* Charitable contributions
* Owning a clean-fuel vehicle
* Disaster relief contributions
* Prescription medicinces
* Stop-smoking programs
* Travel and transportation expenses
* Alimony

The rule of thumb on whether to itemize is simple: can you deduct more in mortgage interest, charitable contributions, state taxes, than the standard deduction? — $10,000 for married couples filing jointly and $5,000 for a single filer. Itemizing does take a little preplanning and organization in saving receipts and other paperwork documenting your expenditures.

If you are scrambling to retrieve those important papers that may be scattered hither and yon, consider investing in a spreadsheet, such as Quicken or Microsoft Money. Even if you aren’t tackling your own taxes this year, you could slash your tax-preparation fee in half. Microsoft.com says Microsoft Money 2006 can eliminate the paper chase, allowing you to sort out important tax information from day-to-day expenses, make educated tax investments and minimize capital gains taxes. Microsoft.com also recommends doing a little research on the front end to find out what can be deductible. The website suggests checking out MSN Money to learn about contributing to funds like IRA’s, ESPs, and OTPs, which may be tax deductible.

Here are a few deductions that www.msnbc.msn.com recommends you remember:

* Charitable contributions. If your donations are $250 or less, you do not need to include receipts. Any amount over that, however needs to be documented. According to the website, generally you can’t contribute more than 50 percent of your adjusted gross income, but under the Katrina Emergency Tax Relief Act of 2005, you can waive that restrictions for donations between Aug. 28 and Dec. 31. In addition, the IRS says you can also use a higher standard mileage rate and exclude mileage reimbursements from income.
* Education expenses that can range from saving for your kid’s college to paying off your own student loans.
* Home-office expenses if you work at home.
* Medical expenses if they exceed more than 7.5 percent of your adjusted gross income
* Miscellaneous deductions. According to the IRS, these can include depreciation on computers or cell phones, job search expenses, hobby expenses, military uniforms, safe deposit box rent, gambling losses, trustee’s administrative fees for IRA.

With a little research and organization, you can end up saving a lot of money by itemizing deductions. So throw away that shoebox you’ve used to store receipts. Its never too early to get organized.

The first step in creating a price chart is to go through your refrigerator and pantry and catalog the must haves the items you use at least once a month. Some staples in my pantry and refrigerator include onions, garlic, bananas, tomatoes, milk, cheese, orange juice, coffee beans, bread, olive oil, boneless, skinless chicken breasts and breakfast cereal.

After I compile a list of food items, I start recording the best prices I’ve found on the items, being sure to determine costs by size and packaging, as well. For instance, I know that I can find 6 oz cans of tomato paste, a staple in my Italian cooking, for $.25 apiece if I wait for a sale. That is about $.07 less than buying the cans in bulk at my local warehouse store. Because I almost always have the paste on hand so there is never an emergency situation, it is a better bargain for me to wait for a sale at my local market and bulk up then. However, nine times out of 10, it is a better deal to stock up on toilet paper at the warehouse store, where I can find a sturdy, good quality roll of 425 sheets for $.41 apiece. Keeping a price chart also allows you to quickly distinguish when a sale is really a sale.

I’ve found the simplest way to create a chart is on the computer and print it out. That way, my price chart ends up being a typed piece of paper that easily folds up and remains in my wallet where I can reference it at any time. In addition, having it on the computer means updates are simple. So the next time, you see a big sale on your favorite ice cream, you can quickly reference your price chart and determine that yes, it is worth hopping in the car and stockpiling a pint or two.

There is a psychological cost to owning too much stuff, as well. The more stuff you have the harder you have to work to keep it. The extreme of this is buying a giant house and expensive boat and then working 75 to 80 hours a week to pay for the slip in the harbor, the property taxes, the maid, the furniture to fill the massive space, and so on. When you are over-extended in this way, you have no time (or energy) to enjoy the house or boat.

On the whole, having less stuff is also conducive to clearer thinking. Have you ever noticed how simply cleaning your desk or office or living room promotes a feeling of calm and sense of clarity? Too much stuff is like static on the TV — you can’t really see the true picture in life. In the past two years, I have both borrowed and loaned maternity clothes. During my first pregnancy, during the summer in California, I only had to buy a handful of maternity clothes because most were loaned to me by a friend. After my second pregnancy, in Minnesota during the winter, I bought many winter and warmer items and have now passed them on to a sister-in-law who is pregnant.

Like the example above, sometimes it isn’t a clear-cut exchange. Maybe we won’t ever need something from that person who borrowed our cordless drill, but possibly they will loan someone else something someday. And sometimes the favor is returned in a different form. For instance, we’ve borrowed a ladder from a neighbor, and every time it snows, my husband takes his garage-sale bought snowblower and plows that neighbor’s sidewalk and driveway. Although I’m sure my husband would have done it anyway, it’s still an example how we each create a community when we reach out to others.

And by taking that step and knocking on a neighbor’s door, we also have a very good chance of striking up a new friendship, which is worth more than anything you can buy.

And according to a 2001 report on the NewsHour Extra by Jim Lehrer, by the end of 2000, Americans owed 7.2 trillion dollars in household debt. American families owed 100 percent of the money they earned from work.

Getting out from under that debt may seem insurmountable, but it is crucial to achieving financial freedom. The way to do this is to first take a month and log all your expenditures from that morning coffee to that monthly mortgage. Organize your expenditures in categories such as eating out, groceries, gas for car, entertainment, and so on.

After doing this, most people are astonished by how much of their income they are just piddling away with nothing to show for it. Then, carefully look at where you can cut. Depending on your motivation, you could shave tens or hundreds of dollars off that monthly amount. Whatever that savings amounts to, you need to allocate it to pay off your credit card with the highest interest rate. Keep making chunks of payments until it is paid off and then move onto your next debt until all you have left are low-interest rate student loans, a car loan and/or your mortgage.

Once you pay off all your other debt, then take that amount you spent on debt reduction each month and stick it in a money market account that will be readily accessible in case of emergency. When you have enough money in that account to pay for, say, six months of your living expenses, then it is time to start thinking about whether you’d like to start paying off your other debts: student and car loans and finally, a mortgage.

Some people are satisfied to stop right there, maybe keeping a mortgage for the tax write off and using the money they previously spent on debt for vacations or other treats. But there are some people who keep right on going until they are completely debt free and then invest their money and live on the returns. This is true financial freedom. It is tough, but it has been done. Those people who have accomplished this ultimate financial freedom, such as Vicki Robin and Joe Dominguez, the authors of Your Money or Your Life, claim to have found a richness to life that no money can buy.

If you start at age 25 and contribute the $14,000 maximum each year, you would have nearly $4 million by age 65, said John Demming, a spokesman for Vanguard in an article posted on www.kplctv.com, a Louisiana television station’s website. If you start saving in your 401K at age 40, you would have just over $1 million, he said in the article. Note: For 2006, the maximum was raised to $15,000.

A 401k retirement plan is basically a savings account financed by contributions out of your paycheck. The monies are contributed before taxes and then invested. The money is not taxed until you withdraw it from the account, ideally at retirement age. Early withdrawals are taxed and can incur a monetary penalty, except in a few special circumstances. If your employer offers a plan that matches your contribution, you can’t afford not to participate. That’s turning down free money.

According to Joshua Kennon’s “Your Guide to Investing for Beginners, there can be a big payoff from companies, such as Starbucks, which sweetens its recruitment pot with matching percentages for 401k contributions, He writes, an employee working at the coffee giant for over ten years earning $100,000 that contributed $4,000 to their 401(k) would receive a $6,000 deposit in the account directly from the company (150% match on $4,000 contribution.) Anything the employee deposited above the 4% threshold would not receive a match. According to kplctv.com, its worth checking out websites such as www.Smartmoney.com and www.morningstar.com that have online software and free calculators to help determine how much you should contribute to make your retirement goals.

So don’t walk, run to your HR department and get signed up. The sooner the better.

2. Create a list of all your monthly expenses. If an expense occurs less frequently, simply prorate it to fit a monthly format. Be sure to include such expenses as; housing, food, transportation, utilities, entertainment, etc. It is wise to track your spending for a full month during this stage of budgetary planning. Save your receipts and each evening write down your expenses for the day. This is the best way to gain an accurate reflection of actual expenses.

3. Determine if your income covers all of your current expenses. If the answer is no, then expenses need to be reduced.

4. Adjust expenses. This can be done in a variety of ways. Depending on the amount of the shortfall, it may be a simple matter of reducing some discretionary spending, such as entertainment, or food.(i.e. the number of times you eat out in a given month) If the deficit is larger then it may be a matter of downsizing your vehicle or your living arrangements. If your income covers all of your expenses then this is still a good opportunity to trim some of the fat off of your spending habits. This can help free up extra money for a variety of reasons ranging from, college educations for the kids, to a nice anniversary trip with your wife.

5. Add new categories if necessary. Three areas that are often overlooked are 1) debt reduction 2) retirement savings and 3) emergency savings. An emergency fund will ensure that there is an adequate amount available to cover an unforeseen even (i.e. the car breaks down) should it arise. This will prevent the use of credit which can quickly break a personal budget.

Certain financial terms often mean different things to different organizations depending on their own particular accounting policies. Financial terms will have slightly different interpretations in different countries. So as a general rule for all non-financial business people, if in doubt, ask for an explanation from the person or organization responsible for producing the figures and using the terms – you may be the only one to ask, but you certainly will not be the only one wondering what it all means.

Don’t be intimidated by financial terminology or confusing figures and methodology. Always ask for clarification, and you will find that most financial managers and accountants are very happy to explain.

acid test

A stern measure of a company’s ability to pay its short term debts, in that stock is excluded from asset value. (liquid assets/current liabilities) Also referred to as the Quick Ratio.

assets

Anything owned by the company having a monetary value; eg, ‘fixed’ assets like buildings, plant and machinery, vehicles (these are not assets if rentedand not owned) and potentially including intangibles like trade marks and brand names, and ‘current’ assets, such as stock, debtors and cash.

asset turnover

Measure of operational efficiency – shows how much revenue is produced per £ of assets available to the business. (sales revenue/total assets less current liabilities)
balance sheet

The Balance Sheet is one of the three essential measurement reports for the performance and health of a company along with the Profit and Loss Account and the Cashflow Statement. The Balance Sheet is a ‘snapshot’ in time of who owns what in the company, and what assets and debts represent the value of the company. (It can only ever nbe a snapshot because the picture is always changing.) The Balance Sheet is where to look for information about short-term and long-term debts, gearing (the ratio of debt to equity), reserves, stock values (materials and finsished goods), capital assets, cash on hand, along with the value of shareholders’ funds. The term ‘balance sheet’ is derived from the simple purpose of detailing where the money came from, and where it is now. The balance sheet equation is fundamentally: (where the money came from) Capital + Liabilities = Assets (where the money is now). Hence the term ‘double entry’ – for every change on one side of the balance sheet, so there must be a corresponding change on the other side – it must always balance. The Balance Sheet does not show how much profit the company is making (the P&L does this), although pervious years’ retained profits will add to the company’s reserves, which are shown in the balance sheet.

budget

In a financial planning context the word ‘budget’ (as a noun) strictly speaking means an amount of money that is planned to spend on a particularly activity or resource, usually over a trading year, although budgets apply to shorter and longer periods. An overall organizational plan therefore contains the budgets within it for all the different departments and costs held by them. The verb ‘to budget’ means to calculate and set a budget, although in a looser context it also means to be careful with money and find reductions (effectively by setting a lower budgeted level of expenditure). The word budget is also more loosely used by many people to mean the whole plan. In which context a budget means the same as a plan. For example in the UK the Government’s annual plan is called ‘The Budget’. A ‘forecast’ in certain contexts means the same as a budget – either a planned individual activity/resource cost, or a whole business/ corporate/organizational plan. A ‘forecast’ more commonly (and precisely in my view) means a prediction of performance – costs and/or revenues, or other data such as headcount, % performance, etc., especially when the ‘forecast’ is made during the trading period, and normally after the plan or ‘budget’ has been approved. In simple terms: budget = plan or a cost element within a plan; forecast = updated budget or plan. The verb forms are also used, meaning the act of calculating the budget or forecast.

capital employed

The value of all resources available to the company, typically comprising share capital, retained profits and reserves, long-term loans and deferred taxation. Viewed from the other side of the balance sheet, capital employed comprises fixed assets, investments and the net investment in working capital (current assets less current liabilities). In other words: the total long-term funds invested in or lent to the business and used by it in carrying out its operations.

cashflow

The movement of cash in and out of a business from day-to-day direct trading and other non-trading or indirect effects, such as capital expenditure, tax and dividend payments.

cashflow statement

One of the three essential reporting and measurement systems for any company. The cashflow statement provides a third perspective alongside the Profit and Loss account and Balance Sheet. The Cashflow statement shows the movement and availability of cash through and to the business over a given period, certainly for a trading year, and often also monthly and cumulatively. The availability of cash in a company that is necessary to meet payments to suppliers, staff and other creditors is essential for any business to survive, and so the reliable forecasting and reporting of cash movement and availability is crucial.

cost of debt ratio (average cost of debt ratio)

Despite the different variations used for this term (cost of debt, cost of debt ratio, average cost of debt ratio, etc) the term normally and simply refers to the interest expense over a given period as a percentage of the average outstanding debt over the same period, ie., cost of interest divided by average outstanding debt.

cost of goods sold (COGS)

The directly attributable costs of products or services sold, (usually materials, labour, and direct production costs). Sales less COGS = gross profit. Effetively the same as cost of sales (COS) see below for fuller explanation.

cost of sales (COS)

Commonly arrived at via the formula: opening stock + stock purchased – closing stock.

Cost of sales is the value, at cost, of the goods or services sold during the period in question, usually the financial year, as shown in a Profit and Loss Account (P&L). In all accounts, particularly the P&L (trading account) it’s important that costs are attributed reliably to the relevant revenues, or the report is distorted and potentially meaningless. To use simply the total value of stock purchases during the period in question would not produce the correct and relevant figure, as some product sold was already held in stock before the period began, and some product bought during the period remains unsold at the end of it. Some stock held before the period often remains unsold at the end of it too. The formula is the most logical way of calculating the value at cost of all goods sold, irrespective of when the stock was purchased. The value of the stock attributable to the sales in the period (cost of sales) is the total of what we started with in stock (opening stock), and what we purchased (stock purchases), minus what stock we have left over at the end of the period (closing stock).

current assets

Cash and anything that is expected to be converted into cash within twelve months of the balance sheet date.

current ratio

The relationship between current assets and current liabilities, indicating the liquidity of a business, ie its ability to meet its short-term obligations. Also referred to as the Liquidity Ratio.

current liabilities

Money owed by the business that is generally due for payment within 12 months of balance sheet date. Examples: creditors, bank overdraft, taxation.

depreciation

The apportionment of cost of a (usually large) capital item over an agreed period, (based on life expectancy or obsolescence), for example, a piece of equipment costing $10k having a life of five years might be depreciated over five years at a cost of $2k per year. (In which case the P&L would show a depreciation cost of $2k per year; the balance sheet would show an asset value of $8k at the end of year one, reducing by $2k per year; and the cashflow statement would show all $10k being used to pay for it in year one.)

dividend

A dividend is a payment made per share, to a company’s shareholders by a company, based on the profits of the year, but not necessarily all of the profits, arrived at by the directors and voted at the company’s annual general meeting. A company can choose to pay a dividend from reserves following a loss-making year, and conversely a company can choose to pay no dividend after a profit-making year, depending on what is believed to be in the best interests of the company. Keeping shareholders happy and committed to their investment is always an issue in deciding dividend payments. Along with the increase in value of a stock or share, the annual dividend provides the shareholder with a return on the shareholding investment.
earnings before..

There are several ‘Earnings Before..’ ratios and acronyms: EBT = Earnings Before Taxes; EBIT = Earnings Before Interest and Taxes; EBIAT = Earnings Before Interest after Taxes; EBITD = Earnings Before Interest, Taxes and Depreciation; and EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization. (Earnings = operating and non-operating profits (eg interest, dividends received from other investments). Depreciation is the non-cash charge to the balance sheet which is made in writing off an asset over a period. Amortisation is the payment of a loan in installments.

fixed assets

Assets held for use by the business rather than for sale or conversion into cash, eg, fixtures and fittings, equipment, buildings.

fixed cost

A cost which does not vary with changing sales or production volumes, eg, building lease costs, permanent staff wages, rates, depreciation of capital items.

FOB – ‘free on board’

The FOB (Free On Board) abbreviation is an import/export term relating to the point at which responsibility for goods passes from seller (exporter) to buyer (importer). It’s in this listing because it’s commonly misunderstood and also has potentially significant financial implications. FOB meant originally (and depending on the context stills generally means) that the seller is liable for the goods and is responsible for all costs of transport, insurance, etc., until and including the goods being loaded at the (nominated FOB) port. An importing buyer would typically ask for the FOB price, (which is now now often linked to a port name, eg., FOB Hamburg or FOB Vancouver), knowing that this price is ‘free’ or inclusive of all costs and liabilities of getting the goods from the seller to the port and on board the craft or vessel. Logically FOB also meant and still means that the seller is liable for any loss or damage up to the point that the goods are loaded onto the vessel at the FOB port, and that thereafter the buyer assumes responsibility for the goods and the costs of transport and the liability. From the seller’s point of view an FOB price must therefore include/recover his costs of transport from factory or warehouse, insurance and loading, because the seller is unable to charge these costs as extras once the FOB price has been stated. The FOB expression originates particularly from the meaning that the buyer is free of liability and costs of transport up to the point that the goods are loaded on board the ship. In modern times FOB also applies to freight for export by aircraft from airports. In recent years the term has come to be used in slightly different ways, even to the extent that other interpretations are placed on the acronym, most commonly ‘Freight On Board’, which is technically incorrect. While technically incorrect also, terms such as ‘FOB Destination’ have entered into common use, meaning that the insurance liability and costs of transportation and responsibility for the goods are the seller’s until the goods are delivered to the buyer’s stipulated delivery destination. If in doubt ask exactly what the other person means by FOB because the applications have broadened. While liability and responsibility for goods passes from seller to buyer at the point that goods are agreed to be FOB, the FOB principle does not correlate to payment terms, which is a matter for separate negotiation. FOB is a mechanism for agreeing price and transport responsibility, not for agreeing payment terms. In summary: FOB (Free On Board), used alone, originally meant that the transportation cost and liability for exported goods was with the seller until the goods were loaded onto the ship (at the port of exportation); nowadays FOB (Free On Board or the distorted interpretation ‘Freight On Board’) has a wider usage – the principle is the same, ie., seller has liability for goods, insurance and costs of transport until the goods are loaded (or delivered), but the point at which goods are ‘FOB’ is no longer likely to be just the port of export – it can be any place that it suits the buyer to stipulate. So, if you are an exporter, beware of buyers stipulating ‘FOB destination’ – it means the exporter is liable for the goods and pays transport costs up until delivery to the customer.
forecast

See ‘budget’ above.

gearing

The ratio of debt to equity, usually the relationship between long-term borrowings and shareholders’ funds.
goodwill

Any surplus money paid to acquire a company that exceeds its net tangible assets value.

gross profit

Sales less cost of goods or services sold. Also referred to as gross profit margin, or gross profit, and often abbreviated to simply ‘margin’. See also ‘net profit’.

initial public offering (ipo)

An Initial Public Offering (IPO being the Stock Exchange and corporate acronym) is the first sale of privately owned equity (stock or shares) in a company via the issue of shares to the public and other investing institutions. In other words an IPO is the first sale of stock by a private company to the public. IPOs typically involve small, young companies raising capital to finance growth. For investors IPO’s can risky as it is difficult to predict the value of the stock (shares) when they open for trading. An IPO is effectively ‘going public’ or ‘taking a company public’.

letters of credit

These mechanisms are used by exporters and importers, and usually provided by the importing company’s bank to the exporter to safeguard the contractual expectations and particularly financial exposure of the exporter of the goods or services. (Also called ‘export letters of credit, and ‘import letters of credit’.)

When an exporter agrees to supply a customer in another country, the exporter needs to know that the goods will be paid for.

The common system, which has been in use for many years, is for the customer’s bank to issue a ‘letter of credit’ at the request of the buyer, to the seller. The letter of credit essentially guarantees that the bank will pay the seller’s invoice (using the customer’s money of course) provided the goods or services are supplied in accordance with the terms stipulated in the letter, which should obviously reflect the agreement between the seller and buyer. This gives the supplier an assurance that their invoice will be paid, beyond any other assurances or contracts made with the customer. Letters of credit are often complex documents that require careful drafting to protect the interests of buyer and seller. The customer’s bank charges a fee to issue a letter of credit, and the customer pays this cost.

The seller should also approve the wording of the buyer’s letter of credit, and often should seek professional advice and guarantees to this effect from their own financial services provider.

In short, a letter of credit is a guarantee from the issuing bank’s to the seller that if compliant documents are presented by the seller to the buyer’s bank, then the buyer’s bank will pay the seller the amount due. The ‘compliance’ of the seller’s documentation covers not only the goods or services supplied, but also the timescales involved, method for, format of and place at which the documents are presented. It is common for exporters to experience delays in obtaining payment against letters of credit because they have either failed to understand the terms within the letter of credit, failed to meet the terms, or both. It is important therefore for sellers to understand all aspects of letters of credit and to ensure letters of credit are properly drafted, checked, approved and their conditions met. It is also important for sellers to use appropriate professional services to validate the authenticity of any unknown bank issuing a letter of credit.

letters of guarantee

There are many types of letters of guarantee. These types of letters of guarantee are concerned with providing safeguards to buyers that suppliers will meet their obligations or vice-versa, and are issued by the supplier’s or customer’s bank depending on which party seeks the guarantee. While a letter of credit essentially guarantees payment to the exporter, a letter of guarantee provides safeguard that other aspects of the supplier’s or customer’s obligations will be met. The supplier’s or customer’s bank is effectively giving a direct guarantee on behalf of the supplier or customer that the supplier’s or customer’s obligations will be met, and in the event of the supplier’s or customer’s failure to meet obligations to the other party then the bank undertakes the responsibility for those obligations.

Typical obligations covered by letters of guarantee are concerned with:

* Tender Guarantees (Bid Bonds) – whereby the bank assures the buyer that the supplier will not refuse a contract if awarded.
* Performance Guarantee – This guarantees that the goods or services are delivered in accordance with contract terms and timescales.
* Advance Payment Guarantee – This guarantees that any advance payment received by the supplier will be used by the supplier in accordance with the terms of contract between

seller and buyer.

There are other types of letters of guarantee, including obligations concerning customs and tax, etc, and as with letters of credit, these are complex documents with extremely serious implications. For this reasons suppliers and customers alike must check and obtain necessary validation of any issued letters of guarantee.

liabilities

General term for what the business owes. Liabilities are long-term loans of the type used to finance the business and short-term debts or money owing as a result of trading activities to date . Long term liabilities, along with Share Capital and Reserves make up one side of the balance sheet equation showing where the money came from. The other side of the balance sheet will show Current Liabilities along with various Assets, showing where the money is now.

liquidity ratio

Indicates the company’s ability to pay its short term debts, by measuring the relationship between current assets (ie those which can be turned into cash) against the short-term debt value. (current assets/current liabilities) Also referred to as the Current Ratio.
net assets (also called total net assets)

Total assets (fixed and current) less current liabilities and long-term liabilities that have not been capitalised (eg, short-term loans).

net current assets

Current Assets less Current Liabilities.

net present value (npv)

NPV is a significant measurement in business investment decisions. NPV is essentially a measurement of all future cashflow (revenues minus costs, also referred to as net benefits) that will be derived from a particular investment (whether in the form of a project, a new product line, a proposition, or an entire business), minus the cost of the investment. Logically if a proposition has a positive NPV then it is profitable and is worthy of consideration. If negative then it’s unprofitable and should not be pursued. While there are many other factors besides a positive NPV which influence investment decisions; NPV provides a consistent method of comparing propositions and investment opportunities from a simple capital/investment/profit perspective. There are different and complex ways to construct NPV formulae, largely due to the interpretation of the ‘discount rate’ used in the calculations to enable future values to be shown as a present value. Corporations generally develop their own rules for NPV calculations, including discount rate. NPV is not easy to understand for non-financial people – wikipedia seems to provide a good detailed explanation if you need one.

net profit

Net profit can mean different things so it always needs clarifying. Net strictly means ‘after all deductions’ (as opposed to just certain deductions used to arrive at a gross profit or margin). Net profit normally refers to profit after deduction of all operating expenses, notably after deduction of fixed costs or fixed overheads. This contrasts with the term ‘gross profit’ which normally refers to the difference between sales and direct cost of product or service sold (also referred to as gross margin or gross profit margin) and certainly before the deduction of operating costs or overheads. Net profit normally refers to the profit figure before deduction of corporation tax, in which case the term is often extended to ‘net profit before tax’ or PBT.

opening/closing stock

See explanation under Cost of Sales.

p/e ratio (price per earnings)

The P/E ratio is an important indicator as to how the investing market views the health, performance, prospects and investment risk of a public company listed on a stock exchange (a listed company). The P/E ratio is also a highly complex concept – it’s a guide to use alongside other indicators, not an absolute measure to rely on by itself. The P/E ratio is arrived at by dividing the stock or share price by the earnings per share (profit after tax and interest divided by the number of ordinary shares in issue). As earnings per share are a yearly total, the P/E ratio is also an expression of how many years it will take for earnings to cover the stock price investment. P/E ratios are best viewed over time so that they can be seen as a trend. A steadily increasing P/E ratio is seen by the investors as increasingly speculative (high risk) because it takes longer for earnings to cover the stock price. Obviously whenever the stock price changes, so does the P/E ratio. More meaningful P/E analysis is conducted by looking at earnings over a period of several years. P/E ratios should also be compared over time, with other company’s P/E ratios in the same market sector, and with the market as a whole. Step by step, to calculate the P/E ratio:

1. Establish total profit after tax and interest for the past year.
2. Divide this by the number of shares issued.
3. This gives you the earnings per share.
4. Divide the price of the stock or share by the earnings per share.
5. This gives the Price/Earnings or P/E ratio.

profit and loss account (P&L)

One of the three principal business reporting and measuring tools (along with the balance sheet and cashflow statement). The P&L is essentially a trading account for a period, usually a year, but also can be monthly and cumulative. It shows profit performance, which often has little to do with cash, stocks and assets (which must be viewed from a separate perspective using balance sheet and cashflow statement). The P&L typically shows sales revenues, cost of sales/cost of goods sold, generally a gross profit margin (sometimes called ‘contribution’), fixed overheads and or operating expenses, and then a profit before tax figure (PBT). A fully detailed P&L can be highly complex, but only because of all the weird and wonderful policies and conventions that the company employs. Basically the P&L shows how well the company has performed in its trading activities.
overhead

An expense that cannot be attributed to any one single part of the company’s activities.

quick ratio

Same as the Acid Test. The relationship between current assets readily convertible into cash (usually current assets less stock) and current liabilities. A sterner test of liquidity.
reserves

The accumulated and retained difference between profits and losses year on year since the company’s formation.

restricted funds

These are funds used by an organisation that are restricted or earmarked by a donor for a specific purpose, which can be extremely specific or quite broad, eg., endowment or pensions investment; research (in the case of donations to a charity or research organisation); or a particular project with agreed terms of reference and outputs such as to meet the criteria or terms of the donation or award or grant. The source of restricted funds can be from government, foundations and trusts, grant-awarding bodies, philanthropic organisations, private donations, bequests from wills, etc. The practical implication is that restricted funds are ring-fenced and must not be used for any other than their designated purpose, which may also entail specific reporting and timescales, with which the organisation using the funds must comply. A glaring example of misuse of restricted funds would be when Maxwell spent Mirror Group pension funds on Mirror Group development.

return on capital employed (ROCE)

A fundamental financial performance measure. A percentage figure representing profit before interest against the money that is invested in the business. (profit before interest and tax/capital employed x 100)

return on investment

Another fundamental financial and business performance measure. This term means different things to different people (often depending on perspective and what is actually being judged) so it’s important to clarify understanding if interpretation has serious implications. Many business managers and owners use the term in a general sense as a means of assessing the merit of an investment or business decision. ‘Return’ generally means profit before tax, but clarify this with the person using the term – profit depends on various circumstances, not least the accounting conventions used in the business. In this sense most CEO’s and business owners regard ROI as the ultimate measure of any business or any business proposition, after all it’s what most business is aimed at producing – maximum return on investment, otherise you might as well put your money in a bank savings account. Strictly speaking Return On Investment is defined as:

Profits derived as a proportion of and directly attributable to cost or ‘book value’ of an asset, liability or activity, net of depreciation.

In simple terms this the profit made from an investment. The ‘investment’ could be the value of a whole business (in which case the value is generally regarded as the company’s total assets minus intangible assets, such as goodwill, trademarks, etc and liabilities, such as debt. N.B. A company’s book value might be higher or lower than its market value); or the investment could relate to a part of a business, a new product, a new factory, a new piece of plant, or any activity or asset with a cost attached to it.

The main point is that the term seeks to define the profit made from a business investment or business decision. Bear in mind that costs and profits can be ongoing and accumulating for several years, which needs to be taken into account when arriving at the correct figures.
share capital

The balance sheet nominal value paid into the company by shareholders at the time(s) shares were issued.

shareholders’ funds

A measure of the shareholders’ total interest in the company represented by the total share capital plus reserves.

t/t (telegraphic transfer)

Interntional banking payment method: a telegraphic transfer payment, commonly used/required for import/export trade, between a bank and an overseas party enabling transfer of local or foreign currency by telegraph, cable or telex. Also called a cable transfer. The terminology dates from times when such communications were literally ‘wired’ – before wireless communications technology.

variable cost

A cost which varies with sales or operational volumes, eg materials, fuel, commission payments.

working capital

Current assets less current liabilities, representing the required investment, continually circulating, to finance stock, debtors, and work in progress.

The decision to file for bankruptcy is a highly personal one, based on your particular financial situation. It should only be considered once you have dug deep to tighten your budget and sought credit counseling.

Filing for personal bankruptcy has long lasting repercussions. It can affect your credit — and your life — for as long as 10 years.

It can hurt your ability get a job, buy or rent a car or home and even to purchase insurance. Employers, landlords and insurance companies are increasingly relying on credit reports to help them make decisions.

A bankruptcy filing can even make it next to impossible to hold onto your bank accounts and credit cards.

Keep in mind, if you have a steady job and just aren’t juggling your debts adequately or are living beyond your means, a judge may not even grant you a bankruptcy filing.

If you have a steady income and still can’t make ends meet despite your best efforts to do so, you may consider filing for Chapter 13, which will allow you to keep some of your belongings, such as a house or car with a 3-5 year repayment plan. This type of filing will remain on your credit report for 7 years.

If you don’t have a job or steady income you may consider filing for Chapter 7, which will allow you to erase most of your debts, but will affect your credit report for 10 years.

However, both forms of personal bankruptcy will not erase debts such as student loans, recent taxes owed, child support or alimony.

With all these warnings, sometimes filing a bankruptcy is inevitable to escape mounting debts.

If you are facing court orders that will grant your creditors the right to garnish your wages or even raid your bank accounts, then maybe filing bankruptcy is an option worth considering.

Just remember it is a last resort that can have long-lasting negative consequences on your life and lifestyle. Before it is embarked on, you should meet with an attorney or financial advisor to have them determine whether your particular financial crisis will be solved by bankruptcy filing.

Yet so often we find ourselves betraying these values (everyone does this at some point), and it is when we choose to betray these values that we find ourselves in financial trouble instead of in financial stability. We either spend money on things that don’t match or even oppose our values, or we spend money on our values but in a misguided fashion.

Why do we do this? The biggest reason that we spend money out of accord with our values is that we don’t sit down and define our goals. Goals are merely the specific embodiment of our values – tangible milestones that are clear indications of lives lived in tune with our values.

You’re probably thinking to yourself, I have values and goals already – this is a waste of my time. Before you log off, I want to ask you one simple question: first, do your goals actually match the values in your life? Let me give you an example. One of my major short term goals is buying a house, something many of you can identify with. This is a goal related to one of my primary values, my family. Thus, I’m buying a house for my family. Understanding this connection lets me clearly define what type of house I’m looking for (it doesn’t need to be shiny and new, but it does need to have space for my son and my future children – a large kitchen, a family room, and four bedrooms are what I seek). Thus, every time I think about the home purchase, I realize that I’m working for my family.

If you can honestly match ever single goal in your life with one of your central values, you’re more well-adjusted than almost everyone in the world. The truth is that we all have central values without any associated goals, goals without any associated values, and goal-value pairings that are really unclear and muddled. People that are financially successful find ways to minimize all of these.

How do they do this? They define all of their goals based directly on their personal values, and they live their lives to meet these goals above everything else. If they go to spend money, they ask themselves whether that money directly leads them to one of their goals. If the answer is no, they don’t spend the money. Thus, when they actually spend money, it doesn’t fill them with guilt. They can immediately see how that money is going to realize their goals, which are fundamentally connected to the values that define their life.

How do we get there? Let’s take an hour, sit down, and define ten goals in our life. If you went through yesterday’s exercise, you will already have a list of the five values that are central to your life. Now, we take these values and use them to define ten concrete goals.

First, forget what you believe your goals are right now. You might end up coming back to these goals during this process or you might not. The intent is to define your goals in direct harmony with your core values.

For each value on your list, ask yourself where you want to be in terms of that value in twenty five years. I mentioned that one of my main values is my family (specifically my children), so in twenty five years, I would like to have two college-educated children starting stable lives on their own, and perhaps a third in college.

Now, turn that dream into a goal. For my children to be able to start out their own lives on their own, I want to minimize their college debts and set a good example for their lives. So, my goal is to be able to pay for at least part of their education.

You might be tempted to start writing a plan for that goal right now, but don’t. We’ll get to that later. Right now, we just want to make a list of long-term goals that match your values.

For those curious, here are some sample goals for twenty five years down the road:
+ I want to be able to pay for a significant part of my child’s college education
+ I want to have a fully paid for house big enough for my grandchildren to visit and feel comfortable
+ I want to be able to travel the world with my wife
+ I want to have three books in print
+ I want to be able to live off the interest of my non-retirement investments

Once you’ve made the long term goals, go through your values again and ask yourself where you want to be in terms of that value in one year. Just like before, figure out where you would like to be in relation to that value in one year and don’t worry about defining a plan for that goal.

Again, here are some sample one year goals:
+ I want to double the value of my son’s 529 college savings plan
+ I want to buy and move into a house
+ I want to select and begin learning a foreign language
+ I want to quadruple the readership of The Simple Dollar
+ I want to reach $10K in my non-retirement mutual fund account

Now that you have these goals, we’re ready to begin defining some plans, but let’s sleep on it first.

For each of the short term goals, I want you to define five specific actions:

I will do this in the next three days.
I will do this in the next week.
I will do this every week.
I will do this in the next month.
I will do this in the next six months.

Some of these will be information gathering and have no cost. Others will actually require some investment, usually the one that happens every week.

For example, yesterday I mentioned that one of my short term goals is doubling the value of my son’s 529 college savings plan in the next year. Here’s what my five specific actions look like:

In the next three days, I will get the balance of my son’s 529 account, along with the data on the annual returns of each of the investment options in the plan. In the next week, I will determine how much I need to invest in the coming year
to double the account balance and also estimate what the return for the coming year might be.

Every week, I will invest 2% of what I calculate is needed to double the balance in the coming year.

In the next month, I will evaluate all of the different funds available for my son’s 529 and choose a fund that I feel is the best match for him.

In six months, I will check in on the account and see how he’s doing for the year, see how the various funds are doing for the year, and reconsider my investment choices.

Generally, the model outlined above works well: gather information in the next three days, plan a baseline amount you’ll need in the next week, save an appropriate amount every week, investigate the details in the next month, and review things in six months. If you do this, you’ll almost always meet your annual goal.

Now, for each of the long term goals, I want you to define five specific actions:

I will do this in the next week.
I will do this in the next month.
I will do this every month.
I will do this in the next year.
I will do this in three years.

Some of these will be information gathering and have no cost. Others will actually require some investment, usually the one that happens every month.

For example, yesterday I mentioned that one of my long term goals is completely owning a wonderful house in twenty five years. Here’s what my five specific actions look like:

In the next week, I will gather information a selection of potential houses that reflect what I plan to buy immediately and what I plan to buy in fifteen years.

In the next month, I will calculate how much I will have to spend per month on mortgage, insurance, and taxes on the lower-end house, and also calculate how much the nice house will cost in fifteen years.

Each month, I will save 25% of a mortgage payment for helping me get ahead on payments when I purchase the first home. This will enable me to ‘trade up’ more effectively when the time comes.

In the next year, I will buy a home that is in the lower house bracket and switch the extra 25% from a savings account to a direct payment on the mortgage.

In three years, I will sit down and re-evaluate what my ‘dream home’ is like and refactor my plan accordingly.

By doing this, I break down something that seems far-off (a beautiful big house to retire in and for my children and grandchildren to enjoy) into smaller pieces that I can do right now. I also find it useful to find an image that captures a long-term goal and place it in a place that I’ll see regularly. This way, the end goal is always in sight; it’s a constant visual reminder of where I need to go.

Now that you’ve defined these plans, you have specific things that you’re saving for and spending your money on that are in line with your values and goals. Whenever you go to spend money, pause for a second and think about your values, goals, and plans, and ask yourself if that money expenditure is really helping you reach your goals or is really reflecting your values.

You should strongly consider making up a schedule that combine all of your plans together. What will you do in the next week? What will you do every week? What will you do in the next month? What will you do every month?

A schedule that keeps you following your plans will help with this.

One week from now, you should have some numbers that will show you what you need to be doing to reach your goals. The amounts might trouble you, but don’t worry. In one week, we’ll take these numbers and use some techniques to carefully evaluate what they really mean – and how you can make them count for more than you think.

Before I did this exercise, I often found that, even though I often realized it wasn’t a good idea to spend, I would still spend money anyway. Why? I didn’t have any sort of concrete plan for what to do with my money, especially not one that was larger than saving for a new gadget or toy. Now, whenever I’m tempted to spend money in a frivolous way, I think about what’s important to me, and it directly connects to a plan for spending my money.

Tomorrow, we’ll start looking at your money.