri Zwierzynski - Accel Innovation, Inc.
Terri Zwierzynski is a self-employed business strategist and marketing consultant to solo entrepreneurs, and a grassroots promoter of the solo entrepreneur lifestyle. She runs [http://www.solo-e.com]Solo-E.com, the resource website for the self-employed which attracts thousands of solo home business owners monthly from over 100 countries on six continents (and was recently named a finalist for Website of the Year in the 4th Annual Stevie® Awards for Women in Business). Terri is also the co-author of [http://www.136waystomarket.com]136 Ways To Market Your Small or Solo Business.
Find more articles about [http://www.solo-e.com/library/articles/business-basics/business-planning.shtml]Business Planning at Solo-E.com, plus get a copy of our new ebook, "25 Surefire Ways to Capture More Clients, Get More Done in Less Time, and Make More Money -- in 90 Days or Less."
Article Source: [http://EzineArticles.com/?Top-10-Business-Plan-Myths-of-Solo-Entrepreneurs&id=5410] Top 10 Business Plan Myths of Solo Entrepreneurs

Popular Business Misconceptions Cost You Money!

Popular Business Misconceptions Cost You Money!
By [http://ezinearticles.com/?expert=J._Stephen_Pope]J. Stephen Pope
Faulty information costs you money! Which of these
popular business misconceptions do you believe?

Popular Misconception #1:
"We Only Need Our Books Done Once A Year For Tax Purposes."
Are Your Accounting Records Adequate To Run Your Business?

Although it is important to keep records for tax purposes,
it is not the only reason (or even the primary reason) good
accounting records should be kept. Another frequent reason
clients request financial statement preparation is to obtain
bank financing. Although important, this also is not the
primary purpose of keeping good records for your business.

Good recordkeeping will enable you to extract meaningful
financial information for your business that will help you
to manage it properly. If you can`t access this information,
you will not be able to manage your business properly. Bad
management leads to business failure.

Yes, the primary reason good accounting records should be
kept is to produce periodic (at least on a monthly basis)
financial statements for management information purposes.
Only with this current financial information can you properly
manage your business. This information can alert you to
declining sales, excessive expenses, tax opportunities,
cashflow problems, and many other vital concerns for your
business.

To be of value, this accounting system should be set up
with meaningful account categories and departments. It may
be cost-effective to have an outside accounting service do
the monthly bookkeeping. However, with accounting software
that is readily available, you don`t have to be an expert
bookkeeper to do your own books and extract meaningful
financial information.

If you do your monthly statements yourself, it would still
be prudent to have your accountant or business advisor help
you set up your system and, as well review such information
with you to discuss problems and opportunities.

Popular Misconception #2:
"Writing My Hobby Off As A Business Loss
Saves Me A Lot Of Income Tax!"
Is Your Hobby A Tax Write-Off?

If your business has no reasonable expectation of profit, if it is a
hobby and not really a business, you will ultimately fail in your tax
objective. Since your losses are being incurred for a hobby and not a
true profit generating business, the tax authorities will take the
position that you aren`t entitled to any deductions. This is a double
blow. First, you`re losing money. Second, you`re denied tax deductions.

It is true, however, that if you enjoy what you`re doing, you`ll do
better at it. You`ll be willing to work longer hours and you`ll be
willing to put up with more hardships in order to make your business a
success.

Rather than attempting to have the tax system subsidize your hobby,
why not turn that favorite pasttime into a real, profit generating
business? This is a doubly rewarding. First, you make money at
something you love doing. Secondly, the tax authorities legally have to
allow your reasonable expenses to earn your now substantial business
income.

Prove that you`re running a business by running a business. Prepare and
follow a proper business plan. Keep good accounting records with at
least monthly financial statements to give you the information you need
to manage your business. Above all, make money from what you do.

Popular Misconception #3:
"I Don`t Make Enough Money to Incorporate!"
Will Incorporating Really Benefit You?

Some persons resist the idea of incorporating themselves because
the tax savings may not justify the added costs of incorporation,
annual minutes, and extra tax returns. However, incorporation gives
advantages that go far beyond tax savings.

Insurance may give you some protection against loss. However, you
may suffer business losses and lawsuits that may not be covered. For
extra protection, consider incorporating yourself. The limited
liability of your own corporation alone may justify the additional cost
and complexity.

Corporations may also be used for income-splitting with your family,
as well as estate planning and retirement planning objectives.
Additionally, corporations lend some credibility to smaller businesses
and may enhance your image and prestige in the eyes of clients or
suppliers.

Lower corporate tax rates will generally apply on small business income.
Even in loss years, wages can be paid by the corporation to you so that
you may utilize personal tax credits available. If unincorporated, these
credits might be lost forever. The now larger corporate losses can be
carried forward to future (hopefully more profitable) years.

A full analysis of the advantages and disadvantages of incorporation is
beyond the scope of this report. However, being incorporated may give
you more flexibility and advantages than you originally anticipated.
Certainly, it is not prudent to reject it as an option simply because it
is more complicated and costly. In fact, it may be one of the best
investments you ever made.

Popular Misconception #4:
"I really need an office out.
Being home-based makes me look amateur!"
Is A Home Office REALLY Professional?

Many times small business persons make the mistake of generating
unnecessary overhead in order to impress clients and prospects. Often
this attitude leads to escalating debt and business failure. One such
example is getting an impressive, but expensive, commercial office
space.

Customers aren`t stupid. They can see when such outside space is
necessary or advantageous for them. They can also see when it is a
waste of money and designed to fuel your ego. What matters most to
clients is whether they are getting cost-effective results or not. If
your product or service delivers such excellent value, your customers
will be impressed and come back. In contrast, if one allows his ego to
get in the way of satisfying the customers` needs, they will go
elsewhere.

With the move to telecommuting, downsizing, networked communications,
and home-based businesses, operating from your home office is actually
smart and trendy. Can you think of a more appropriate location for a
consulting firm specializing in home-based businesses? They of all
businesses should set the example in cutting unnecessary expenses and
operating efficiently.

This is not to say that there aren`t any disadvantages to being
home-based. One certainly must be well organized, disciplined, and
willing to follow good time management principles. This alone could
mark you as more professional than other businesses, home-based or not.

Expensive office space is not the answer to reflecting a professional
image. If you are truly concerned about your image, offer quality
service. Make sure that all your corporate communications (telephone,
websites, printed materials, et cetera) reflect the professional nature
of your business.

Popular Misconception #5:
"Since we`re not seeking financing,
we don`t need a business plan."
Do You REALLY Need a Business Plan?

To obtain financing, many persons will prepare a business plan.
Although entrepreneurs will go to great lengths to get their loan or
capital, these same business persons will not bother to plan ahead very
far or analyse their business.   Even if you required no additional
money, preparing a business plan can help you to succeed in your
business.

Running a business without a plan is like going on a trip without a
map,sufficient gas, money, or even a destination. Just as you wouldn`t
go on a vacation without some planning, no business can be successful
without it. Putting that plan in writing helps you to think out a
strategy for successfully operating and growing your business.

Where is your business today? Where will it be tomorrow? What is your
mission statement? What product lines are profitable? Which ones
aren`t? What business do you think you are in? What business do your
clients think you are in? Should you be in a different business? Is
your product or service less attractive to your clients? How are
competition, global commerce, technological and social changes affecting
your company? What is your competitive strength? What are your
weaknesses? Who are your biggest competitors? What are their
weaknesses and strengths? What is your marketing strategy?

What are your projected income and expenses and cashflow for the next
year? How about the next five years? Do you have a capital budget?
What determines whether you buy an asset or not? Do you have an exit
strategy? How will you manage growth? Do you have a financial plan? Do
you have an operations plan? What definite sales and net profit targets
have you set for this year and the next five years? What factors could
interfere with the attaining of these goals? What contingency plans have
you made to deal with such problems?

The purpose of these questions is to get you thinking and planning.
If you fail to plan, you plan to fail. Although your accountant or
business advisor can help you prepare your business plan, only you can
set the appropriate goals and follow through on them. Yes, you
definitely need a business plan, not just for obtaining capital, but as
a roadmap for your business.

Popular Misconception #6:
"I like bartering with clients
because it saves paperwork and taxes."
Are You Reporting Barter Transactions?

Bartering is an excellent way of doing business. However, contrary to
popular belief, some barter transactions are taxable, both for income
and sales tax purposes.

Legally, you must maintain adequate financial records for your business.
Barter transactions made by your business must be reported to the
appropriate taxation authorities and taxes paid.   However, transactions
between friends not engaging in business with each other may not be
taxable.

If you are an auto mechanic and I am an accountant and I swap accounting
services for your car repair services, the transaction in this case is
most likely taxable, even if we are friends. However, your accounting
fees should be deductible as a business expense and so should the
business portion of my car expenses. Note also that sales and similar
taxes may apply on this transaction.

On the other hand, if I trade accounting services for a vacation for my
family, I should really declare the value of such services as income.
The firm supplying the vacation would be able to deduct that value as
accounting fees.   Any sales or similar taxes would have to be paid on
such transaction.

Many persons don`t record such transactions. For some, it may be a
matter of wanting to believe that you don`t need to be bothered with the
extra paperwork or taxes. Remember, though, that ignorance of the law
is no excuse. Legally, you must keep proper records and pay all taxes
due.

Popular Misconception #7:
"All My Workers Are Self-Employed, So I Don`t Need
To Bother With Payroll Or Workers` Compensation."
Do You Need To Pay Payroll Taxes?

To save on payroll taxes and workers` compensation premiums, many
employers arrange their affairs in such a way that those working for
them are self-employed, independent contractors. This is good tax
planning.

On the other hand, some employers take the position that all those
working for them are self-employed, whether they are or not. Although
it is tempting to eliminate payroll taxes and workers` compensation
premiums, care should be taken to do so legally.

Whether those working for you are employed or self-employed is a
question of fact (which can be determined by the Courts). Do you supply
the tools and vehicles? Do you determine the working hours? Do you
have the right to control how the job will be done? Do you pay a
flat-rate or by-the-hour or a salary? Does your worker have other
clients?

By asking several such questions, a pattern will emerge as to whether
your worker is employed or self-employed. If it turns out that your
worker fits all the criteria of an employee, don`t say he`s
self-employed. On audit, you would still be responsible for the payroll
taxes (and penalties and interest as well).

Even if your workers are considered independent contractors by the
Income Tax Department, it is still possible that they will be considered
to be "workers" for purposes of Workers` Compensation legislation.
Thus, it is the responsibility of the employer to determine whether such
coverage is necessary or not. Failure to obtain proper coverage could
subject you to substantial (and unnecessary) costs.

In review, calling someone self-employed, doesn`t necessarily make them
self-employed. If you have a dog, call it a dog. Your position that
your dog is really a cat will not be successful. Likewise, make sure
that your position regarding your workers is legally correct.

Popular Misconception #8:
"My Accountant Charges Too Much.
I Can`t Afford It Anymore."
Is Your Accountant Worth His Fee?

Many business persons view bookkeeping, accounting, and tax preparation
as necessary evils. In their view, accounting fees are an expense to be
reduced, deferred or even completely eliminated.

A good accountant, however, can give you benefits far in excess of the
fees charged. Well-designed accounting systems will enable you to
extract meaningful financial information for your business that will
help you to manage it properly, avoid business failure, and alert you to
declining sales, excessive expenses, tax opportunities, cashflow
problems, and many other vital concerns for your business.

Your accountant can save you lots of money with the advice you receive
on tax and other business matters. As well, a competent accountant can
be a valuable resource in discussing business problems and opportunities
with you.

Popular Misconception #9:
"Nobody Makes Money On The Internet."
Can You REALLY Profit From The Internet?

Many people feel that the Internet is all hype. Many others feel that
it is overrated. Still others are of the opinion that it may be good
for some types of business, but not theirs.

Typical comments heard include: "I`ve lost money on the Internet...Major
corporations have lost millions...Do you personally know anyone who has
made money from the Internet?"

However, if you check out the list of recent billionaires, a high
proportion of these are Internet-related, and many of them under
forty years of age. As well as the very rich, you can find many cases
of more modest financial prosperity resulting from Internet commerce.

It is true that many are losing money on the Internet. It is also true
that many don`t know what they`re doing. However, with the proper
assistance, you, too, could profit from the net.
J. Stephen Pope, President of Pope Consulting Inc., http://www.popeconsultinginc.com/ has been helping clients to earn maximum business profits for over
twenty-five years.

For valuable Work at Home Small Business Ideas, visit http://www.yenommarketinginc.com/
Article Source: [http://EzineArticles.com/?Popular-Business-Misconceptions-Cost-You-Money!&id=252] Popular Business Misconceptions Cost You Money!

วันพุธที่ 19 มกราคม พ.ศ. 2554

What to Really Expect When Buying A Bank Owned Property

What to Really Expect When Buying A Bank Owned Property
By [http://ezinearticles.com/?expert=Aaron_Gordon]Aaron Gordon
In recent years, most new buyers wanted to buy a new home from a homebuilder. Today, nearly every buyer I pre-qualify today says the same thing. "I want to buy a bank-owned property."

In some counties around the country, foreclosures are at all-time highs. As a result, in today's market, the best deal for homebuyers is quite often the bank-owned property.

While many real estate professionals claim their business is off by as much as 60%, agents who concentrate on bank-owned properties are experiencing the second coming of the gold rush.
In the Las Vegas, the bank-owned real estate market is somewhat of an unknown. For many years, someone who was on the verge of foreclosure simply listed their home for sale and found a willing buyer to step in and save the day. As a result, many experienced real estate professionals and homebuyers are not as familiar with the process of buying a bank-owned property.   Hopefully, this newsletter will help.

A bank-owned property or REO for "Real Estate Owned" is any property where the lender or bank has taken back ownership through a foreclosure, short sale, or other related act.

In the Las Vegas market today our inventory has swelled with this product.   Many pundits believe this is the very tip of the iceberg and many, many more are coming.

It's important to understand there is a difference between a foreclosure and an REO. The REO is what happens after the act of foreclosure and after an unsuccessful foreclosure auction.
This newsletter will help you understand the process of buying a property that is owned by the bank. This is not about buying a home in foreclosure or in pre-foreclosure.

There are far more benefits, far less stress, and it's much easier to buy an REO property than a pre-foreclosure.    Let's walk through it.

So Joe Smith bought a house in 2005 for $350,000.   He did 100% financing, interest only, and he recently lost his job. Joe couldn't make his mortgage payments so he called a real estate agent to sell the house. The agent regretfully advises him his house is worth $340,000 today and by the time he pays commissions, closing costs and late payments to the mortgage company, he will have to write a check to close his house for $30,000.

Joe can't afford to do that so when he fails to make his mortgage payments, he is eventually foreclosed on by his bank, and evicted from his home.

Now, the bank has a foreclosure sale or auction.   They require a minimum bid of $378,000 for the property. This minimum bid includes the balance of the loan, accrued interest, the attorney's fees for the legal action to get to this point, and all of the other money associated with this foreclosure.

At the foreclosure auction, the bank requires that any bidder have their $378,000 money ready that day in the form of a cashier's check for the full amount of their bid.   They also let the bidders know that they will get the house "as is," with no repair allowance, and with all other liens that are on it.

Since Mr. Smith didn't have much equity, neither does the bank, and when they add all of these fees to the auction price, the minimum bid becomes a price at or well above market value, like in this case $378,000.   That means it rarely ends up getting bid on.
This means the property ends up back in the hands of the bank and now you have an REO.

The bank now owns the property, and it gets recorded on their books as a sellable asset.   Banks are in the business of loaning money and maximizing their value through strong business practices like checking, savings, lending, and making money for their shareholders.

They are not usually in the business of owning real estate.
They want to turn this asset into cash, so they put the home on the market with the goal of selling it as quickly as possible.

To accomplish this they will usually reduce the price of all of the costs they had at the foreclosure auction like the legal fees and such.    They will list it and market the property with an experience REO real estate agent who can advertise it and put it on lock box for easy access. They will get rid of all of the liens.
They will put the property in the very best position possible to move. So in this case, you would expect the house to go back on the market for somewhere around the market value of $340,000.

But don't read too much into this.   Just because they want to sell it fast doesn't necessarily mean that they will dramatically reduce the price further below market value.   In some cases they will, but in others they won't.   It's a sell-able asset and they want to make as much as possible.

This is where you come in.

First, you will want to contact a lender to make sure you are qualified to buy a home, the home is qualified for the lender, and how much you are qualified to buy.

Next, and equally as important, you want to contact a real estate agent and let them know you are interested in purchasing an REO.
Not all REO properties are a bargain.   Its important that you hire a real estate professional who can let you know if you are getting a deal or not. Ask your agent to do a "CMA" or "comparative market analysis" on the property and find out what its worth in today's market.

Do your research before making an offer. Buying a bank-owned property is often a great opportunity but is also has its challenges.

I spoke with Dan Humeston, with Century 21 Moneyworld, who is considered one of Las Vegas' top REO agents.   No one in this market today is busier than Dan.

A recent report listed Dan as the number one producing real estate agent in Las Vegas so far in 2007 and by a far margin. I understand he is currently #3 nationwide for all Century 21 agents.

I asked Dan, who is a long-time expert in REO, what you can do to make sure your offers are accepted and also what you can expect when making an offer on a bank-owned property.

Dan says agents and their clients have to understand what they are getting into before moving forward.   Here is what you need to know.

#1)     KNOW THE HOUSE AND HOW THE LOAN APPROVAL PROCESS WORKS ON BANK-OWNED PROPERTIES
Banks are exempt from providing you with a real property disclosure. Therefore, before you even think about making an offer you have to do an initial inspection of the house. You want to understand what damage has been done to the home and what your lender says about it. Some of this damage may not make it through the lending process and you need to be aware of that before making your offer.

Items like a damaged roof, broken windows, AC and heating problems, exposed wiring, or missing flooring can make it so your lender cannot loan on that home.   Before making an offer, make a list of the repairs that you see that need to be done. Go over this list with the lender and the appraiser then decide whether or not to move forward.

Dan says this is the number one problem he faces today on offers. The client makes an offer but has no idea how the repairs necessary will affect his loan.   The bank knows what damage will not make it through the lending process and may reject the offer simply because you haven't done your research.

Knowing if the home is able to get a loan on it is something that needs to be done before you make an offer. The house has to qualify just like the borrower's do.

#2)     DEALING WITH REPAIRS
A quick tour of REO properties and you soon discover that people going into foreclosure rarely take care of the home at the end. It can take four to eight months for a person to be foreclosed on.   They sometimes get angry and knowing they are losing the home anyway, they fail to maintain it in a satisfactory condition. It is not uncommon during your tour to find dead landscaping, broken windows, holes in walls, stained carpet, broken fixtures, missing appliances, and much worse.

Banks will often ask that you buy the property "as is."    You probably assume this means none of those items will be fixed should you decide to buy the home. However, Dan says that isn't always the case.    On occasion, you may be able to negotiate to get some minor repairs done.

Dan recommends that once again, before you make your offer, you analyze the repairs that are necessary. Get with the lender and his appraiser and find out which repairs will be absolutely necessary for the loan to happen. Put together a price for these, let's say $3500.

When you make your offer, ask for $3500 in "appraisal-condition repairs" or "lender-required repairs." Use those exact terms. Dan says he may be able to sell these to the bank.   If you just say "$3500 for miscellaneous repairs," you dramatically reduce your chance of acceptance.

However, let's say you did your initial inspection of the house, you didn't see a lot of problems and you make your offer.   During the formal inspection with the home inspector, you learn the home has $10,000 in roof damage. Your lender tells you the roof needs to be repaired before you close escrow.   The bank refuses to pay for it as it wasn't in the original offer. Don't plan on the bank giving you access to the home during escrow to fix this, Dan says. The liability and the risk are too high for the bank.

#3)     SLOWER PROCESSING OF YOUR OFFER
You will make your initial offer in writing. Unless it's a full list offer with no additional concessions, the offer may require the listing agent to go back to the seller, the bank, for approval.   The bank may be in a different time zone.    Banks are closed on weekends.

Also, always remember, that banks are in the money business, not the real estate business.    Your transaction is secondary to their day-to-day business and may be treated as such.

If they have a dedicated department that handles REO properties for them, and many do, they may have 3-4 people who have to review it first.

I have heard stories of banks taking 30-45 days to answer counter offers. In this time, they may get an offer better than yours and you are out. If you really love the house and think it's a great deal, you will want to be very careful about your counter offers.

I recently heard a story about a bank that took nearly 50 days to answer a counter offer that was only 3% off of list. The buyer got angry on the 45th day and walked. Five days later when the bank called to say they accepted the offer, the buyer had moved on. There is little sense of urgency from banks today if the offer is not clean and near full price.

Dan says if you want this to happen quickly, make a clean offer, with a higher net to the bank, and get your due diligence done in 10 days or less. If you are an agent and you want 2 additional points, make a higher offer. The bank doesn't care what you make, they have a net figure in mind. And don't ask for the appraisal to be paid by the bank.   They rarely will accept that.

When you make your offer feel free to ask for what you want, like closing costs, repairs, and more. However, the more you ask for, the longer you will want to plan on waiting for the answer.

Its also very important that you or your real estate agent find out how much the bank has on the books for the loan on the property. If they have $350,000 on the books and they are listing it for $310,000, they will not be too excited about an offer for $290,000 where you are asking for closing costs.

If they have $280,000 on the books and they are listing it for $310,000, your offer for $290,000 plus closing costs may be a winner.

In a declining market it's very important to know the actual market value of the property. I am doing a loan for a client who saw an REO that was listed for $465,000.    His agent advised him the property was only worth $420,000. However, the bank had taken it back with a loan on it for $510,000.   He offered $400,000 and got it.

Dan says banks decide how much to list their properties by studying the recent comps, not by what they have in the deal.   They want to net as much as possible and that may mean they are selling it a big profit, not a loss.

#4)     HIGHER EARNEST MONEY DEPOSITS
In today's market with 23,000 houses, many sellers will let you make an offer with a deposit of $1000 or less. With bank-owned properties this number will usually be much higher. Plan on $5000-$20,000 or 3%-5% of the asking price. I recently saw $15,000 of earnest required on a $300,000 home.

#5)     PREQUALIFYING WITH THEIR BANK
The bank that owns the property may ask you to get pre-qualified with their bank before making your offer. You don't have to use them. You can choose whatever bank you want for your loan but they want to make sure you are a real candidate.   They also want to try and make some more money on the home by being your lender.

I recently pre-qualified a low credit score buyer who was putting down 30% on an REO property that was held by a major bank who recently reduced their subprime guidelines. He couldn't qualify with them but I demonstrated that I had him approved. They still turned him down.

On the flip side, if you end up in that spot, I highly recommend that you have your lender contact the listing agent to walk him through the strengths of your loan.
I have another loan currently where the property was the REO of another large bank, the borrower went through their pre-qualification process, and his offer was declined. I spoke with the listing agent, went over the entire loan with him and its strengths, presented him a detailed approval letter from my in-house underwriter, as well as a two-week close of escrow, and we got the deal.

Dan says these loan requests usually come from a different department at the bank that sees this as an opportunity to generate revenue. The REO departments simply want these homes off their books and don't care who does the loan.   However they have a right to make sure your lender is not a flake and the pre-qualification letter is real. Asking you to pre-qualify through them just to test your worthiness is not an outrageous request.

#6)     THE HOME INSPECTION IS MORE IMPORTANT THAN EVER
Make sure you hire a very reputable home inspector and that he inspects the home very carefully.   A lot of damage could have been done by the previous owners and a lot of it unseen by just walking through.   As we discussed earlier, before making your offer you want to be sure to factor in the costs of the repairs you will have to do. However, you may want to make sure your offer is contingent on termination if the damages are far greater than originally disclosed and expected.

If your home inspector turns up additional damage like this, this could be an opportunity.   If you are still willing to go forward, contact the bank and renegotiate the deal with the new information.   They may be willing to lower the price and you may get a well-earned and valuable price break. However, you don't want to plan on this.

A client of mine, who specializes in fixer-uppers, has had some success renegotiating on bank-owned properties by presenting a detailed list of the damage he sees to the bank before he makes an offer. After the formal inspection, he does a new list.

He gets a professional contractor to prepare a cost analysis to fix the damage after he gets the report from the inspector and then presents this to the bank.    Once again, this won't always work on "as is" but can be very effective as it gives the bank the opportunity to see a real list of the damage with details of the costs that it will take to repair.
The bottom line to buying a bank-owned property is get pre-qualified as a borrower, get the house's damage pre-qualified with your lender to review the possible challenges in the loan before making your offer, don't plan on the bank's willingness to "give the house" away, and be patient for answers.

If you are preparing to make an offer on a bank-owned property, you want some advice, or you simply want more information on bank-owned properties, and you want to reach Dan Humeston, you can do so at [mailto:humeston@GTE.net]humeston@GTE.net.
Aaron Gordon is a top-producing Senior Mortgage Consultant with Maverick Residential Mortgage Corporation in Las Vegas, NV. His monthly newsletter currently goes out to over 10,000 real estate agents and other professionals natiowide.    He helps over 200 families each year who trust him in their mortgage needs in many states. He can be reached by email at [mailto:aarong@maverickmortgage.com]aarong@maverickmortgage.com or you can see more newsletters at http://www.aarongordon.net/
Article Source: [http://EzineArticles.com/?What-to-Really-Expect-When-Buying-A-Bank-Owned-Property&id=661202] What to Really Expect When Buying A Bank Owned Property

Bankers' Banks- The Role of Central Banks in Banking Crises

Bankers' Banks- The Role of Central Banks in Banking Crises
By [http://ezinearticles.com/?expert=Sam_Vaknin,_Ph.D.]Sam Vaknin, Ph.D.
Central banks are relatively new inventions. An American President (Andrew Jackson) even cancelled its country's central bank in the nineteenth century because he did not think that it was very important. But things have changed since. Central banks today are the most important feature of the financial systems of most countries of the world.
Central banks are a bizarre hybrids. Some of their functions are identical to the functions of regular, commercial banks. Other functions are unique to the central bank. On certain functions it has an absolute legal monopoly.
Central banks take deposits from other banks and, in certain cases, from foreign governments which deposit their foreign exchange and gold reserves for safekeeping (for instance, with the Federal Reserve Bank of the USA). The Central Bank invests the foreign exchange reserves of the country while trying to maintain an investment portfolio similar to the trade composition of its client - the state. The Central bank also holds onto the gold reserves of the country. Most central banks have lately tried to get rid of their gold, due to its ever declining prices. Since the gold is registered in their books in historical values, central banks are showing a handsome profit on this line of activity. Central banks (especially the American one) also participate in important, international negotiations. If they do not do so directly - they exert influence behind the scenes. The German Bundesbank virtually dictated Germany's position in the negotiations leading to the Maastricht treaty. It forced the hands of its co-signatories to agree to strict terms of accession into the Euro single currency project. The Bunbdesbank demanded that a country's economy be totally stable (low debt ratios, low inflation) before it is accepted as part of the Euro. It is an irony of history that Germany itself is not eligible under these criteria and cannot be accepted as a member in the club whose rules it has assisted to formulate.
But all these constitute a secondary and marginal portion of a central banks activities.
The main function of a modern central bank is the monitoring and regulation of interest rates in the economy. The central bank does this by changing the interest rates that it charges on money that it lends to the banking system through its "discount windows". Interest rates is supposed to influence the level of economic activity in the economy. This supposed link has not unequivocally proven by economic research. Also, there usually is a delay between the alteration of interest rates and the foreseen impact on the economy. This makes assessment of the interest rate policy difficult. Still, central banks use interest rates to fine tune the economy. Higher interest rates - lower economic activity and lower inflation. The reverse is also supposed to be true. Even shifts of a quarter of a percentage point are sufficient to send the stock exchanges tumbling together with the bond markets. In 1994 a long term trend of increase in interest rate commenced in the USA, doubling interest rates from 3 to 6 percent. Investors in the bond markets lost 1 trillion (=1000 billion!) USD in 1 year. Even today, currency traders all around the world dread the decisions of the Bundesbank and sit with their eyes glued to the trading screen on days in which announcements are expected.
Interest rates is only the latest fad. Prior to this - and under the influence of the Chicago school of economics - central banks used to monitor and manipulate money supply aggregates. Simply put, they would sell bonds to the public (and, thus absorb liquid means, money) - or buy from the public (and, thus, inject liquidity). Otherwise, they would restrict the amount of printed money and limit the government's ability to borrow. Even prior to that fashion there was a widespread belief in the effectiveness of manipulating exchange rates. This was especially true where exchange controls were still being implemented and the currency was not fully convertible. Britain removed its exchange controls only as late as 1979. The USD was pegged to a (gold) standard (and, thus not really freely tradable) as late as 1971. Free flows of currencies are a relatively new thing and their long absence reflects this wide held superstition of central banks. Nowadays, exchange rates are considered to be a "soft" monetary instrument and are rarely used by central banks. The latter continue, though, to intervene in the trading of currencies in the international and domestic markets usually to no avail and while losing their credibility in the process. Ever since the ignominious failure in implementing the infamous Louvre accord in 1985 currency intervention is considered to be a somewhat rusty relic of old ways of thinking.
Central banks are heavily enmeshed in the very fabric of the commercial banking system. They perform certain indispensable services for the latter. In most countries, interbank payments pass through the central bank or through a clearing organ which is somehow linked or reports to the central bank. All major foreign exchange transactions pass through - and, in many countries, still must be approved by - the central bank. Central banks regulate banks, licence their owners, supervise their operations, keenly observes their liquidity. The central bank is the lender of last resort in cases of insolvency or illiquidity.
The frequent claims of central banks all over the world that they were surprised by a banking crisis looks, therefore, dubious at best. No central bank can say that it had no early warning signs, or no access to all the data - and keep a straight face while saying so. Impending banking crises give out signs long before they erupt. These signs ought to be detected by a reasonably managed central bank. Only major neglect could explain a surprise on behalf of a central bank.
One sure sign is the number of times that a bank chooses to borrow using the discount windows. Another is if it offers interest rates which are way above the rates offered by other financing institutions. There are may more signs and central banks should be adept at reading them.
This heavy involvement is not limited to the collection and analysis of data. A central bank - by the very definition of its functions - sets the tone to all other banks in the economy. By altering its policies (for instance: by changing its reserve requirements) it can push banks to insolvency or create bubble economies which are bound to burst. If it were not for the easy and cheap money provided by the Bank of Japan in the eighties - the stock and real estate markets would not have inflated to the extent that they have. Subsequently, it was the same bank (under a different Governor) that tightened the reins of credit - and pierced both bubble markets.
The same mistake was repeated in 1992-3 in Israel - and with the same consequences.
This precisely is why central banks, in my view, should not supervise the banking system.
When asked to supervise the banking system - central banks are really asked to draw criticism on their past performance, their policies and their vigilance in the past. Let me explain this statement:
In most countries in the world, bank supervision is a heavy-weight department within the central bank. It samples banks, on a periodic basis. Then, it analyses their books thoroughly and imposes rules of conduct and sanctions where necessary. But the role of central banks in determining the health, behaviour and operational modes of commercial banks is so paramount that it is highly undesirable for a central bank to supervise the banks. As I have said, supervision by a central bank means that it has to criticize itself, its own policies and the way that they were enforced and also the results of past supervision. Central banks are really asked to cast themselves in the unlikely role of impartial saints.
A new trend is to put the supervision of banks under a different "sponsor" and to encourage a checks and balances system, wherein the central bank, its policies and operations are indirectly criticized by the bank supervision. This is the way it is in Switzerland and - with the exception of the Jewish money which was deposited in Switzerland never to be returned to its owners - the Swiss banking system is extremely well regulated and well supervised.
We differentiate between two types of central bank: the autonomous and the semi-autonomous.
The autonomous bank is politically and financially independent. Its Governor is appointed for a period which is longer than the periods of the incumbent elected politicians, so that he will not be subject to political pressures. Its budget is not provided by the legislature or by the executive arm. It is self sustaining: it runs itself as a corporation would. Its profits are used in leaner years in which it loses money (though for a central bank to lose money is a difficult task to achieve).
In Macedonia, for instance, annual surpluses generated by the central bank are transferred to the national budget and cannot be utilized by the bank for its own operations or for the betterment of its staff through education.
Prime examples of autonomous central banks are Germany's Bundesbank and the American Federal Reserve Bank.
The second type of central bank is the semi autonomous one. This is a central bank that depends on the political echelons and, especially, on the Ministry of Finance. This dependence could be through its budget which is allocated to it by the Ministry or by a Parliament (ruled by one big party or by the coalition parties). The upper levels of the bank - the Governor and the Vice Governor - could be deposed of through a political decision (albeit by Parliament, which makes it somewhat more difficult). This is the case of the National Bank of Macedonia which has to report to Parliament. Such dependent banks fulfil the function of an economic advisor to the government. The Governor of the Bank of England advises the Minister of Finance (in their famous weekly meetings, the minutes of which are published) about the desirable level of interest rates. It cannot, however, determine these levels and, thus is devoid of arguably the most important policy tool. The situation is somewhat better with the Bank of Israel which can play around with interest rates and foreign exchange rates - but not entirely freely.
The National Bank of Macedonia (NBM) is highly autonomous under the law regulating its structure and its activities. Its Governor is selected for a period of seven years and can be removed from office only in the case that he is charged with criminal deeds. Still, it is very much subject to political pressures. High ranking political figures freely admit to exerting pressures on the central bank (at the same breath saying that it is completely independent).
The NBM is young and most of its staff - however bright - are inexperienced. With the kind of wages that it pays it cannot attract the best available talents. The budgetary surpluses that it generates could have been used for this purpose and to higher world renowned consultants (from Switzerland, for instance) to help the bank overcome the experience gap. But the money is transferred to the budget, as we said. So, the bank had to do with charity received from USAID, the KNOW-HOW FUND and so on. Some of the help thus provided was good and relevant - other advice was, in my view, wrong for the local circumstances. Take supervision: it was modelled after the Americans and British. Those are the worst supervisors in the West (if we do not consider the Japanese).
And with all this, the bank had to cope with extraordinarily difficult circumstances since its very inception. The 1993 banking crisis, the frozen currency accounts, the collapse of the Stedilnicas (crowned by the TAT affair). Older, more experienced central banks would have folded under the pressure. Taking everything under consideration, the NBM has performed remarkably well.
The proof is in the stability of the local currency, the Denar. This is the main function of a central bank. After the TAT affair, there was a moment or two of panic - and then the street voted confidence in the management of the central bank, the Denar-DM rate went down to where it was prior to the crisis.
Now, the central bank is facing its most daunting task: facing the truth without fear and without prejudice. Bank supervision needs to be overhauled and lessons need to be learnt. The political independence of the bank needs to be increased greatly. The bank must decide what to do with TAT and with the other failing Stedilnicas?
They could be sold to the banks as portfolios of assets and liabilities. The Bank of England sold Barings Bank in 1995 to the ING Dutch Bank.
The central bank could - and has to - force the owners of the failing Stedilnicas to increase their equity capital (by using their personal property, where necessary). This was successfully done (again, by the Bank of England) in the 1991 case of the BCCI scandal.
The State of Macedonia could decide to take over the obligations of the failed system and somehow pay back the depositors. Israel (1983), the USA (1985/7) and a dozen other countries have done so recently.
The central bank could increase the reserve requirements and the deposit insurance premiums.
But these are all artificial, ad hoc, solutions. Something more radical needs to be done:
A total restructuring of the banking system. The Stedilnicas have to be abolished. The capital required to open a bank or a branch of a bank has to be lowered to 4 million DM (to conform with world standards and with the size of the economy of Macedonia). Banks should be allowed to diversify their activities (as long as they are of a financial nature), to form joint venture with other providers of financial services (such as insurance companies) and to open a thick network of branches.
And bank supervision must be separated from the central bank and set to criticize the central bank and its policies, decisions and operations on a regular basis.
There are no reasons why Macedonia should not become a financial centre of the Balkans - and there are many reasons why it should. But, ultimately, it all depends on the Macedonians themselves.
About The Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and "After the Rain - How the West Lost the East". He is a columnist in "Central Europe Review", United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor to the Government of Macedonia.
His web site: http://samvak.tripod.com/
Article Source: [http://EzineArticles.com/?Bankers-Banks--The-Role-of-Central-Banks-in-Banking-Crises&id=32548] Bankers' Banks- The Role of Central Banks in Banking Crises

Is My Money Safe? On The Soundness Of Our Banks

Is My Money Safe? On The Soundness Of Our Banks
By [http://ezinearticles.com/?expert=Sam_Vaknin,_Ph.D.]Sam Vaknin, Ph.D.
Banks are institutions wherein miracles happen regularly. We rarely entrust our money to anyone but ourselves - and our banks. Despite a very chequered history of mismanagement, corruption, false promises and representations, delusions and behavioural inconsistency - banks still succeed to motivate us to give them our money. Partly it is the feeling that there is safety in numbers. The fashionable term today is "moral hazard". The implicit guarantees of the state and of other financial institutions moves us to take risks which we would, otherwise, have avoided. Partly it is the sophistication of the banks in marketing and promoting themselves and their products. Glossy brochures, professional computer and video presentations and vast, shrine-like, real estate complexes all serve to enhance the image of the banks as the temples of the new religion of money.
But what is behind all this? How can we judge the soundness of our banks? In other words, how can we tell if our money is safely tucked away in a safe haven?
The reflex is to go to the bank's balance sheets. Banks and balance sheets have been both invented in their modern form in the 15th century. A balance sheet, coupled with other financial statements is supposed to provide us with a true and full picture of the health of the bank, its past and its long-term prospects. The surprising thing is that - despite common opinion - it does. The less surprising element is that it is rather useless unless you know how to read it.
Financial Statements (Income - aka Profit and Loss - Statement, Cash Flow Statement and Balance Sheet) come in many forms. Sometimes they conform to Western accounting standards (the Generally Accepted Accounting Principles, GAAP, or the less rigorous and more fuzzily worded International Accounting Standards, IAS). Otherwise, they conform to local accounting standards, which often leave a lot to be desired. Still, you should look for banks, which make their updated financial reports available to you. The best choice would be a bank that is audited by one of the Big Six Western accounting firms and makes its audit reports publicly available. Such audited financial statements should consolidate the financial results of the bank with the financial results of its subsidiaries or associated companies. A lot often hides in those corners of corporate ownership.
Banks are rated by independent agencies. The most famous and most reliable of the lot is Fitch-IBCA. Another one is Thomson BankWatch-BREE. These agencies assign letter and number combinations to the banks, that reflect their stability. Most agencies differentiate the short term from the long term prospects of the banking institution rated. Some of them even study (and rate) issues, such as the legality of the operations of the bank (legal rating). Ostensibly, all a concerned person has to do, therefore, is to step up to the bank manager, muster courage and ask for the bank's rating. Unfortunately, life is more complicated than rating agencies would like us to believe. They base themselves mostly on the financial results of the bank rated, as a reliable gauge of its financial strength or financial profile. Nothing is further from the truth.
Admittedly, the financial results do contain a few important facts. But one has to look beyond the naked figures to get the real - often much less encouraging - picture.
Consider the thorny issue of exchange rates. Financial statements are calculated (sometimes stated in USD in addition to the local currency) using the exchange rate prevailing on the 31st of December of the fiscal year (to which the statements refer). In a country with a volatile domestic currency this would tend to completely distort the true picture. This is especially true if a big chunk of the activity preceded this arbitrary date. The same applies to financial statements, which were not inflation-adjusted in high inflation countries. The statements will look inflated and even reflect profits where heavy losses were incurred. "Average amounts" accounting (which makes use of average exchange rates throughout the year) is even more misleading. The only way to truly reflect reality is if the bank were to keep two sets of accounts: one in the local currency and one in USD (or in some other currency of reference). Otherwise, fictitious growth in the asset base (due to inflation or currency fluctuations) could result.
Another example: in many countries, changes in regulations can greatly effect the financial statements of a bank. In 1996, in Russia, to take an example, the Bank of Russia changed the algorithm for calculating an important banking ratio (the capital to risk weighted assets ratio). Unless a Russian bank restated its previous financial statements accordingly, a sharp change in profitability appeared from nowhere.
The net assets themselves are always misstated: the figure refers to the situation on 31/12. A 48-hour loan given to a collaborating firm can inflate the asset base on the crucial date. This misrepresentation is only mildly ameliorated by the introduction of an "average assets" calculus. Moreover, some of the assets can be interest earning and performing - others, non-performing. The maturity distribution of the assets is also of prime importance. If most of the bank's assets can be withdrawn by its clients on a very short notice (on demand) - it can swiftly find itself in trouble with a run on its assets leading to insolvency.
Another oft-used figure is the net income of the bank. It is important to distinguish interest income from non-interest income. In an open, sophisticated credit market, the income from interest differentials should be minimal and reflect the risk plus a reasonable component of income to the bank. But in many countries (Japan, Russia) the government subsidizes banks by lending to them money cheaply (through the Central Bank or through bonds). The banks then proceed to lend the cheap funds at exorbitant rates to their customers, thus reaping enormous interest income. In many countries the income from government securities is tax free, which represents another form of subsidy. A high income from interest is a sign of weakness, not of health, here today, there tomorrow. The preferred indicator should be income from operations (fees, commissions and other charges).
There are a few key ratios to observe. A relevant question is whether the bank is accredited with international banking agencies. The latter issue regulatory capital requirements and other defined ratios. Compliance with these demands is a minimum in the absence of which, the bank should be regarded as positively dangerous.
The return on the bank's equity (ROE) is the net income divided by its average equity. The return on the bank's assets (ROA) is its net income divided by its average assets. The (tier 1 or total) capital divided by the bank's risk weighted assets - a measure of the bank's capital adequacy. Most banks follow the provisions of the Basel Accord as set by the Basel Committee of Bank Supervision (also known as the G10). This could be misleading because the Accord is ill equipped to deal with risks associated with emerging markets, where default rates of 33% and more are the norm. Finally, there is the common stock to total assets ratio. But ratios are not cure-alls. Inasmuch as the quantities that comprise them can be toyed with - they can be subject to manipulation and distortion. It is true that it is better to have high ratios than low ones. High ratios are indicative of a bank's underlying strength of reserves and provisions and, thereby, of its ability to expand its business. A strong bank can also participate in various programs, offerings and auctions of the Central Bank or of the Ministry of Finance. The more of the bank's earnings are retained in the bank and not distributed as profits to its shareholders - the better these ratios and the bank's resilience to credit risks. Still, these ratios should be taken with more than a grain of salt. Not even the bank's profit margin (the ratio of net income to total income) or its asset utilization coefficient (the ratio of income to average assets) should be relied upon. They could be the result of hidden subsidies by the government and management misjudgement or understatement of credit risks.
To elaborate on the last two points: a bank can borrow cheap money from the Central Bank (or pay low interest to its depositors and savers) and invest it in secure government bonds, earning a much higher interest income from the bonds' coupon payments. The end result: a rise in the bank's income and profitability due to a non-productive, non-lasting arbitrage operation. Otherwise, the bank's management can understate the amounts of bad loans carried on the bank's books, thus decreasing the necessary set-asides and increasing profitability. The financial statements of banks largely reflect the management's appraisal of the business. This is a poor guide to go by.
In the main financial results' page of a bank's books, special attention should be paid to provisions for the devaluation of securities and to the unrealized difference in the currency position. This is especially true if the bank is holding a major part of the assets (in the form of financial investments or of loans) and the equity is invested in securities or in foreign exchange denominated instruments. Separately, a bank can be trading for its own position (the Nostro), either as a market maker or as a trader. The profit (or loss) on securities trading has to be discounted because it is conjectural and incidental to the bank's main activities: deposit taking and loan making.
Most banks deposit some of their assets with other banks. This is normally considered to be a way of spreading the risk. But in highly volatile economies with sickly, underdeveloped financial sectors, all the institutions in the sector are likely to move in tandem (a highly correlated market). Cross deposits among banks only serve to increase the risk of the depositing bank (as the recent affair with Toko Bank in Russia and the banking crisis in South Korea have demonstrated).
Further closer to the bottom line are the bank's operating expenses: salaries, depreciation, fixed or capital assets (real estate and equipment) and administrative expenses. The rule of thumb is: the higher these expenses, the worse. The great historian Toynbee once said that great civilizations collapse immediately after they bequeath to us the most impressive buildings. This is doubly true with banks. If you see a bank fervently engaged in the construction of palatial branches - stay away from it.
All considered, banks are risk traders. They live off the mismatch between assets and liabilities. To the best of their ability, they try to second guess the markets and reduce such a mismatch by assuming part of the risks and by engaging in proper portfolio management. For this they charge fees and commissions, interest and profits - which constitute their sources of income. If any expertise is attributed to the banking system, it is risk management. Banks are supposed to adequately assess, control and minimize credit risks. They are required to implement credit rating mechanisms (credit analysis), efficient and exclusive information-gathering systems, and to put in place the right lending policies and procedures. Just in case they misread the market risks and these turned into credit risks (which happens only too often), banks are supposed to put aside amounts of money which could realistically offset loans gone sour or non-performing in the future. These are the loan loss reserves and provisions. Loans are supposed to be constantly monitored, reclassified and charges must be made against them as applicable. If you see a bank with zero reclassifications, charge off and recoveries - either the bank is lying through its teeth, or it is not taking the business of banking too seriously, or its management is no less than divine in its prescience. What is important to look at is the rate of provision for loan losses as a percentage of the loans outstanding. Then it should be compared to the percentage of non-performing loans out of the loans outstanding. If the two figures are out of kilter, either someone is pulling your leg - or the management is incompetent or lying to you. The first thing new owners of a bank do is, usually, improve the placed asset quality (a polite way of saying that they get rid of bad, non-performing loans, whether declared as such or not). They do this by classifying the loans. Most central banks in the world have in place regulations for loan classification and if acted upon, these yield rather more reliable results than any management's "appraisal", no matter how well intentioned. In some countries in the world, the Central Bank (or the Supervision of the Banks) forces banks to set aside provisions against loans of the highest risk categories, even if they are performing. This, by far, should be the preferable method.
Of the two sides of the balance sheet, the assets side should earn the most attention. Within it, the interest earning assets deserve the greatest dedication of time. What percentage of the loans is commercial and what percentage given to individuals? How many lenders are there (risk diversification is inversely proportional to exposure to single borrowers)? How many of the transactions are with "related parties"? How much is in local currency and how much in foreign currencies (and in which)? A large exposure to foreign currency lending is not necessarily healthy. A sharp, unexpected devaluation could move a lot of the borrowers into non-performance and default and, thus, adversely affect the quality of the asset base. In which financial vehicles and instruments is the bank invested? How risky are they? And so on.
No less important is the maturity structure of the assets. It is an integral part of the liquidity (risk) management of the bank. The crucial question is: what are the cash flows projected from the maturity dates of the different assets and liabilities - and how likely are they to materialize. A rough matching has to exist between the various maturities of the assets and the liabilities. The cash flows generated by the assets of the bank must be used to finance the cash flows resulting from the banks' liabilities. A distinction has to be made between stable and hot funds (the latter in constant pursuit of higher yields). Liquidity indicators and alerts have to be set in place and calculated a few times daily. Gaps (especially in the short term category) between the bank's assets and its liabilities are a very worrisome sign.
But the bank's macroeconomic environment is as important to the determination of its financial health and of its creditworthiness as any ratio or micro-analysis. The state of the financial markets sometimes has a larger bearing on the bank's soundness than other factors. A fine example is the effect that interest rates or a devaluation have on a bank's profitability and capitalization. The implied (not to mention the explicit) support of the authorities, of other banks and of investors (domestic as well as international) sets the psychological background to any future developments. This is only too logical. In an unstable financial environment, knock-on effects are more likely. Banks deposit money with other banks on a security basis. Still, the value of securities and collaterals is as good as their liquidity and as the market itself. The very ability to do business (for instance, in the syndicated loan market) is influenced by the larger picture. Falling equity markets herald trading losses and loss of income from trading operations and so on.
Perhaps the single most important factor is the general level of interest rates in the economy. It determines the present value of foreign exchange and local currency denominated government debt. It influences the balance between realized and unrealized losses on longer-term (commercial or other) paper. One of the most important liquidity generation instruments is the repurchase agreement (repo). Banks sell their portfolios of government debt with an obligation to buy it back at a later date. If interest rates shoot up - the losses on these repos can trigger margin calls (demands to immediately pay the losses or else materialize them by buying the securities back). Margin calls are a drain on liquidity. Thus, in an environment of rising interest rates, repos could absorb liquidity from the banks, deflate rather than inflate. The same principle applies to leverage investment vehicles used by the bank to improve the returns of its securities trading operations. High interest rates here can have an even more painful outcome. As liquidity is crunched, the banks are forced to materialize their trading losses. This is bound to put added pressure on the prices of financial assets, trigger more margin calls and squeeze liquidity further. It is a vicious circle of a monstrous momentum once commenced.
But high interest rates, as we mentioned, also strain the asset side of the balance sheet by applying pressure to borrowers. The same goes for a devaluation. Liabilities connected to foreign exchange grow with a devaluation with no (immediate) corresponding increase in local prices to compensate the borrower. Market risk is thus rapidly transformed to credit risk. Borrowers default on their obligations. Loan loss provisions need to be increased, eating into the bank's liquidity (and profitability) even further. Banks are then tempted to play with their reserve coverage levels in order to increase their reported profits and this, in turn, raises a real concern regarding the adequacy of the levels of loan loss reserves. Only an increase in the equity base can then assuage the (justified) fears of the market but such an increase can come only through foreign investment, in most cases. And foreign investment is usually a last resort, pariah, solution (see Southeast Asia and the Czech Republic for fresh examples in an endless supply of them. Japan and China are, probably, next).
In the past, the thinking was that some of the risk could be ameliorated by hedging in forward markets (=by selling it to willing risk buyers). But a hedge is only as good as the counterparty that provides it and in a market besieged by knock-on insolvencies, the comfort is dubious. In most emerging markets, for instance, there are no natural sellers of foreign exchange (companies prefer to hoard the stuff). So forwards are considered to be a variety of gambling with a default in case of substantial losses a very plausible way out.
Banks depend on lending for their survival. The lending base, in turn, depends on the quality of lending opportunities. In high-risk markets, this depends on the possibility of connected lending and on the quality of the collaterals offered by the borrowers. Whether the borrowers have qualitative collaterals to offer is a direct outcome of the liquidity of the market and on how they use the proceeds of the lending. These two elements are intimately linked with the banking system. Hence the penultimate vicious circle: where no functioning and professional banking system exists - no good borrowers will emerge.
About The Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and "After the Rain - How the West Lost the East". He is a columnist in "Central Europe Review", United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor to the Government of Macedonia.
His web site: http://samvak.tripod.com/
Article Source: [http://EzineArticles.com/?Is-My-Money-Safe?-On-The-Soundness-Of-Our-Banks&id=26688] Is My Money Safe? On The Soundness Of Our Banks