In other words, the opportunity cost of capital is the marginal productivity of additional investment in the best alternative uses. It is, therefore, not surprising that the marginal productivity of capital in the private sector is frequently suggested as an appropriate value for the opportunity cost of capital to be used in public investment projects. It seems reasonable to say that if the marginal investment can earn x percent in the private sector, no public investment project should be allowed to earn less, and vice versa. However, the suggestion does not lead to a solution, since measurement of marginal productivity of capital is a formidable (if not impossible) task due to the fact that capital is not a homogeneous good. That is, marginal products from different capital goods may differ. A more practical way to determine the value of the opportunity cost of capital is to use some market rate of interest.

The use of a market rate of interest corresponds to the neoclassical approach of perfect competition, which assumes the existence of a capital market that generates efficient prices. That is, the price system equates marginal costs and benefits and results into efficient allocation of resources. Thus, efficient prices are the prices at which there would be a competitive equilibrium between supply and demand. In other words, they are equilibrium prices for the various factors in an optimum situation when all alternative uses have been taken into account. Naturally, an efficient price system rarely exists due to various market imperfections–tariffs, taxes, quotas, increasing returns to scale, monopoly and monophony power by various buyers and sellers, or a lack of necessary market institutions. Nevertheless, the use of a market rate of interest for the opportunity cost of capital is often a good approximation.

In practice, the use of a market interest rate follows the following procedure: (1) selection of relevant interests rates; (2) estimation of the prime interest rate or the rate charged borrowers having the highest credit training; and (3) adjustment of the prime interest rate by including a corresponding risk premium, if necessary. From a broad viewpoint, the selection of relevant interest rates calls for a reflection of what determines the rate of interest in an economy. In brief, it is the result of the interplay between the supply of and demand for capital. Basically, the supply depends on the level of savings in a country and the flows of capital from abroad. The demand stems from investment plans by private business and government. Thus, we could consider the following array: interest rates related to the short-term funds, medium- and long-term loans, preferred shares and equity capital, interest rates on time deposits, rates for consumer credits, rates of return on real assets (fixed assets and inventories), and interest rates charged by private money lenders operating in unorganized markets.

The selection of relevant interest rates relates to the choice of the interest rate that is a prime rate (as free of risk as possible) and not subject to random short-term fluctuations. Consequently, we eliminate from the above array interest rates related to equity capital, preferred shares, and short-term funds.

The rates of return on real assets are not recommended for consideration either, since the establishment of these rates calls for the evaluation of such assets, which is a Herculean task if one considers the variety of existing real assets. Moreover, prices of similar fixed assets vary from location to location.

Interest rates charged by private money lenders in unorganized markets primarily take place in developing countries where private money lending sometimes accounts for a large portion of the total volume of credit extended. However, such rates are also not recommended for consideration since they often reflect the default of borrowers, and frequently exist in quasi-monopolistic environments (the loans are frequently made by small businessmen and farmers in rural areas with a lack of good communications and money markets).

The above eliminations leave us with interest rates of medium- and long-term loans, interest on time deposits, and rates for consumer credits to estimate the prime interest rate. In the United States, Canada, and most western European nations, the capital markets are essentially free, and governments, in their borrowings, pay a competitive price. In addition, government bonds in these countries are regarded as the prototype of investments with a prime interest rate. Therefore, it is reasonable to use the yields on long-term government bonds for the opportunity cost of capital in the United States, Canada, and most western European nations.

In developing countries, however, capital markets are usually imperfect, and governments do not always enjoy the highest credit rating. Depending on local conditions, it is frequently better to use first-rate corporate bond yields, long-term private borrowing rates on high-grade loans of commercial and specialized credit institutions, first trusts granted by mortgage banks, or a weighted average of these.

The adjustment of the prime interest rate by including a corresponding risk premium is necessary when there are risky investment plans. The correct adjustment relies largely on judgment, since there is no practicable way to analyze systematically and to transform price risks and risk of failure of the investment into one risk premium. The difference between short-term and long-term lending rates for prime risk capital may give an indication of the market’s assessment of the adjustment necessary for price risks. In addition, the yields on purchasing power bonds (those bonds whose nominal value is tied to a value standard such as a general price index) may, if they exist, be compared to ordinary financial bonds of similar terms. An indication of the adjustment necessary for risk of failure of the investment may also be obtained on the basis of past trends and forecasts of probable failures of ventures.

The use of competitive growth models is sometimes suggested for the determination of the opportunity cost of capital. The models are based on highly abstract production functions of the Cobb-Douglas type with variables and parameters that are difficult or impossible to measure empirically. In addition, the underlying assumptions appear to be unrealistic in real-world situations. The application of growth models to the establishment of the opportunity cost of capital may become more promising once the approach has been further developed through the relaxation of unrealistic assumptions and the inclusion of variables which are easier to measure. So far, little progress along these lines has been made.

Abey Francis – About the Author:
Full time blogger engaged in the areas of management and technology. Author and Moderator of famous business management blog Management Articles and Business Case Studies.

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Aside from having accounting and bookkeeping software, one must think of ways to improve their cash flow.

Here are some accounting tips to improve business cash-flow:

-Cash Flow Analysis. First and foremost prior to starting to improve your cash flow management, a detailed view of how your business manages cash must be obtained. Analyze your accounts receivable, accounts payable, credit terms and inventory.

-Accounts Receivable. Your business’ accounts receivable make up a large proportion of the cash coming into a small business. So it is important to keep a close eye on them.

How?

Keep on Top of Payments. Always be aware when customers’ payments are coming due. You can do this by using a bookkeeping accounting software as they can generate an accounts receivable aging report. In this way you can keep track of the habits of your customers over time which will help you identify which ones are likely to need to be prompted to pay.

Promptly Collect Your Receivables. Don’t wait for your customers to decide they want to pay you. Have a process in place for invoicing and collections. Stick to them as the longer your receivables are outstanding, the harder or the less likely you are to collect. To collect promptly, you must establish a due date on the invoice and then send out a follow-up statement within 10 to 30 days from the due date.

Make it easier for them to pay. Be prompt in issuing your invoices. If customers regularly receive their invoices in a timely manner, there is a high chance for you to receive your money quickly. Make sure that your customers know exactly when payment is due as well as offer to them an easy and fast payment options, such as fax and online methods. You could also offer them discounts if they pay early.

-Accounts Payable. Carefully monitor your outflows as it is beneficial to you to keep cash on hand for as long as possible.

Manage your due dates. To do this, you can make payment on an invoice on the day it is due to keep consistent cash flow. Do not pay early as it can leave you short of cash at a crucial time. Organize your outflows by arranging electronic fund transfers with your financial software.

Have your payment times extended. Negotiate with your vendors and try to work out an agreement so that payments are spread out and payment times are extended as long as possible.

Strengthen your relationships with vendors. This is useful in cases you need to delay payment in the future.

-Inventory Management. This basically involves monitoring your daily sales activity and making steps to ensure that your on-hand inventory reflects these patterns. Use a retail management software so that you can generate a forecast on how demand will ebb and flow throughout the coming months. It is common to have 80 percent of your revenue coming from 20 percent of your inventory. Once you figure out which of your products applies, you will be able to make informed decisions about how much of a certain item to order – and when.

In cases when you find yourself with an out-of-date inventory, the best strategy is to sell it for the best price you can as inventory that is not being transformed into cash is useless.

Source:
Kevin Jeffersons – About the Author:
Shoebooks.com.au is a premium provider of online accounting solutions for SME businesses in Australia. Check out Shoebooks accounting software business services and experience the advantages of our accounting software in Australia. Shoebooks is located at Unit 12, 118 Church Street, Hawthorn Victoria 3122, Australia.

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Avoiding Business Failure

Neither the employees nor creditors can be paid on time unless the business receives monthly invoices on time from customers. It is very challenging to wait for 30-45 days till customers pay up. Small businesses need that money for vital payments. It is enough for them to be put out of business. This is where invoice factoring comes in. Invoice factoring is very helpful as it makes available ready cash within 28-48 hours of selling the invoices. This money can be used for all pressing payment issues.

Timely Payment of Bills

A business that deals with an experienced invoice factoring institution can improve its business in many ways. It can improve its credit worthiness and also fulfill orders on time besides meeting payroll requirements and making timely tax payments. Credit worthiness is improved by resorting to invoice factoring because the additional cash can be used to pay off creditors. A business can expect to grow rapidly by resorting to invoice factoring. Cash flow issues are settled thus making it easier to handle more orders. The increase in working capital makes having bigger and more number of customers a viable possibility.

Advantage Over Bank Loans

It is impractical for small businesses to wait for bank loan approvals and funds as they can be time consuming processes. Companies would also be required to establish some credit line which new businesses are less likely to have. A small business may not be in a position to wait for release of bank funds, especially if there is an urgent order from customer that has to be fulfilled. Banks also require some form of collateral, which is another factor that keeps away small businesses. Invoice factoring, on the other hand, is not a form of loan or debt. It is merely the sale of invoices. It does not require lengthy waiting period or any form of collateral.

With invoice factoring services, small businesses can no longer be held back because of cash flow problems.

Source:
Alex Martin – About the Author:
1st American Factoring providing best invoice factoring solutions for minimizes debt consolidation to your organization at very affordable price. Visit www.1stamericanfactoring.com to know more about invoice factoring.

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Assets

To begin with, we’ll have a look at what an asset it. This can be defined as anything that has economic value or is expected to provide future benefit if invested in, such as money in the bank, personal property, real estate, and investments. Look around your house or business premises, I’m sure you’re bound to see a few. For example, that computer that you use to write short stories for submission in exchange for pay is an asset. That pickup truck that you use to transport items for sale from the warehouse to your supermarket is an asset as well. Make a list of everything you own that is of value. Include your possessions such as vehicles, property, jewelry, furnishings, equipment, antiques and collectibles. Add any investments that you may have, and any cash in the bank. Place a value on each item. When you add up these values, you will have an idea of the worth of your assets. Remember, assets can be converted to cash for times when you’d find yourself in a rough spot.

If you want to acquire additional assets to secure your financial future, you could invest steady investment classes such as stocks, bonds and gold. These can be bought from investment brokers, who will advise you on the best stocks to buy in order to make a profit. It’s wise to diversify your assets to bolster your finances from future rainy days that each of us is bound to come into. With a good mix of assets, you can weather the storm and brave economic slumps when they hit.

Liabilities

Next, we’ll check out what liabilities are. These are amounts you owe to people or businesses in the form of bills or loans. These also include things that will cost you money in the future like that car loan you’re servicing. It’s important to make sure that your liabilities never exceed your assets. The funny thing, however, is that sometimes when you’re acquiring assets, you incur liabilities. Unless you have cash in the bank to cover their cost, assets are often accompanied by debts. Please note that day-to-day living expenses are not liabilities, as these are costs that are to be expected and should be planned for in advance in your budget.

In order to have an idea of your net worth, add the total cost of your liabilities and subtract it from your assets. This kind of knowledge will give you the power and confidence to take control of your financial future and ensure that you live a worry-free and financially secure life.

Author:
Styla Brite
Styla Brite is a published author and product reviewer. Continue reading more about How to Accounting and Fundamentals of options

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Bookkeeping services use the cash basis method for many small businesses without inventory. Under the cash basis method of accounting revenues are reported when the business has received them. Expenses are reported when they are actually paid for. Accrual accounting recognizes revenue when you have sold and delivered goods and when services have been performed. Cash does not need to be received to in order to record revenue. In other words, revenue is recognized when earned and expenses are recorded when incurred. So for example, if your employees perform a service for your customer you record, the revenue earned and expense the payroll incurred while hiring employees.

The use of accrual or cash basis accounting can have a significant affect to financial statements. The income statement shows readers the revenue and expenses for a business. If bookkeepers were to switch from accrual basis to cash basis accounting you would be able to see a significant difference in the company’s profit.

Lets suppose your window washing business has just provided services for a large building. After completing the job you are promised $600 but only given $400 in cash. The rest of the money will be paid later in the year. Your business also incurs expenses that total $300. Your window washing business pays $150 in expenses right away and the rest will be paid later.

If a bookkeeper or accountant was to record the transactions under each method you would see different figures for the income statement. The accrual method of accounting shown below on the left side shows a higher profit. The cash basis method of accounting shown below on the right side shows a lower profit.

As you can see depending on the accounting method the income statement will show you different figures. Most small businesses can justify the use of the cash basis because there are few transactions. Medium and large businesses will use the accrual method.

Source:
Honorino Lora – About the Author:
Honorino provides portland bookkeeping services. Besides freelance bookkeeping in Portland, Tigard, Beaverton, Hillsboro and the metro area he also writes articles on accounting and bookkeeping topics.

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Solution:
So here are five practical steps to start learning finance and business:

Read an introductory book on personal finance
In my opinion, starting with personal finance is a good way to learn finance and business. It is from personal finance that you get the most applicable ideas for your life. Isn’t it ironic if you know a lot about finance and business but have your own personal finance in a mess?

So I’d recommend reading a book that introduces you to all important aspects of personal finance. For this purpose, I like the book Personal Finance by Kapoor, Dlabay and Hughes. It is very readable, and cover all important aspects of personal finance like budgeting, consumer credit, housing, insurance, investing, and retirement. The book is also very scannable; you can easily scan through it to grasp the main ideas of every part.
The book is expensive ($132.19), but I borrow it from the library for free. If you can’t get it, don’t worry, you can always read other books. The bottom line is the book should introduce you to all important aspects of personal finance.

Subscribe to a personal finance blog
Subscribing to a personal finance blog will help you apply the principles of personal finance in your daily life. It will remind you of the principles you have learned, help you learn new principles, and most importantly help you put those principles into practice. The blog I like is Get Rich Slowly. The tips and experiences shared there are very useful and practical.

Subscribe to a personal finance podcast
Similar to my previous point about blog, subscribing to a personal finance podcast is a good way to help you put personal finance principles into practice. The podcast I like is Money Girl. It’s short (often less than five minutes), very easy to understand and contains a lot of practical tips.

Subscribe to a business podcast
Now we move from personal finance to finance and business in general. A good way to start is subscribing to a business podcast. There are many business podcasts, but the one I like most is HBR Ideacast for one simple reason: it gives me preview of the newest business ideas.
The podcast often features interview with the authors of new business books. By listening to this podcast alone, I can quickly get the main ideas of those books. In some cases, I get enough from the podcast that I no longer need to read those books. It saves me a lot of time while keeping me up-to-date with the newest concepts in the business world.

Read an introductory book on finance and business
Eventually, to get deeper knowledge about finance and business, there is no choice but to read “real” finance and business books. By “real” here I mean something that uses those jargons MBAs talk about in their conversations about business.
Fortunately, there are books that can help you get there in relatively short time. The book I like is The Ten-Day MBA by Steven Silbiger. This book introduces you to all important aspects of finance and business like marketing, accounting, economics, and strategy. It gives you enough knowledge to understand the conversations in finance and business world.

These five steps should give you strong enough foundation in finance and business. However, if you want to move beyond these five steps, I’d recommend reading the books listed in the Personal MBA. The list contains 42 books and periodicals which aim to give you finance and business knowledge comparable to someone taking an MBA program.

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Starting a student investment club begins with the desire to invest. An adult should start and run the club and provide structure and guidance along the way. Properly used, however, the student investment club will be a good learning experience for everyone.

1. Begin with a simple goal’s to provide kids with limited ability to search and select stocks to invest. Ensure that younger kids have their parent’s permission to participate. Come up with weekly or monthly goals for investing.

2. Write rules and stick to them. Investment clubs need rules and regulations and the student investment club is no exception. This helps to establish order and ensure that things are handled properly. Write the rules in plain language that can be easily understood by the age group.

3. Limit the investments. Children have limited funds so there should be low limits on the participation requirements as well as limits to the amount the child can invest. Get the buy-in of the parents before you begin. Always consider the amount of money available to students before you choose investments.

4. Make investments fun. The idea of investments can seem somewhat a dreary subject. Spice it up by allowing kids to invest in companies that they know or have heard about. Think about popular toy or video game companies, food or restaurant companies or clothing companies. Investing in a stodgy company they never heard of and don’t know the nature of business will make the club boring and kids will lose interest quickly.

5. Encourage kids to use their own money. When appropriate the students will learn better when they use their own money. Whether it’s from their allowance or from a part-time job, using their own money will force kids to be more interested in the investments.

6. Invite guest speakers. Whenever possible try to add interest by inviting guest speakers to meetings with the students. Find members of the local community to speak such as investment bankers, finance counselors or accountants.

7. Divide students into smaller groups. If you have a large group of students, it may be wise to have them form smaller groups. Allow them to form a corporation for investing and even let them name their company. Have them choose a president and then let them vote on investment choices.

8. Track investment performance. Teach students to use charts or graphs to track their investments and keep abreast with market trends in the newspaper or on the internet. Determine a specific day in a week to review investments with the students.

Source: http://www.articlesbase.com/fitness-articles/how-to-start-a-student-investment-club-252081.html
Author: Alvin Toh

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With posting boards additional documents or records can be produced whilst the entry is being made. If a statement form is filed with each ledger account it can be inserted under the spring clip at the same time as the ledger sheet; thus one writing will produce the sales journal, the ledger, and the entry on the statement. At the end of the month all that is necessary is to extract the statements and mail them to the customers.

Although, as an example, a detailed description has been given of the sales section of the accounts department, it should be realized that the posting- board method can be adopted for other entries. In dealing with cash received it is possible to produce at the same time the receipt, the cash book entry and the bank paying-in-slip. Whilst writing a cheque, entries can be made un the cash book and purchase ledger. Throughout the accounting system, and indeed for other purposes, wide use can be made of manifold posting equipment.

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The method described in this section is useful for small business, and also form the basis for mechanical accounting systems. It has important applications un the use of computers by providing basic accounting procedures. There must be a rigid check on the accuracy of the input to a computer system; if the wrong data is put into that system then the wrong answer will be produced- “garbage in, garbage out”. One of the controls of the input system is to have check total produced at the point transactions arise or original documents are prepared. The method illustrated and described in this section would provide some of these check totals.

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An additional advantage of the slip system us that invoices can be sorted un the required order for entering in the ledger. It must be emphasized that where use us made of simplified methods a strict control must be kept since the normal book- keeping checking methods can not be used.

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