Dividends – Rewards for Risk

As a student, I used to always confuse dividend with ownership in the firm. Later when I started working as a finance person is when I fully understood how this works. The learning is not over because the finance sector is ever evolving and the number of new instruments coming up in the market is increasing. There are different names given to the returns on investment although it all means rewards for the risk undertaken. Yes, in simple terms dividends are rewards for the risk undertaken by the investor.

The Risk

In a saving economy, people are more interested in having their money deposited in the bank and earn whatever minimal return it provides. A good percentage of the lot invests in gold. People are afraid of losing their money if invested in other sources. This is the risk we are talking about. People who have taken up the chances and invested in funds definitely get higher returns in form of dividends. These returns are way higher than the returns from bank deposits or any other traditional form of saving because they are a share of the profit from company one has invested. Higher returns also come with high risk. There can be times when there are no dividends paid. So the investor must be prepared for both.

Re-investment Risk and Benefits

Dividends can be distributed in different ways to the investor. It can be paid in cash or in form of additional shares. Re-investment of dividends increases the investment value of the investor. It means more income for the investor in form of future dividends. Dividends in the form of stocks in the company also do not have the tax liability on the investor. Thus it increases the future earnings of the investor. This form of dividend also comes with its own set of risks. Risk of losing the earned dividends of the company fails to perform as expected in future.

Market Risks

Risks associated with dividend are proportional to the returns. The dividend payments are made at the sole discretion of the management/board of directors. It depends on the performance of the company, its dividend policy, and the general market conditions. If the company is going for expansion, they might decide to curtail dividend payments for re-investment. This might not be in the best interest of the investor. It markets are favorable and the company is performing well then the investor can expect a steady rise in his income

A savings account in a bank will earn a steady and safe income but it will not provide any appreciation to wealth whereas dividends promise higher returns and also increases the wealth of the investor. The question is the investor is ready to take the risk.

 

 

 

 

A Simple Guide To Capital Budgeting

The business decision to make the future better in terms of profit requires some brilliant investment which has the future forecast of profits. These decisions are not formulated by mere speculation or just the thoughts about the market, they should involve valid reasons of why a business should choose a particular investment. That sounds sensible, right?

Yes! By making valuations of business models which are planned for future can help the company to chose the best path to success. This process is very important one in financial modules and it is called Capita Budgeting. The name itself suggests a perfect meaning budgeting for the capital invested.

Need for capital budgeting

This is a method which follows a step by step pattern to find the merits and demerits of investment decisions of a business. But, how is this done or accomplished? To know if an investment decision is profitable or not takes some effective research and valuation. And not only are the numerical but also the factors which affect such business decisions.

Taking an example of a non-profitable charitable organization, the profits from it is not at all required to know the future success but the mission and vision of this organization to serve the society are the least needed.

Also, the business decision of capital budgeting requires accountability and measurability. Any business if it starts the mission of an investment decision without assessing the risks and return will be held responsible by its shareholders and owners for the irresponsible attitude. But making proper calculations about the future in every manner is more than satisfactory to the owners and they provide all their support in this.

Benefits of Capital Budgeting to a company are listed here:

  • Formulate and develop long-term strategic goals: ability to set long-term goals is the prior decision in a business. Knowing the future profits through capital budgeting methods can prove to be very effective for the business.
  • Find more new investment projects: while comparing and calculating the investment projects for the business, the people get to know more knowledge about the available profitable projects that suit the business.
  • Forecast the future cash flows: using this technique of budgeting it is simple and easy to know the future value of the assets in the business and what profits it may give.
  • Regulate the transfer of information: this is a step by step process where many decisions are suggested and their approval is required from the top management. This is easy as the there proper and effective transfer of information in the company at all levels.
  • Creation of decision: while making capital budgeting techniques and their comparison, the company automatically fits into a properly regulated regime. This helps the company to function effectively.

 

Therefore capital budgeting is the core necessity of a business for a long life.

 

Learn About Initial Coin Offering

You may associate the term unregulated when we speak about Initial Coin Offering or ICO, but this is actually a blessing for the cryptocurrency market trapped in legal formalities. It is not a serendipity that the method is also called as Initial Public Coin Offering. It is a kind of crowdfunding technique with the purpose of raising capital for new ventures or start-ups. It is a kind of contract between a group of parties in which cryptocurrencies are offered as a token with a re-fixed value. This is called an ICO campaign and can be successful or a failure.

The ICO campaign

The procedure works like this. You want to start a cryptocurrency startup and need capital to fund it. You have to create a plan for your venture on a white paper including other details like:

  • The concept of the project
  • The project estimate or approximate capital required until the completion of the project
  • The resources you may require until completion
  • The type of funding you seek
  • The duration of the campaign
  • The share of virtual tokens to be kept by you

When the campaign starts, your supporters will purchase a portion of the cryptocurrencies kept for distribution with virtual currency or fiat (a legal tender), which form the tokens for the ICO. By this process, you are actually allowing the coin buyers to won the corresponding shares in your startup, like the shares offered by a public company in IPO.

You will raise some money in this way and if it reaches your project estimate or the minimum amount of capital for the startup, the campaign is a success. You can use the money to start the venture or for any related constructive concept. If the raised money does not reach the minimum required fund, the campaign is deemed as a failure and you return the money to the buyers.

ICO started with the first token sale in the year 2013 and has been growing since then with Ethereum holding almost 80% of the share and has proved to be successful in ICO campaigns as Ether tokens. It provides the start-ups a means to generate capital without the extra expenses of facing regulatory bodies, intermediaries like banks and stock exchanges and seeking licenses. Even though it is facing many legal hurdles, many attempts are currently being undertaken to make it open and regulated by the jurisdictions.

Capital Budgeting Tools

Making wise business decisions is the key to a successful business and ensures a long life to it. This is possible by carefully making investment decisions and then comparing the best projects through capital budgeting. The management begins its decision of approval or disapproval of the decided projects. For this, the capital budgeting tools are used.

There are three common capital budgeting tools and they are discussed in simple terms below. Let us take a glance and get a basic understanding of it.

Payback period:

This method is the prime one which is preferred by most of the companies as it is a simple decision tool. This method involves the calculations to find out how long will it take to get back the amount that we invest in a project.

It is simply done by taking the total cost of the project divided by yearly cash flow expected, this will give the number of years in which it can be received back. This is the best method for small project analysis and gives quick solutions. Though it looks simple it is highly effective too.

A company generating accurate cash flows each year can be easily judged for recoupment of profits in years. While dealing with mutual projects the one with shorter payback should be selected.

Net present value method:

This is again an effective method used to calculate the benefits from a project by means of cash flows. The net difference between cash outflows and cash inflows is calculated in this method. This is a very accurate method as it uses discounted analysis on future cash flows speculating the losses that may happen in the due course of the project. Hence that proves for accuracy in this type of calculation.

The rule with this method is that a project with positive value will be approved and that with a negative value will be rejected. In mutually exclusive projects the one with higher NPV is chosen.

The internal rate of return:

In this method, a rate of discount is used to calculate how much value will be lost from the particular project after few years and what will be the then net worth. This internal rate is strictly the discount rate at break-even of a project which means no loss no gain position or when the net present value is zero. Therefore you need to choose the project when the return is more than the cost of financing in terms of percentage.

Hence depending on the factors of calculations and the results the business tools for capital budgeting should be effectively chosen.

Are You A Good Financial Manager?

It is not just enough to be a good businessman but is also important and essential to be a good managerial and financial businessman. Now before going deep into these, let us try to first understand what each of these has in store to be understood clearly before implementing them into business.

Financial businessman

He is the one who is able to have a control and good command over the financial capital of his business. Now, this is nothing but the chunk of funds that are used by the businessman in making all his major expenses like investments, new project start-up etc…

Managerial businessman

he is the one who is able to have a significant view of the financial techniques followed. This would be more clear from the different finance related queries a person might have in his mind regarding the finances and its management.

Now it is based on these two things that a business`s progress or performance is measured and these two are the most important things that a person should follow meticulously to always see his business come through all the high and low tides of business.

Simple finance tips

You need not be a great businessman to have a great business for it is just the simple tricks and tips that would bring success and this is possible to all and any type of businessman.

  • Never procrastinate the immediate and simple needs. Most businessmen, in the excitement of getting into the market, forget in doing the basic things like maintaining the books of records etc… this would, in the long run, make it difficult and unmanageable for the businessman to continue further in the market.
  • Focussing on core strengths is another important thing for your business. This needs to be on the go along with the other initiatives and plans made and executed by the businessman.
  • It is not about how much time you spend for and on your business but the productive time that is spent here. This need not be hours and hours together but is enough if it is just an hour or so but needs to be an effective and profitable time without any distractions. So time is not the criteria but it is the quality time being spent.
  • Try to make the best use of the various opportunities presented to you. This might not work all the time but there is definitely no harm in trying it.