Going Fundamental: Balance Sheet what?

source: http://live.regnumchristi.org

I know you might ask that to me. So I might as well dedicate a post regarding this document which usually fits in a piece of paper but has a very very important information about the company you might be thinking to invest in.

Balance Sheet is one of the set of Financial Statements I discussed in my previous post What are Financial Statements?

In order for us to fully understand the value of information we get in a Balance Sheet let me share with an equation called the Balance Sheet Equation:

Basically the above equation tells us about Balance Sheet. A Balance Sheet is a list of what the company owns, owes, and the net balance which it could claim as the real value that it owns.

It has 3 components:

ASSET are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings,equipment, and vehicles.

LIABILITY are obligations of a company or organization. Amounts owed to lenders and suppliers. Liabilities often have the word "payable" in the account title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed

CAPITAL/EQUITY is the net amount invested by the owners or the amount that is attributable to the owners or in other words the owners' part in the whole company.

source: http://accountingquickbooksexperiences.blogspot.com/

Now why do we have to know these things about company?

One thing an investor needs to know using these information is the ability of the company to continue doing business which accountants term as "GOING CONCERN". No sane investor would put his or her money on a company that has no certainty of doing further business. If company has no capability to continue doing business it follows that its ability to generate income is already questionable.

Assets and Liabilities are further sub-divided to current and non-current(sometimes it is called long term). These sub-division allows us to compute ratios that will help us evaluate the company's ability to stay afloat in the short run(basically within a year) and its ability to further expand.


Some ratios derived from the Balance Sheet are the following:

Current Ratio is computed by dividing Current Assets by Current Liabilities. It indicates the capability of the company to pay currently maturing liabilities. 

Debt to Equity Ratio which is computed by dividing Liabilities by Equity indicates the leverage level of the company. A company with a high Debt-Equity Ratio is high risk because it shows that the company is more of owned by lenders rather than investors. It also post a risk of insolvency because the company is heavily indebted. 

Another thing that makes the rich richer and the poor poorer

 source: http://www.kccatalyst.com

If you remember my post on the same topic, you will remember that one thing that makes such things happen is because of TAX. 

Now there is another thing that makes rich richer and that is what we call ATTITUDE.

If you have already read Robert Kiyosaki's book "Rich Dad, Poor Dad" I believe you get the whole idea.

For those who haven't let me dispense what so far I have learned and digested.

source: http://www.sha.tc/tips/rich-dad-poor-dad

As Kiyosaki's rich dad, which is his friend Mike's dad, said the rich become richer because they keep on increasing their asset while the poor become poorer because they only increase their earnings.

The key ATTITUDE here lies on the definition of an asset. The poor define asset as a thing of value they owned. The rich define asset as a thing that puts money in their pocket. Because of this definitions the poor keeps on buying things which they consider has value like cars, house, and jewelries thinking that they have real value. 

 source: http://musicdjnik.blogspot.com/

This attitude is what we call the SPENDING ATTITUDE. And in order to spend they keep on working and working only to buy things for self use and the only way to feed that spending is to increase their earnings; just up to there and no other. Thus they work hours and hours to have overtime pay, slave to bosses so that they get promotion and have a raise, to the point that they try to impress the higher ups so that they get increase or bonus. This is what they call the RAT RACE; you have to work to feed that spending.

On the other hand the rich focus on one thing that is to increase their asset. They don't just buy things of value, they buy asset that put money to their pockets this is what we call INVESTING ATTITUDE. 

 

source: http://www.best-investing-guide.com/

They buy rental property, they buy stocks that give dividends, they buy small business which runs on its own and gives them earnings, they buy  property which can be resold at a gain, and so on. They buy things that generate income and re-invest those income to get more assets that generate income thus their asset increases so their earnings increases until to the point that they don't have to work because their assets generate enough to make them retire young.

The poor complains why the rich don't work hard and yet they have luxury. The poor gets jealous thus he works to earn enough and buy the same things he sees in the rich and end broke because of so much liabilities. The true rich on the other hand waits until his earnings  from his or her income generating assets is more than enough to sustain that asset's operation. The extra earnings becomes free money for her or him to use to buy and enjoy luxury. They only buy on credit to leverage. But there are rich who doesn't know such thus they make bad spending just like the poor and end up broke losing the money they have.

It is on how one handles money. That is why to be truly rich does not necessarily mean filthy rich but rather it is the point where one does not worry where to get the money to buy one's needs and one's luxury from time to time because they have assets that work hard for them.

source: http://sproutednutrition.com/

Another thing that makes the rich richer and the poor poorer

 source: http://www.kccatalyst.com

If you remember my post on the same topic, you will remember that one thing that makes such things happen is because of TAX. 

Now there is another thing that makes rich richer and that is what we call ATTITUDE.

If you have already read Robert Kiyosaki's book "Rich Dad, Poor Dad" I believe you get the whole idea.

For those who haven't let me dispense what so far I have learned and digested.

source: http://www.sha.tc/tips/rich-dad-poor-dad

As Kiyosaki's rich dad, which is his friend Mike's dad, said the rich become richer because they keep on increasing their asset while the poor become poorer because they only increase their earnings.

The key ATTITUDE here lies on the definition of an asset. The poor define asset as a thing of value they owned. The rich define asset as a thing that puts money in their pocket. Because of this definitions the poor keeps on buying things which they consider has value like cars, house, and jewelries thinking that they have real value. 

 source: http://musicdjnik.blogspot.com/

This attitude is what we call the SPENDING ATTITUDE. And in order to spend they keep on working and working only to buy things for self use and the only way to feed that spending is to increase their earnings; just up to there and no other. Thus they work hours and hours to have overtime pay, slave to bosses so that they get promotion and have a raise, to the point that they try to impress the higher ups so that they get increase or bonus. This is what they call the RAT RACE; you have to work to feed that spending.

On the other hand the rich focus on one thing that is to increase their asset. They don't just buy things of value, they buy asset that put money to their pockets this is what we call INVESTING ATTITUDE. 

 

source: http://www.best-investing-guide.com/

They buy rental property, they buy stocks that give dividends, they buy small business which runs on its own and gives them earnings, they buy  property which can be resold at a gain, and so on. They buy things that generate income and re-invest those income to get more assets that generate income thus their asset increases so their earnings increases until to the point that they don't have to work because their assets generate enough to make them retire young.

The poor complains why the rich don't work hard and yet they have luxury. The poor gets jealous thus he works to earn enough and buy the same things he sees in the rich and end broke because of so much liabilities. The true rich on the other hand waits until his earnings  from his or her income generating assets is more than enough to sustain that asset's operation. The extra earnings becomes free money for her or him to use to buy and enjoy luxury. They only buy on credit to leverage. But there are rich who doesn't know such thus they make bad spending just like the poor and end up broke losing the money they have.

It is on how one handles money. That is why to be truly rich does not necessarily mean filthy rich but rather it is the point where one does not worry where to get the money to buy one's needs and one's luxury from time to time because they have assets that work hard for them.

source: http://sproutednutrition.com/

Ways to be debt free: What now?

                                                       source: http://7million7years.com

Its been awhile since I wrote something about this topic. If you haven't read the first part click here.

In my last post we talked about accepting that you are in fact buried in debt. It may sound crazy or something but as any other form of addiction acknowledging your situation is the very first step. Now the next thing one should do is to make an inventory of whatever one has. 

When I say "whatever one has" that includes your assets and your liabilities.

Do you have a car? Do you have a house or a laptop? These things are your assets. Assets are things of value that you own. 

Do you have a credit card loan, a bank loan, a mortgage, or a "utang sa 5/6" ? These things are liabilities. Liabilities are things that you owe.

List these things separately. You could have a notebook with the pages equally divided of which the first half would be your ASSETS and the second your LIABILITIES. Make it a four column page. The first would be your description or name of the asset or liability, the second is the amount related to it, the third is your plan for it, ans the last is where you can either put a tick mark to indicate if the plan for it is done or a date of which you want to achieve such. See  sample below:

Now just like the above examples you have to decide which assets of yours can go away and which one are necessity. I know this would be gory but hey remember you are buried in debt and if you don't get out of it fast the more you will be buried in the pit. Oh these is one of the secrets ... you must get out of debt fast.

On your liability section determined which one are onerous or burdensome.

Lets define onerous, courtesy of wiktionary.org

Etymology

From Latin onerosus (“burdensome”), from onus (“load”).
Pronunciation

    * (UK) IPA: /ˈəʊn.ɜː(ɹ).ʌs/ SAMPA: /"@Un.3:(r).Vs/

Adjective

onerous (comparative more onerous, superlative most onerous)

   1. burdensome; difficult; wearing; tiring

Antonyms

    * gratuitous

Related terms

    * exonerate
    * exoneration
    * onus

Why list liability in the order of burdensomeness? 

As I have said awhile ago the faster you pay your debt the better. So the faster you pay debts or loans with hefty interest the better because you save money paying the interest attached to it. So looking back at the above I guess the Php 650,000.00 bank loan at 15% per annum should be settled or paid first to avoid paying interest.

Now looking at your assets, list them down in the order of greater fair value. Sorry I never told you. Maybe your laptop cost 25,000.00 when you bought it 3 months ago but if you are to sell it  now probably you will only get 10,000.00 to 15,000.00. One has to consider an asset's fair value. 

Wikipedia has this to say about fair value:

A rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:

    * acquisition/production/distribution costs, replacement
      costs, or costs of close substitutes
    * actual utility at a given level of development of social
      productive capability
    * supply vs. demand

and subjective factors such as

    * risk characteristics
    * cost of and return on capital
    * individually perceived utility

What does this mean? Your assets may have a lower or higher value depending on how much is the accepted fair value at the time of sale. So what can you do to be able to sell your stuff to pay off your debts? I guess these are my only advice in regards to this matter ; first make sure people who are interested to buy see value in your asset and second make sure such are in good shape.

Looking at the two sides you might notice that you have a difference of negative Php 197,500.00

This is what we call Net Worth. To read about my post regarding Net Worth click here.

Having a negative net worth signifies that you are really buried in debt while having a break even or a positive net worth means you are able to leverage your assets and liability to the full potential. 

So what is one of the things that you should do to be debt free? 

You have to list your asset in the order of greater fair value and liabilities in the order of onerousness. Pay first your onerous debts and make sure your assets has greater value so that you can get as much from it.

Ways to be debt free: What now?

                                                       source: http://7million7years.com

Its been awhile since I wrote something about this topic. If you haven't read the first part click here.

In my last post we talked about accepting that you are in fact buried in debt. It may sound crazy or something but as any other form of addiction acknowledging your situation is the very first step. Now the next thing one should do is to make an inventory of whatever one has. 

When I say "whatever one has" that includes your assets and your liabilities.

Do you have a car? Do you have a house or a laptop? These things are your assets. Assets are things of value that you own. 

Do you have a credit card loan, a bank loan, a mortgage, or a "utang sa 5/6" ? These things are liabilities. Liabilities are things that you owe.

List these things separately. You could have a notebook with the pages equally divided of which the first half would be your ASSETS and the second your LIABILITIES. Make it a four column page. The first would be your description or name of the asset or liability, the second is the amount related to it, the third is your plan for it, ans the last is where you can either put a tick mark to indicate if the plan for it is done or a date of which you want to achieve such. See  sample below:

Now just like the above examples you have to decide which assets of yours can go away and which one are necessity. I know this would be gory but hey remember you are buried in debt and if you don't get out of it fast the more you will be buried in the pit. Oh these is one of the secrets ... you must get out of debt fast.

On your liability section determined which one are onerous or burdensome.

Lets define onerous, courtesy of wiktionary.org

Etymology

From Latin onerosus (“burdensome”), from onus (“load”).
Pronunciation

    * (UK) IPA: /ˈəʊn.ɜː(ɹ).ʌs/ SAMPA: /"@Un.3:(r).Vs/

Adjective

onerous (comparative more onerous, superlative most onerous)

   1. burdensome; difficult; wearing; tiring

Antonyms

    * gratuitous

Related terms

    * exonerate
    * exoneration
    * onus

Why list liability in the order of burdensomeness? 

As I have said awhile ago the faster you pay your debt the better. So the faster you pay debts or loans with hefty interest the better because you save money paying the interest attached to it. So looking back at the above I guess the Php 650,000.00 bank loan at 15% per annum should be settled or paid first to avoid paying interest.

Now looking at your assets, list them down in the order of greater fair value. Sorry I never told you. Maybe your laptop cost 25,000.00 when you bought it 3 months ago but if you are to sell it  now probably you will only get 10,000.00 to 15,000.00. One has to consider an asset's fair value. 

Wikipedia has this to say about fair value:

A rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:

    * acquisition/production/distribution costs, replacement
      costs, or costs of close substitutes
    * actual utility at a given level of development of social
      productive capability
    * supply vs. demand

and subjective factors such as

    * risk characteristics
    * cost of and return on capital
    * individually perceived utility

What does this mean? Your assets may have a lower or higher value depending on how much is the accepted fair value at the time of sale. So what can you do to be able to sell your stuff to pay off your debts? I guess these are my only advice in regards to this matter ; first make sure people who are interested to buy see value in your asset and second make sure such are in good shape.

Looking at the two sides you might notice that you have a difference of negative Php 197,500.00

This is what we call Net Worth. To read about my post regarding Net Worth click here.

Having a negative net worth signifies that you are really buried in debt while having a break even or a positive net worth means you are able to leverage your assets and liability to the full potential. 

So what is one of the things that you should do to be debt free? 

You have to list your asset in the order of greater fair value and liabilities in the order of onerousness. Pay first your onerous debts and make sure your assets has greater value so that you can get as much from it.