Developed in the 1930s by Columbia University professor and economist, Ben Graham, value investing involves screening securities to find stocks undervalued relative to peers and the market. Stocks are then assessed for their intrinsic value, determined by a fundamental metric—such as the price-earnings ratio—and purchased only if the stock price is less than its intrinsic value.

With value investing, dividends, cash flow, and earnings growth matter more than market factors on the stock’s price. The idea is that the market will eventually correct—and when that happens, the undervalued stock will rise in price and the investor will make money.

Buffett’s investments have consistently outperformed the market, decade after decade, which is why he’s become known as the “godfather” of value investing.

Warren Buffett’s story

In the early 1950s Buffett enjoyed success following Ben Graham’s investing guidelines, but began to assess potential stocks differently than his mentor. While Graham kept his focus on the bottom line numbers—the balance sheet and income statement—Buffett looked at a company’s corporate leadership and overall potential to generate earnings long term.

In 1962 Buffett bought Berkshire Hathaway, a failing textile company whose shares were valued at $7.50 each. He phased out its textile manufacturing division and transformed the business into a holding company for investments. By choosing to invest in a number of assets that proved lucrative in insurance, oil, and the media, Buffett was able to build Berkshire Hathaway into the incredibly profitable company it is today.

Value investing tips

These tips from a Business Insiders article on Warren Buffett’s winning investment strategies can help you become a more successful investor.

Re-think your diversification strategy

Buffett recommends selecting stocks carefully, with an eye on the long-term future, maintaining focus on individual investments rather than hedging bets with a varied portfolio designed to minimize volatility.

Follow the 99-1 rule

Buffett warns investors not to sell as soon as it appears that a stocks’ value is declining—like the 99% do, overreacting as they take in just 1% of the daily financial news.

Play the long game

Buffett’s approach to investing requires patience and commitment. He advises investors to select stocks with potential and hang onto them for decades. Investors who constantly buy and sell may lose out on higher returns—and end up paying more trading commissions and taxes.

Get started with a formula for value investing
For more detailed information on value investing strategies—including guidelines for how to choose undervalued securities with excellent profitability potential—check out this article on Investopedia.

You might also be interested in taking a look at The Essays of Warren Buffett: Letters to Corporate America—a collection of letters Warren Buffett wrote to Berkshire Hathaway shareholders—or Ben Graham’s classic book on value investing, The Intelligent Investor.

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Often home-based business owners assume they are covered under their homeowner’s policy. Other entrepreneurs, working long hours and pulled in too many directions, may never get around to talking to an insurance agent about their business.

If you’ve been procrastinating on business insurance, consider this: small businesses are much more likely than larger companies to be devastated in the event of an unforeseen loss, and business insurance needn’t be costly. You can save money on a bundled business insurance package, or lower your premiums by simply increasing your deductible.

Take a look at these 4 essential types of business insurance designed to protect businesses of any size.

General liability insurance
Protects business owners should they, an employee, product, or service cause personal injury or property damage to a third party.

Property insurance
Protects business owners who own a building or other valuable assets (e.g. equipment, computers, tools, or inventory) in case of fire, flood, vandalism, or theft.

Business interruption
Protects business owners from financial loss should business activity be suspended for a period of time (e.g. following a theft, flood, or other unforeseen loss).

Vehicle coverage
Protects business owners for damage and collisions when vehicles owned or leased by the business are used by staff to perform their jobs or transport products/equipment.

Save cash with a business owner’s policy

A number of factors come into play when determining business insurance premiums, including the type of business insured, location, gross revenue, and types of coverages required. A business owner’s policy (BOP) offers the most complete coverage in a customizable bundled package, and the best value. This type of policy typically includes:

• Liability insurance
• Property insurance
• Crime insurance
• Business interruption insurance and
• Vehicle coverage.

Insurance for home-based businesses

If you run a business out of your home, you may prefer an add-on or rider to your homeowner or renter insurance rather than a separate comprehensive policy. This can be a cost-efficient option for solopreneurs who don’t own a large amount of inventory or valuable equipment—in other words, a business owner for whom a fire, theft, or flood won’t greatly disrupt or devastate the business.

An in-home policy is another option for home-based business owners who need greater protection than a rider or add-on to an existing policy can offer. Generally speaking, this type of policy costs a bit more than a rider but protects the owner and up to three employees against theft, injury, and other risks to the business.

Final tips

When it comes to protecting your small business, your profit margins aren’t what should determine whether or not to get insurance. What matters is how great the impact would be to your business should something unexpected go wrong.

Get in touch with a reputable insurance company, or seek out an independent business insurance broker, to do a risk assessment for your business—then see exactly what kind of insurance you need.

If cost is a barrier to getting business insurance, take heart; your premiums may very well qualify as an end-of-the-year tax write off.

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Recent stats from PWC Global show that family owned businesses are no more prepared: 43% don’t have a succession plan in place, and only 12% survive to the third generation.

No matter whether your company has one employee, a hundred or a thousand, a succession plan is essential to minimize the risk of financial loss.

Read on to help prepare for a stress-free transition when it’s time to sell or transfer ownership of your business.

Define your objectives

The starting point for any succession plan is a reflection on your long term goals, both personally and professionally.

Where do you see yourself in five or ten years? What would you like your retirement to look like? Who are the best people to take over if you have to step away from the business suddenly – and how can you best prepare them for the task?

Once you’ve tackled the big picture questions, your next step is to seek planning advice from your lawyer, accountant, wealth management, and business advisors.

At the same time you’ll be able to start grooming your predecessor and training your employees for a smooth transition when you leave.

Tips for successful succession planning

Most entrepreneurs find it daunting to think about everything they’ll need to do before they can leave the company they’ve worked so hard to build. It takes time to create a useful, well-thought out succession plan—so start early, and don’t rush the process.

One of the most important elements of succession planning is clear and timely communication. Be sure to keep key stakeholders, business partners, employees, and family members involved in the planning process early and often.

Set a reasonable timeline for the creation of your succession plan and try your best stick to it. Once you have a plan in place, schedule a review on a yearly basis. It’s always wise to have contingency plans in place in case any sudden life changes require an unexpected exit.

Many business owners time an annual review of their business plan along with a review of their succession plan to ensure both are always up to date.

Final tips

A wealth of information is available online for small business owners ready to start succession planning. Free and low cost tools—including this self-paced e-course—can help you get started and stay on track throughout the process.

Although it’s impossible to predict how long it might take for a small business to sell, a good guideline to keep in mind is two to five years. In addition to the other professionals you’ll want to consult as you draft your succession plan, you may want to consider the services of a business broker.

Ask your business colleagues for a referral to a local broker with experience in your industry. A good broker can really streamline the sales process and maximize the perceived value of your business to buyers.

It can be heart wrenching for a business owner to walk away from their company, and some entrepreneurs will plan to stay involved in some way for a few months—or indefinitely. Many find maintaining an ongoing role in their business can mean a more satisfying, and financially stable, retirement.

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On the one hand, if your business owns the car you’ll have a long-term asset and may qualify for more tax deductions. On the other hand, buying a car is a huge expense and monthly lease payments tend to be lower than car loan payments; they may also be tax deductible.

Learn more about the benefits and drawbacks of buying versus leasing a vehicle for your business:

Why buy a company car?

The major benefit to purchasing a car is that it becomes a company asset that offers a number of perks for business owners:

• You can write off your gas, mileage and maintenance expenses
• Your interest payments on a car loan and depreciation costs may also qualify as eligible business expenses
• You may enjoy lower insurance and liability rates on a vehicle owned by your business

The big con for many business owners is that buying a car is a major expense—one that may require you to finance a depreciating asset. You will, however, maintain the residual value on your investment as you pay it off, and once you own the car you can use it for as long as it can do its job.

If you decide not to buy a vehicle but choose to use a personal vehicle for business, you may also be eligible for itemized deductions come tax time. Be sure to check with your country’s small business tax rules and regulations to confirm which vehicle-related expenses you may be able to write off.

The pros and cons of leasing
For many small business owners, leasing a company car is the more attractive option. Typically, it comes down to cost and cash flow. When you lease a vehicle you won’t have to come up with a down payment or collateral—and monthly lease payments tend to be lower than car payments.

The flip side, however, is that leasing tends to cost more in the end—and those affordable monthly payments won’t add up to an asset for your business. Another point to keep in mind is your insurance requirements may be different and amount to higher fees.

Also be aware of the maximum number of miles stipulated in your lease agreement—if you exceed the limit it can also mean additional fees at the end of your payment term.

If you’ll be putting a lot of miles on a car, leasing allows you to upgrade to a new car on a regular basis – and doing so may allow you to dodge costly repairs on an aging vehicle.

As a final note on the “plus” side, just like business owners who purchase their company vehicle, those who lease can write off some of their business-related car expenses.

Final considerations

Before you commit to buying or leasing a company vehicle, do a cost-benefit analysis. Take note of the car’s total cost over the car loan or lease term including:

• Monthly payments, including interest
• Anticipated mileage
• Maintenance, fuel, insurance, parking and other related costs
• The value of the car at the end of the lease vs. the ownership period.

Talk to your accountant about which expenses you can claim on your income tax, whether you choose to lease or buy.

At the same time you may want to seek advice on how to track your company car costs accurately and efficiently. Keeping good records is a must to make sure you don’t miss any eligible write offs for your company car—and so everything is in order if you are ever called for an audit.

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Capital gain (or loss)

This is the difference in the overall value of your investment between when you purchased it and now (or the date that you sold it.) You can work it out as:

((Current or sale price per unit – purchase price) * number of units) – fees and taxes

For example, let’s assume that you purchased 100 shares of Amazing Blue Widget Co. for $50 each and then sold them for $80 each. You had to pay $10 to buy, $10 to sell and 15% tax on the profit, this would work out to: (($80 – $50)*100) – $20 – $450 = $2,430 or a return of 48.6% on your original $5,000 investment.

Interim income (dividends, interest etc.)

This is the amount that you’ve received in interim payments over the life of your investment. It’s calculated as:

(Interim % * value of investment) – taxes

You would need to work this out for each interim payment that you receive.

For example, let’s assume that you’ve held 100 ABWC shares for three years, and that they paid dividends of 3% a year; in the first year the shares were $50 each, in the second, $60 each and in the third $80 each. Your return would be: 3% of $5,000, $6,000 and $8,000 less tax; this works out to: $485.

Your total return

This is equal to your capital gain (or loss) plus your interim income. You can then compare this to your original purchase price to understand what percentage gain or loss that you’ve made.

For example, your purchase price of ABWC shares was $5,000; over three years, you’ve made $2,430 in capital gains and $485 in interim returns (dividends) for a total of $2,915. That’s an increase of 58.3% over three years, or 19.4% a year – Not bad!

You should compare your total return to your targets and life goals. This can help you decide if you should keep your investments, or if it would be wise to sell them.

The post Investment Basics – Understanding Your Gains And Losses appeared first on Dudley & Associates, Chartered Professional Accountants.

Scheduling time to attend to these business activities on a regular basis is a great way to get on track for greater success.

Know your numbers

It’s not uncommon for business owners to lose touch with how well their business is performing on a day-to-day basis. But an awareness of your real time income and expenses is the key to making better decisions that will nurture growth.

Implement these changes and see the difference they make in your business:

• Switch to an online accounting solution that offers access to real time data anywhere, anytime
• Monitor your finances on a daily, weekly, monthly, and quarterly basis; review the data with your accountant often
• Check in on your other numbers, too – your website metrics and software analytics – so you know whether your marketing, lead generation, and sales tactics are working.

Update your business plan

Companies should update their business plan at least once a year—sooner if there’s an upcoming change that requires planning, financing, or re-assigning resources (for instance, a product launch, an opportunity to start importing/exporting, or a new side business).
Many business owners neglect to revise their plans on a regular basis. They end up operating on autopilot, losing sight of their bigger goals and the steps they planned to take their business to the next level.
The start of a new year is an excellent time to set goals, mark milestones, and start implementing your plans. The timing also lines up nicely with closing out the previous year’s books, so you can plan with your latest annual figures in mind.

Hire help

It sounds simple, but the self-sufficient, independent nature of many entrepreneurs can make it difficult to get comfortable delegating responsibility. Finding the right people to relieve the burden of doing everything, all the time, is the only way a business can scale and reach its potential.

Think carefully about how you spend your days. Are you still at the point where you want to – or need to – do it all? The ultimate success of any company is to reach the point where it can run without you, so you can enjoy a holiday, pass the business on to a family member, or sell it.
It can take time to find the right people that you can trust to perform their jobs well and continue to grow your business. A recruitment agency can help you craft an attractive job description and recruit so you can focus on strategies that can bring you greater enjoyment and success.
Developing new business habits takes time and commitment – but the pay off is well worth it! Which of these business habits is most important for you to commit to this year?

The post How to create good habits in business appeared first on Dudley & Associates, Chartered Professional Accountants.

To cover the costs of your business you need to sell enough goods or services to reach your break-even point. Knowing where that point is, and how long it will take you to reach it, can be fundamental to your success. This especially true if you’re thinking about starting or buying a business.

Calculate fixed and variable costs

The first step is to establish your fixed and variable costs.

Fixed Costs

Fixed costs are bills your business always has to pay, regardless of its level of sales. Also known as overheads, they could include:

• Salaries for permanent staff.
• Rent on your premises.
• Insurance.
• Interest on debt.

Variable Costs

These are costs that increase with your levels of sales – materials and production costs are two examples. Others include sales bonuses, part-time wages and freight.

Now work out:

• The total fixed costs bill for the year.
• An average overall variable cost for each product or service sold (the Variable Cost per Unit).

Some bills might be a combination of fixed and variable costs, such as a phone bill split between a line cost and toll call charges. Separate these bills into fixed and variable parts for greater accuracy.

If breaking them up is too time consuming, choose which element is greater in the bills and classify it as that. For example, if you don’t make many calls to mobile phones or outside your local area, you’d classify the phone bill as being fixed.

Determine your break-even point

Let’s assume you manufacture shoes with the following details:

• Budgeted fixed costs of $60,000.
• Average cost to make a pair of shoes is $110.
• Average sale price per pair of shoes is $250.

Calculating your break-even point requires the use of a few formulas:

1. Sales Price per Unit ($250) minus Variable Costs per Unit ($110) = Contribution Margin per Unit ($140).
2. Contribution Margin per Unit ($140) divided by Sales Price per Unit ($250) = Contribution Margin Ratio (0.56).
3. Fixed Costs ($60,000) divided by Contribution Margin Ratio (0.56) = Break-even Sales Volume ($107,142).

Based on these calculations, if you sell more than $107,142 of shoes you’ll make a profit. That equates to 429 pairs.

Using your break-even point

Once you’ve worked out your break-even point, the next step is to work out whether the sales volume you’ll need to break even is realistic and achievable.

You can also use your break-even calculation to see the effect of changes in costs on your business. If you were able to source cheaper materials and reduce the variable cost per pair of shoes, you’d need to sell fewer pairs to break even.

If your sales remained the same, you’d make more profit.

To be of real value to you, your fixed and variable costs calculations need to be accurate. Putting inaccurate figures into your break-even calculations will give you an inaccurate result. It’s worth investing time to work out your figures accurately.

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Sales forecasting may well be the most difficult and complicated of all areas covered in a strategic business plan. To predict sales, a business has to consider numerous economic, demographic, and social variables.  Because sales has a major impact on income stream, a business plan should include a continuity strategy for dealing with poor sales performance. But what happens if a business does better than expected?

Can Customer Service Handle Additional Requests?

A lot of small businesses fail to appreciate the impact sales have on customer service resources. Even quality products and services have mishaps, and when this happens customer service will be expected to resolve any issues. The more sales a business makes, the greater the number of product-related issues it will receive.

No business will ever complain about booming sales but it should be prepared for increased customer service issues.  If a business finds itself unprepared, the following problems may result:

1. Customer service overload: The sheer volume of customer contact is too much for current resource to handle and calls and emails from customers go unanswered.
2. Reduction in service quality: In a rush to answer all customer issues, staff don’t take the time to fully deal with a problem or assure the customers the issue will be resolved. This leads to customer dissatisfaction and can have a negative impact on future sales.
3. Delayed resolutions: Greater pressure on customer service resources affects the time taken to resolve consumer issues. Delayed resolution will lead to increased refund requests and decreased business reputation.
4. Reduced production and sales: A business uses all available staff resources to deal with customer queries, in order to maintain a quality level of service, but this results in a slowdown of production and sales.

Customers Don’t Get What They Order

There are other key business processes affected by increased demand:

1. Production/stock
2. Packaging/delivery

Let’s look at the problem associated with each process one at a time. Starting with production and stock:

Production and stock

If goods are made to order: Increased demand instantly places pressure on production. Employees will have to work overtime or the business may have to employ additional staff to complete orders on time.

Product stock levels: Increased orders will eat away at stock levels. A business with pre-existing stock is initially in a better position to cope with increased demand. However, if demand remain high there will be increased pressure on production to fufill orders and replenish stock levels.

In either situation, a business has to have plans in place to deal with a sudden rise in sales. If a business is unable to increase production to cope with demand, there will be a delay in order processing. This is damaging to both reputation and profitability.

Packaging and delivery

More sales means more packaging material is required and a there will be a larger volume of orders to deliver. If a business handles packaging and delivery in-house, then the onus falls on the business to have adequate packaging materials and logistics to cope with a sudden spike in demand.

For the businesses that package goods in house and use a postal service or courier to ship, the responsibility for delivery can still fall on the business. Customers don’t care about high demand excuses and expect a business to have sourced a delivery solution that can process and deliver orders on time, regardless of order volume.

Prosperity Favours the Prepared

The focus has been on material products. However, all the examples given so far are transferable to digital products or services. Digital products also require production and delivery. A digital product can be affected by limited human resources. The effect of additional demand on supply can impact any product or service.

Businesses often make plans for less-than-perfect situations. Disaster recovery and continuation processes are a pessimistic, but necessary, business fail-safe. A start-up business always hopes its sales will achieve best-case forecasts, but is unlikely to forecast a sales boom. The outcome of this is that not many small businesses factor in adverse effects of high-sales into short-term strategy.

There is nothing foolhardy or unrealistic about planning potential solutions for increased demand. It’s better to have a plan and never need it, than to have no plan and fail to meet demand. Making a plan will only cost some forethought and time. Failing to meet demand will wreak havoc on business reputation and prosperity.

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For example, you might bundle offers into a monthly subscription, or launch a points system that incentivizes loyalty with free gifts or special discounts. Recurring revenue comes in many forms and is considered the gold standard of business models.

Jim Schleckser, a growth specialist with Inc. CEO Project, maintains that every business should have “recurring revenue woven into its core [and] if you’re not thinking along these lines, you’re putting the future of your business in jeopardy.”

Strong words! Still need a bit more convincing? Here are the top three reasons it’s a good idea to build recurring revenue into your business model.

1. Frees up more time to grow your business

Consider this: if your business generates $1 million in revenue, and 75% of that total is recurring revenue, you’ll start each year knowing you can count on at least $750, 000. This immediately frees up time and energy for new product development, expanded marketing, and attracting new customers. Plus, the added financial certainty can help alleviate stress, which goes a long way to improving productivity and your overall wellbeing.

2. Helps maintain positive cash flow

Recurring revenue also helps business owners develop and stick to a reasonable budget. Knowing you can expect to earn a certain amount each month makes it easier to cover both routine and unexpected costs – like accounts payable, employee salaries, last-minute repairs, loan payments, etc.

Ultimately, this predictability yields greater financial visibility. You’ll be better positioned to ramp up or lower expenses relative to revenue, and stay cash flow positive

It’s also worth noting that potential investors, private equity, and loan providers tend to regard businesses with recurring revenue as “safer bets” because they’re less prone to insolvency. If you’re hoping to attract a partner or secure a loan to expand your company, showing recurring revenue streams can help strengthen your position.

 3. Opens the door to valuable customer insights

Generating recurring revenue streams requires looking closely at the particular wants, needs, and behaviors of your target audience.

In order to build the long-term relationships necessary for repeat business, you must understand what matters most to your customers and how to meet those needs (in ways your competitors do not).

As you research your market and talk with your clients, deeper insights will emerge about their particular preferences and pain-points – knowledge that will directly inform your marketing and further refine your product or service offers. Enhanced customization leads to more competitive offers, which in turn supports recurring revenue.

The bottom line? Business owners should focus on building long-term customer relationships, rather than focussing exclusively on one-off transactions. While lucrative one-time deals are definitely a bonus, recurring contracts are the gifts that keeps on giving!

The post 3 Reasons Recurring Revenue is a Good Idea appeared first on Dudley & Associates, Chartered Professional Accountants.

Getting approved for a business loan or line of credit is more difficult than qualifying for a personal loan. It’s crucial that small business owners are adequately prepared to meet with a lender to present their business in the best possible light and qualify for the money they need.

Here’s what you can do to streamline the loan approval process for your small business.

Your business risk profile

One of the most important parts of any business loan application is demonstrating to a lender that your company is able to make regular payments and repay the loan in full. If your business is profitable, you can show you’re a low risk by presenting cash flow statements, a detailed business plan and, of course, your good credit history. Some of the most common reasons a bank won’t grant a loan to a small business are a lack of security (e.g. no business assets), a poor or non-existent credit history, business inexperience and/or a weak business plan.

Know your credit score

It’s highly recommended that you review your credit score before you apply for financing. That way you’ll know whether it might be better to wait until you’re in a better position to qualify. Check that your report is complete or free of any errors that can affect your score. Your credit report includes your payment history for credit cards, equipment leases, mortgage or office rentals, electricity, phone fees and other business expenses. A simple omission – say your internet provider, whom you always pay on time, isn’t included in your payment history – can result in your credit score being lower than it should be, so be sure to correct any errors immediately.

Before you apply for financing

If you suspect a lender will decide your business is too high risk for a loan, or you’ve been denied financing, apply for business credit instead. Your spending limit may be low to begin with, but a credit card will give you that opportunity to build a good credit history. Pay off your balance – or, at the very least, make your minimum payment each month. Keep up with your other financial obligations, too, such as any personal loan payments, rent, leased equipment and any income taxes owing. Apply for a loan in six months to a year and you’ll have a much better chance of approval.

Before you apply, be sure you have all the documentation needed to support your loan application. Include in your portfolio copies of business banking statements, financial reports, a detailed business plan including projections and a well-researched marketing plan.

You should also be prepared to discuss with a lender why you need to borrow the amount you’re asking for, the length of term and how your business can afford to repay it. Make a strong case for funding by demonstrating profitability, a good credit history and a solid business plan, and you’ll be in an excellent position to qualify for the funds you need to grow your business.

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