In an interview potential employers generally mentions a gross remuneration packet for its potential employees.
These statements usually are gross amounts.
That is a sum total including taxes, insurance, social security, etc.
The employee would never see a good 30%-45% of that income, but he will be fed that amount. In case of doctors I hear its worse here in the US, a good 60% of the gross earnings would be just liability insurance coverage, then taxes but they will also be fed a gross amount - a large portion of which does not constitute to an expendable income.
If you ask the owner of a business enterprise how much he earns he would not be quoting the revenue of his company. He would rather give you a net figure. A figure that is net of costs and expenses, he would rather look at the the figure that he/she has in his pocked to expend than what his company revenues are.
When the owner tries to sell his business products, the sale price is usually a net figure, a cost of goods with profits but not including taxes, insurance and transportation.
Why would an owner a of business look at his own earnings in net terms, his business products in net terms in contrast to his employees in gross terms?
Gross earnings of an employee are a cost to the owner or an employer.
The entire income statement of an employee is an expense statement for the employer, it matters little to an employer that an employee does not see 30%-40% of that money as the owner of a business has to continue to shell out that additional 30%-40% as a part of the expense for his employees.
Net prices of a business product are a cost to the owner, the rest of the cost that is taxes, insurance and transportation are a cost that the owner passes on to the customer. The owner does not bear that cost, we as customers do.
What in effect an owner communicates is, the cost of his earnings on a per employee basis (remuneration of an employee) or an a per product basis(cost of a product).
For an owner the presence of assets such as office, goods, vehicles, etc in a business are cost of earnings. While for the lay man they are assets. They are costs that he bears at the reduction of earnings.
Its about managing how much to give away of earnings such that the give away creates value greater than earnings in hand. The more the owner expends the lower earnings he has. Which in effect means the cost of earnings are higher than what one is actually earning. Also know as profligate expense!
Fancy set ups are a cost, and communicate a higher costs which is being passed onto the customer where ever possible.
But if the owner manages the expenses right, these expenses can create value for the business thereby increasing his earnings.
Which is the second part of earnings - cash flow - how to manage cash flows.
So the first aspect is looking at cost of earnings and the second part is managing cash flows. The first is perspective the second is empirical experience.
Monday, June 30, 2008
Friday, June 27, 2008
default rules
How come in the world of choices we usually end up with the default choice or the one we don't want to make?
frankly I don't know; but I hear a lot about make your destiny and make your choice, the truth could be that seldom if ever do we have it our way for the most part we usually are resigned to the default choice: it usually is last available choice or we are coerced into that last choice.
Funny why we call it choice if it is the last choice, funnier still that we call it choice if we are coerced into it.
perhaps we still called it 'a choice', as the response to that last default choice can be: a 'yes' or a 'no'.
Which is technically still a 'choice'!
And I guess we already know, that 'yes or no' can make a world of a difference in our lives...
frankly I don't know; but I hear a lot about make your destiny and make your choice, the truth could be that seldom if ever do we have it our way for the most part we usually are resigned to the default choice: it usually is last available choice or we are coerced into that last choice.
Funny why we call it choice if it is the last choice, funnier still that we call it choice if we are coerced into it.
perhaps we still called it 'a choice', as the response to that last default choice can be: a 'yes' or a 'no'.
Which is technically still a 'choice'!
And I guess we already know, that 'yes or no' can make a world of a difference in our lives...
confident to a fault
A research surveyed 7,000 CFOs over a six-year span, asking them to predict a range of 1-year and 10-year returns of the S&P 500 index and divulge how certain they felt about their predictions. Although most of the CFOs felt very sure of themselves when selecting, they were correct just 38% percent of the time.
Wanting to be right or thinking to be right or for that matter hoping to be right does not translate to 'being right'.
Despite the dangers of overconfidence, many people contend that it's better to have too much confidence than too little. Well simply because confidence displays a positive attitude, though the positive attitude has no play or driver on reality. Reality is distinct from ones attitude, it is like hoping the wind will blow the way one thinks, this is seldom if never the case.
John Maynard Keynes made a profound observation on confidence when he wrote, "Individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits."
What Keynes meant by animal spirits is that the individuals who do create economic prosperity have to embrace a "naive optimism" and must put aside the thought of ultimate loss, just as healthy men put aside the thought of death.
Well I reckon he is stating you need to be a calculative risk taker, but then all confident or over confident folks think of themselves as calculated risk takers.
The under-confident ones don't take risks even if they can calculate, so that leaves then out!
I guess we are back to square one we still can't distinguish between a confident and over confident dolt. Another point is with a 38% chance at being correct, our thinking of being right is lower than the probability of being right.
Probability alone should have rendered a 50% success rate, but in this case confidence alone lowers success rate by 12%, which is pretty significant.
I guess we are better off just taking chances then...
Wanting to be right or thinking to be right or for that matter hoping to be right does not translate to 'being right'.
Despite the dangers of overconfidence, many people contend that it's better to have too much confidence than too little. Well simply because confidence displays a positive attitude, though the positive attitude has no play or driver on reality. Reality is distinct from ones attitude, it is like hoping the wind will blow the way one thinks, this is seldom if never the case.
John Maynard Keynes made a profound observation on confidence when he wrote, "Individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits."
What Keynes meant by animal spirits is that the individuals who do create economic prosperity have to embrace a "naive optimism" and must put aside the thought of ultimate loss, just as healthy men put aside the thought of death.
Well I reckon he is stating you need to be a calculative risk taker, but then all confident or over confident folks think of themselves as calculated risk takers.
The under-confident ones don't take risks even if they can calculate, so that leaves then out!
I guess we are back to square one we still can't distinguish between a confident and over confident dolt. Another point is with a 38% chance at being correct, our thinking of being right is lower than the probability of being right.
Probability alone should have rendered a 50% success rate, but in this case confidence alone lowers success rate by 12%, which is pretty significant.
I guess we are better off just taking chances then...
Monday, June 16, 2008
choices
Napoleon famously remarked, "There are only two alternatives in this world: to command or to obey."
I guess he left the 3rd choice out, probably on purpose.
"To not Obey".
A single option will gives us 2 choices.
As in "to do or not to do".
Of Shakespeare infamous rhetoric "to be or not to be".
2 options will render us 3 choices, as in the case enumerated above about Napoleon.
greater options probably does give us greater choices but also greater confusion.
The key is that there is not such thing as a default option.
What can I say, life isn't confusing enough, that we have to recognize the subtlety of choice.
I guess he left the 3rd choice out, probably on purpose.
"To not Obey".
A single option will gives us 2 choices.
As in "to do or not to do".
Of Shakespeare infamous rhetoric "to be or not to be".
2 options will render us 3 choices, as in the case enumerated above about Napoleon.
greater options probably does give us greater choices but also greater confusion.
The key is that there is not such thing as a default option.
What can I say, life isn't confusing enough, that we have to recognize the subtlety of choice.
Sunday, June 15, 2008
explaining the business
one of the challenges of being an entrepreneur is explaining what an entrepreneur does?
Most people think it is about how much a entrepreneur makes - financially - rather that is the 'how much' and not the 'what he does'?
For most people being an entrepreneur is about being in business, but what is business, rather what makes the business tick, why choose a particular business, where to set up a business and when to set up a business?
For others it has something to do with investing, financial management, manufacturing, and labor. But these are again just drivers of a business but not the essence of business.
However, business is about the study of how to get the most out of life — the choices we make, given that we can't have everything we want. It is the study of infinite wants and finite means, the ability to bridge the two and own a market niche.
For the layman this is something that he is not able to identify with much less understand, so he equates a business to revenues. However what he needs to look at is the ability that can generate revenues not just for today but for the future.
And since business is about choices, about the finite means to achieve the infinite want, it is about what it costs to achieve the infinite with the finite - the opportunity costs.
It is not just about the opportunity cost but also the ability to choose an investment despite the opportunity cost such that the returns from the investment far outweigh the opportunity cost it bore initially.
On a simpler note it is why we get ourselves educated so we can get better jobs. While we are educating ourselves we are losing out on an income (opportunity cost) but our education (investment) we hope will get us a better return than without an education.
The other attribute about being an entrepreneur is about specializing in an activity.
By specializing in a very small set of skills, selling those skills in the marketplace and relying on the skills of others who have specialized in activities we don't do or cannot do. (Adam Smith - Wealth of Nations)
We try as far as possible to specialize only in that activity where players are fewer so we can get a greater reward whereas we leave out or outsource those activities that does not render a greater reward to us by being self sufficient.
We specialize because the costs of self-sufficiency or rather the costs of doing everything is high, so we specialize only in those activities where we can generate a greater reward - as we have finite means.
We are all given just so much time here, getting the most out of life means using that precious time wisely. Using that time wisely means using and understanding opportunity cost and that ability to choose one opportunity over the other.
Most people think it is about how much a entrepreneur makes - financially - rather that is the 'how much' and not the 'what he does'?
For most people being an entrepreneur is about being in business, but what is business, rather what makes the business tick, why choose a particular business, where to set up a business and when to set up a business?
For others it has something to do with investing, financial management, manufacturing, and labor. But these are again just drivers of a business but not the essence of business.
However, business is about the study of how to get the most out of life — the choices we make, given that we can't have everything we want. It is the study of infinite wants and finite means, the ability to bridge the two and own a market niche.
For the layman this is something that he is not able to identify with much less understand, so he equates a business to revenues. However what he needs to look at is the ability that can generate revenues not just for today but for the future.
And since business is about choices, about the finite means to achieve the infinite want, it is about what it costs to achieve the infinite with the finite - the opportunity costs.
It is not just about the opportunity cost but also the ability to choose an investment despite the opportunity cost such that the returns from the investment far outweigh the opportunity cost it bore initially.
On a simpler note it is why we get ourselves educated so we can get better jobs. While we are educating ourselves we are losing out on an income (opportunity cost) but our education (investment) we hope will get us a better return than without an education.
The other attribute about being an entrepreneur is about specializing in an activity.
By specializing in a very small set of skills, selling those skills in the marketplace and relying on the skills of others who have specialized in activities we don't do or cannot do. (Adam Smith - Wealth of Nations)
We try as far as possible to specialize only in that activity where players are fewer so we can get a greater reward whereas we leave out or outsource those activities that does not render a greater reward to us by being self sufficient.
We specialize because the costs of self-sufficiency or rather the costs of doing everything is high, so we specialize only in those activities where we can generate a greater reward - as we have finite means.
We are all given just so much time here, getting the most out of life means using that precious time wisely. Using that time wisely means using and understanding opportunity cost and that ability to choose one opportunity over the other.
Saturday, June 14, 2008
Why do business' exist
Business' come in to existence on the solid base that the entrepreneur of the business has found out a novel method to reduce costs compared to competition.
Besides the not so common aspect of technological advantage or marvel that brings a firm into a market, business' usually come into existence or exist on the ability to organize markets and labour more efficiently.
Besides the not so common aspect of technological advantage or marvel that brings a firm into a market, business' usually come into existence or exist on the ability to organize markets and labour more efficiently.
representation of interests
Democracy allows us to get our interest expressed and represented.
However between the expression to representation there is a slip between the expression of an interest to its representation in reality.
In a democracy we have politicians represent our interests.
That is the claim, however when we think about how does a politician or a political party try and represent the interests of an entire group of people. Unless of course the group has a common interest, but given our culture backgrounds, our social status, our economic disposition we could have a variegated interest to express and to represent.
How does the politician or a political party represent this diverse interest of its patrons, I am pretty sure there is to be some differences within the same electorate.
Inevitably, our interests and desires clash and politicians are forced to choose between the general interest and the special interest. Most often it is the general interest wins. However while campaigning politicians use special interests to come to power, however once in power they realize that special interest could have an adverse impact on some sections of their electorate.
So politicians are more willing to go with general interests that please the public.
the flip side is they still maintain a self interest and pursue policies that aid their self interest while in contrast only purport an electorate's general interest.
However between the expression to representation there is a slip between the expression of an interest to its representation in reality.
In a democracy we have politicians represent our interests.
That is the claim, however when we think about how does a politician or a political party try and represent the interests of an entire group of people. Unless of course the group has a common interest, but given our culture backgrounds, our social status, our economic disposition we could have a variegated interest to express and to represent.
How does the politician or a political party represent this diverse interest of its patrons, I am pretty sure there is to be some differences within the same electorate.
Inevitably, our interests and desires clash and politicians are forced to choose between the general interest and the special interest. Most often it is the general interest wins. However while campaigning politicians use special interests to come to power, however once in power they realize that special interest could have an adverse impact on some sections of their electorate.
So politicians are more willing to go with general interests that please the public.
the flip side is they still maintain a self interest and pursue policies that aid their self interest while in contrast only purport an electorate's general interest.
Wednesday, June 11, 2008
what gets us about higher prices
I think we all realize that oil prices would head up in time.
I mean with demand outstripping supply and new demand coming in from China & India it is inevitable that energy costs would rise.
But the surprise is not that energy costs have risen, it is startling that they have risen so quickly and by so much.
Its is the pace of price rise that has got us baffled rather than the fact that energy costs have risen. It was inevitable that prices rise just as prices rise for just about everything else, and energy is another commodity that would be affected by the obvious.
Akin to the stock markets, when certain stock prices rise or dip faster than usual, there is always some rigging or horse trading involved.
And this is because the price rise can baffle most of us, but there are still a few smart ones around who know why prices rise (fall) and it would be good to consider what they are doing in times such as these.
The question is finding these smart alecs who are privy to this information.
I mean with demand outstripping supply and new demand coming in from China & India it is inevitable that energy costs would rise.
But the surprise is not that energy costs have risen, it is startling that they have risen so quickly and by so much.
Its is the pace of price rise that has got us baffled rather than the fact that energy costs have risen. It was inevitable that prices rise just as prices rise for just about everything else, and energy is another commodity that would be affected by the obvious.
Akin to the stock markets, when certain stock prices rise or dip faster than usual, there is always some rigging or horse trading involved.
And this is because the price rise can baffle most of us, but there are still a few smart ones around who know why prices rise (fall) and it would be good to consider what they are doing in times such as these.
The question is finding these smart alecs who are privy to this information.
Tuesday, June 10, 2008
the price control
What really can be controlled in today's economy.
There is regulation and management, and how much of what is really taking place out there, no one knows, I doubt the regulators and managers know in effect how much of what they see is actually the effects of regulation or management.
Maybe the effects are just incidental.
Maybe we need to refocus from effects to stimulus, we should look at managing stimuli, but then how much of what stimulus affects to render and effect. I mean in todays world everything has a bearing on everything else.
And even nothing can actually have a bearing on something.
So where is the control?
Maybe it is an illusion?
Look at oil, look at inflation...which affects every consumer in the world today.
How much of inflation can be managed or targeted, I mean we all know oil prices affect prices of almost everything today but we are yet to come up with an alternate or effective management to keep prices in range or bearable.
I guess the only thing I have control over is what time I sleep and what time I wake up. Then again do I really?
There is regulation and management, and how much of what is really taking place out there, no one knows, I doubt the regulators and managers know in effect how much of what they see is actually the effects of regulation or management.
Maybe the effects are just incidental.
Maybe we need to refocus from effects to stimulus, we should look at managing stimuli, but then how much of what stimulus affects to render and effect. I mean in todays world everything has a bearing on everything else.
And even nothing can actually have a bearing on something.
So where is the control?
Maybe it is an illusion?
Look at oil, look at inflation...which affects every consumer in the world today.
How much of inflation can be managed or targeted, I mean we all know oil prices affect prices of almost everything today but we are yet to come up with an alternate or effective management to keep prices in range or bearable.
I guess the only thing I have control over is what time I sleep and what time I wake up. Then again do I really?
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