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BusinessWorks Inc - A Dotcom in making

This blog is intended to stir your entrepreneurial spirit and get going with your own business. It tries to capture day-to-day issues related with a upcoming startup business. If you follow this blog long enough, it may take you from Concept to Wall Street. I invite you to submit your ideas and comments.

"BusinessWorks Blog is a must read for any would-be entrepreneur unaware of the painstaking process of building a business" - FORBES Best of Web

The Power of BusinessWorks is in the way it uses the blog format as an integral part of a process, to solve a business problem. - Small Business Trends PowerBlog Review

Web BusinessWorks

RFID Network Appliance Developer's Kit

Thursday, December 30, 2004
Recently, RF Code, Inc, a leading developer, designer and manufacturer of Auto-ID data management software and active RFID technologies announced availability of a powerful set of tools for enterprises that are building RFID networks. This kit will be provided to approved Systems Integrators and enterprise I.T. project teams for a paltry sum of $2995. Read complete article here.

I wonder, when will companies come out with an affordable kit (costing under $100) for RFID enthusiasts like me? I have a desire to start another blog which will be purely technical and based on RFID Development kit experiments. I wonder if some company can sponsor such a blog and provide me a RFID kit? Hint..Hint..I don't mind Santa arriving late with his gift of RFID Developer's kit for me!
12/30/2004 11:30:00 PM :: 3 comments ::

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The Circle of Information

Tuesday, December 28, 2004
First there was light, then there was a Light Bulb controlled by a switch, then came Internet and the light bulb was still controlled by a switch, finally Pervasive internet will come and control the Light Bulb.

This is the vision of Pervasive Internet. This next version of Internet is destined to control :

* Industrial - Capital Equipment, Automation & Control Equipment
* Power - Meters, Distributed Generators, Electricity Grid and Pipelines
* Healthcare - Medical Devices
* Home / Consumer - Game Systems, Consumer Electronics, Appliances
* Buildings / Facilities - Access Controls, Office Equipment, HVAC / Environmental Systems
* Retail - Lighting & Refrigeration Systems, Scanners & Registers
* Transportation - Vehicles, Airplanes, & Intermodal Transport

This congregation of Internet with the smart devices will create a serious shift in the advancement of the digital revolution - forming a comprehensive "digital neural net".

Imagine a large office building in future, completely auotmated, bootstrapped with thousands of Wireless sensors of all types. Temperature sensors monitoring the temperature outside and inside the building and sending information to the computer that controls the HVAC / Environment systems. Light sensors monitoring sunlight to turn on the lights inside and outside the building via the computer. Motion sensors guarding the building in the night. Well, all these things are available in one form or other, right now, so what is new here?

Futuristic buildings of today need to be pre-wired with these sensors. Even after pre-wiring, most of the networks in the building are disconnected and do not operate in unison, cannot communicate with each other. So what will change when Pervasive Internet kicks in?

All sensors will be wireless and networked with each other to effectively communicate with computer to convey the data needed for achieving the level of integration and control needed to completely automate the management of the building.
12/28/2004 10:43:00 PM :: 0 comments ::

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The Pervasive Internet

Monday, December 27, 2004
As I briefly mentioned about subtle changes in the blog yesterday, RFID and WSNs, two merging technologies will be focus of our attention. Wireless sensor networks or WSNs will bring about the revolution of "The Pervasive Internet" or as Anita Campbell mentioned in her comment today "The Internet of Things". So what does this "Internet of Things" involve?

Providing intelligence to the manufactured objects to be self-aware, to respond to the changes in it's environment is the essence of the Wireless Sensor Networks. How nice it will be if your Computer network can also control your office lighting, airconditioning requirements and your phone systems. This is possible only if these disconnected networks talk to each other. WSNs has the capability to make this happen.

WSNs combined with RFIDs increase the range of RFIDs, thus reducing(not eliminating) the needs for costly RFID readers. This can be done by using a network of sensors to pickup the signal from RFID tags and relay that signal thru the network to the nearest RFID reader.

I can provide an excellent example of connecting your complete house with WSNs, but then I may invite the wrath of privacy groups, instead tomorrow I will present an example of RFID and WSN usage in industrial environment.
12/27/2004 11:21:00 PM :: 0 comments ::

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Few subtle changes

Sunday, December 26, 2004
Hello All. Welcome back to the blog! I am back, refreshed and rejuvenated with some fresh ideas for my readers. Recently my blog was reviewed by none other than Anita Campbell herself on her Small Businesses Blog under PowerBlog category. Read the review here. Thanks to Anita's review, traffic has increased to my site and I have received lots of reader appreciations about the blog and valuable suggestions. A reader mentioned about Wireless Sensor Networks (WSN), which is a complementary technology closely related to RFIDs. This raised my curiosity and I researched few of the sites he had sent me. I ended up subscribing to a M2M Magazine and forming a Google group discussing the merger of these two complementary technologies. Check out the group here. I will be discussing about WSNs in upcoming Posts. Meanwhile, here is a small introduction to WSN:

What are Wireless Sensor Networks? As the name suggests devices are
sensors that can sense changes in temperatures, amount of light and
motion. Unique thing about them is that sensors are Wireless and they
can be a node in a network of Wireless sensors. These sensors can
transmit data to the host, practically without having to make changes
in the existing infrastructure. Sensors can use Bluetooth and Zigbee
technologies to communicate with each other. As with any new
technology, sensor have their shortcomings like..need to change
batteries which last from few weeks to few months, but as the product
matures, these batteries may be replaced or supplemented with solar
panels or non-harmful nuclear energy with low level radiation.

Meanwhile on Vendor responses, I have not received any, either due to holiday season or they do not consider my "virtual" business serious enough. In any case, I will wait for them till New year. In my independent study of RFID vendor, Intermec, I found lots of reading material, complete solutions, case studies in various areas where RFID is being used. If my "virtual" business becomes a real business, my website will be similar in flow as Intermec, without infringing any copyrights.
12/26/2004 07:55:00 PM :: 1 comments ::

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Merry Christmas... I will be busy researching Intermec

Wednesday, December 22, 2004
There will be no posts till the end of this week. I plan to do vendor related research on RFIDs and Intermec. They have one of the most exhaustive sites, choke full of Articles, RFID configuations, white papers, products and solutions. I promise, I will be back with more material for you to read in next week.

So till then Merry Christmas!
12/22/2004 10:41:00 PM :: 0 comments ::

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Vendor Neutrality? Is it possible?

Tuesday, December 21, 2004
While we wait for RFID Vendors to respond, let us talk about Vendor neutrality. About couple of months back, UCLA's research wing WINMEC had conducted interesting demonstrations. The idea was to prove that middleware can work with any database, reader, scanner, and tag combination, with specific integration to other enterprise applications coded in on a customized basis. WINMEC experimented with all kinds of readers (UHF, HF, LF) and tags (including EPC 0 and 1, ISO15693, ICODE, and ISO180006B). Success rate was very high in proving the neutrality.

OATsystems is another company that is also working with enterprise application integration (EAI) provider webMethods. Basically data samples, definitions of structures and content and exceptions are given to webMethods and it does the map. So RFID becomes just another data stream or in other words middleware becomes vendor neutral.

There are some exceptions, but it can be generalized that Vendor neutrality is possible. To read this article, click here...
12/21/2004 10:32:00 PM :: 0 comments ::

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Impact of RFID UHF Generation 2 approval

Monday, December 20, 2004
There were some heartwarming news last week about EPCGlobal Inc, a nonprofit organization chartered to drive standards for RFID technology, approved UHF Generation 2 specification. What will be the impact? If you recall my earlier post of market analysis, I had said,

Over 90% of the untapped market is either researching the feasibility of the RFID solutions or "waiting" to see the results of other companies. Biggest impediment is high cost of RFID hardware, software and integration to achieve a fast ROI. Other barrier is lack of industry standards.

This approval can accelerate the decision making process of the undecided companies. Hundreds of pilot tests that were waiting for lack of standards can now be conducted with approved hardware.

I had originally planned to start my vendor evaluation this week, but UHF Gen 2 approval news made me rethink and defer this process. In a day or two I will be sending requests to various vendors to know their plans about UHF Gen 2 approved hardware availability. That will help me to evaluate vendors on basis of approved technology.
12/20/2004 10:44:00 PM :: 0 comments ::

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After Business Plan, What next?

Saturday, December 18, 2004
Logical step after preparing a business plan, is to approach the Venture Capitalists, but we will take a diversion. I will talk about this diversion in a moment.

For those who tuned in late, I am in process of starting a "Virtual" dotcom company, that will do business in RFID based solutions. So far I have done brainstorming about various technologies and selected RFID as the technology of choice. Next I announced the project, which this virtual company will be pursuing. A business start-up needs a path to proceed forward, so the next step was to discuss business plan. You can read all these steps in the archives or from the index on your left.

The diversion I was talking about is selecting RFID vendors for the company. In coming week, I will be evaluating RFID vendors. As BusinessWorks intends to be a complete RFID solution provider, evaluation of RFID vendors is essential. Process of evaluation will consider factors like compatibility, frequency range, costs, feasibility of creating middleware solutions, security features, tag memory and functionality and many more factors. My goal, after evaluating RFID vendors, would be to select two vendors and form a strategic partnerships with them. This is essential to conduct my business with end users, so I might as well conduct this research next.

This evaluation will be free publicity for the vendors, I wonder if they will be nice enough to provide real RFID test kits. That is a wishful thinking ofcourse. We will have to depend on theoretical evaluation of RFIDs.

I would like to invite my readers to help in this evaluation, especially if they are technically inclined.
12/18/2004 02:30:00 PM :: 1 comments ::

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AIM Global

Friday, December 17, 2004
This is the last RFID related website review. Today's site is Association for Automatic Identification and Mobility. This is a truly rich content website dealing with RFID, bar code, biometrics, smart card, Electronic Article Surveillance and card technologies. AIM is a global trade organization of components, networks, systems and service providers whose services include collection and integration of data with information management systems. There are case studies available upon request or you can select one of the vertical markets and view various case studies. Comprehensive Solution Provider evaluation guide is provided on the site to help you make a educated decision in selecting consultants, systems integrator or a value added reseller in RFID and other areas. You can request or propose business opportunities, look for jobs or employees in the career center. Be sure to check out the RFID events in your area in the calendar section.

AIM also has documents for various RFID standard, so read to your heart's content and when you are done reading that, there is a technology-wise Buyer's guide. AIM Global has most exhaustive coverage on the subject of RFID. This is one website you must have on your favorites, if you are interested in RFID.
12/17/2004 09:20:00 PM :: 0 comments ::

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Spy Chips are a privacy concern?

Thursday, December 16, 2004
While I am reviewing RFID related websites this week, it will be unfair not to consider RFID Privacy sites. I visited SpyChips website today. As expected, they have a good tutorial on what are RFID chips and how your privacy can be violated. It even has a section on frequently asked questions. News articles and Press releases are included to give you complete coverage on privacy issues. Website invites you to get involved in opposing retail surveillance.

I invite you to read Spy Chips website and before you form you opinion about RFID and related privacy concerns, read an article on ComputerWorld website about how RFID privacy scare is overblown.
12/16/2004 09:54:00 PM :: 0 comments ::

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RFID Handbook

Wednesday, December 15, 2004
Today my quest was to find a technically complete handbook on RFID and I hit a jackpot at RFID-Handbook.com. This book is available in 4 different languages apart from English. The author, Klaus Finkenzeller maintains this resource rich site. This site has RFID related forums, links, downloads which includes a simulation program and an obvious book purchase link. I read a free chapter available on the website and was impressed by the explanations, diagrams and the depth of knowledge, author Klaus Finkenzeller posesses. I went ahead and ordered the book from one of the online book sites. Next I visited the links and that area is a goldmine of resources. About 164 companies related with RFIDs are listed. Other links are categorized as Applications, Middleware, Events, Online resources, Education and Research, Radio Regulations, Standardizations, Publications and News.
12/15/2004 10:11:00 PM :: 1 comments ::

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RFID Tribe

Tuesday, December 14, 2004
RFID and Tribe are worlds apart, but RFID Tribe does exist on web and few select cities and is thriving well by deriving it's support from RFID "Warriors", "Braves" and "Chiefs". This tribe is a unique group, which establishes chapters in various cities throughout the world, offers discounted training programs to its members, run electronic forums to collaborate, connect and communicate with other members. Membership is available at various levels, from free to paid, depending on your contribution towards the betterment of the tribe. If you are serious about RFID and want to participate in this technology of future, check on Tribe's website, if there is a "chapter" in your area or become first one to create a "chapter" in your area.

You must be wondering if my focus has shifted from writing about business to reviewing RFID related web sites. It is definitely not the case. I am taking a small break from serious business writing for a while.
12/14/2004 10:32:00 PM :: 0 comments ::

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Investing in RFID sector

Monday, December 13, 2004
After writing about the business plan for so many days, I decided to take a break and research stocks of the companies, which are involved in the business of RFID. I started off with a search in Google, and first result itself uncovered a gem. The website is RFID Investing. Website has a convenient RFID stocks portfolio, that one can track and research. Site also has RFID related new items, Trade shows & conferences. RFIDInvesting site is a part of InvestorIdeas website, which deals with other sectors like Nanotechnology, Wireless, Homeland Security and many others.

Research of 44 RFID related stocks kept me preoccupied most of the time. I plan to select 10 most promising stocks and list my portfolio on the website. RFIDInvesting is one site, that is a "must include" on my Favorites list.
12/13/2004 10:04:00 PM :: 0 comments ::

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Business Plan - Putting it all together

Saturday, December 11, 2004
We have completed all the components of a business plan successfully. The task on hand now is to package these components in a presentable manner and avoid mistakes, generally commited by entrepreuners. Here are some tips:

* Make the presentation attractive enough by adding tables, charts, bullets and other graphics wherever necessary. Afterall a picture is worth thousand words.
* Packaging is equally important. Use a decent three ring or a spiral folder that can lie flat on the desk for easy reading.
* Proofread the business plan thoroughly twice and the Executive summary thrice.
* Make sure the numbers match in graphs, charts, statements and other places.

I am including a Table of Contents for your reference and to quickly go to a topic of interest.

Table of Contents

I. Executive Summary

II. Company Description

III. Product / Service Desc.

IV. Market Research

V. Marketing Plan

VI. Operations Introduction

VII. Organization Structure

VIII. Capital Projection

IX. Management Team

X. Exit Strategy

XI. Financial Plan - Introduction

- Assumptions - Part I

- Assumptions - Part II

- Income Statement

- Cash Flow Statement

- Balance Sheet

- Performance Review

12/11/2004 10:31:00 PM :: 0 comments ::

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Business Plan - An Exit Strategy

Thursday, December 09, 2004
Businesses, especially high profile, high risk Technology based ones must have a mandatory exit strategy as a part of the business plan. Nothing pleases a Venture Capitalist more than seeing a well laid out exit plan, where he / she can get his / her money back(hopefully with a reasonable return) and exit your company. They look for an exit plan of roughly 3 to 7 years (10 years in case of nano or bio-technology) and ofcourse high returns. There are some well established exit strategies you can offer in a business plan:

* Franchise the business
* Initial Public Offering (IPO)
* Merger / Acquisition
* Buyout by partner
* Handing down the business to another family member

Due to uniqueness of each business, exit plan should be custom made taking into account, business life-cycle, management needs, competitive environment. Plan should also be customized to include provisions for death, divorce (marital or business partnership) and disability.

Some fallacies to avoid:
* Never ignore your personal goals when planning an exit strategy.
* overconfidence about your business's potential to go public.

Bottom Line: The most effective exit plan will take into account business, personal, and investor goals. Business plan, being the road map for your company, a well thought out exit strategy defines a future destination when your investor can expect to reach liquidity.

This concludes the series on components of a Business Plan. Tomorrow I will write about "putting it all together" and include an index to each component of a business plan.

12/09/2004 10:22:00 PM :: 0 comments ::

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Business Plan - The Management Team

Being a virtual business, I will refrain from publishing the names of the management team, instead I will give you a quick tutorial on selecting the Mangement team

Ideally an entrepreneur would love to inject company's employees with the love of learning and with the thrill of thinking strategically. But, as with any other process, this comes gradually and with the help from the initial team. And that means he or she will need to select individuals to be members of the initial strategy team, which can motivate rest of the employees. So how many individuals do we select? Very Few (less than 5) and you will have a hard time maintaining a high energy level in your strategy sessions. Too many (beyond 12) and your sessions will easily degenerate into tactical, rather than strategic, discussions.

Important criteria for selection of the team should be the fact that selected person is a strategic thinker. And that criteria will drive home a most important point. That your organization values strategic thinking…and thus, strategic thinkers. Also, make sure they’re smart and Visionaries too. Not everyone has a flair for thinking about the future. Be sure that at least a few of the people on your strategy team have such flair. That they both enjoy the challenge and are somewhat skilled at future thinking… at least they’re interested enough that they’re eager to learn.

With these things in mind, you should make a checklist of talents a team member must possess or better still, write up a resume of an ideal team member and while interviewing your candidates, try to match and size them up with your ideal resume. Make sure you give them questions about the real life business issues and situations and ask them, how they will resolve those issues. Test their team participation skills and give them an excercise to envision the company five or ten years from now.

Business Startups generally do not have the liberty of forming an initial team. However an initial team is so important that it can either make or break the company. Be ready to give away a big piece of your company to your management team. This keeps them motivated to perform better to give you the expected results.

Few other steps to follow are:

* Clearly define your expectations to the team
* Explain what is valued in your company's culture
* Foster a culture for learning
* Offer your feedback regularly to your team.

Tomorrow we will discuss the Exit plan for the business.
12/09/2004 12:13:00 AM :: 0 comments ::

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A RFID Idea for Taxicabs

Tuesday, December 07, 2004
We have two components left to discuss for the business plan, but before that I would like to present the idea received from one my readers. In his own words...

"You should market your RFID to taxi cab companies as well. If you could provide a software solution that would allow dispatchers to "queue" future pick-ups, see in real-time where the cabs are, and utilize some method of maximizing efficiency (say, the best route for cab A would be this way, picking up X passengers, etc), I think even more money could be made. Plus it could allow taxi companies to discover underutilized areas in a particular city, thus maximizing their revenue. A possible pitfall could be an event where someone hails a taxi; how do we update the most efficient path then? Do the future pickups which have already been queued for driver A shuffle to driver B, who is now closer and would maximize revenue? And what about human error; could driver B react that quickly to the new order?"

This idea has lots of potential. There are some issues to resolve. Let us examine them one at a time:

How do we update the most efficient path when someone hails a taxi? This can be resolved by installing a Garmin GPS device or something similar. Although I am not sure, how many days that device will last in a city like New York!

Do the future pickups, which have already been queued for driver A shuffle to driver B, who is now closer and would maximize revenue? And what about human error; could driver B react that quickly to the new order? Real world scenarios will include factors like traffic jams, accidents, adverse weather conditions, driver lethargy and human errors. These cannot be avoided. Only an effort can be made to minimize the effects of these factors. There is a certain limit to automation and control, rest is dependant on human and natural factors.

I plan to group these ideas and make them available at one place for everyone to access. Another reader asked me, if I plan to start a real business based on RFID solutions? My reply is "Yes. Maybe sometime in the future. Let me put it this way..I am practising for the future by writing this blog!"
12/07/2004 10:40:00 PM :: 0 comments ::

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Financial Plan - Performance Review

Monday, December 06, 2004
Performance Review is the last component of the Financial plan. Buyers, investors always face a dilemma before buying or investing in a business about the valuation of the company. Valuation can be a very subjective matter, so they have come out with financial ratios which presents the investor with a decision making tool. These ratios are defined in the areas of Performance, Financing, company activity and Liquidity. We will discuss about Performance related ratios. There are 10 ratios associated with performance of the company:

Average Interest Rate: This is the average rate of interest at which company borrows. This is a useful measurement that tells you how much debt company is carrying from year to year.
Formula to calculate Average Interest Rate is (Interest Expense - Accounts Payable) / Liabilities..

Book Value per Share: This is the accounting value of the share and is radically different than the value that market percieves for the share. Market and book value have nothing in common. Market value is what the investors expectations are and book value is based on costs and retained earnings. Only time Book value is useful when market value is below book value. In such a situation, share is considered to be undervalued and may be an attractive buy for the investor. Formula to calculate Book Value is (Stockholders Equity - Preferred Stock) / Average Outstanding Shares.

Cash Flow to Assets Ratio: This ratio tells us how much cash can company generate with respect to its size. A profitable company is not of much use if it does not have enough cash around to pay the bills. Higher the ratio better it is. Formula to calculate this ratio is Cash from Operations / Total Assets.

Dividend Payout Ratio: This ratio indicates what portion of earnings can be used to pay dividends to the shareholders. Nowadays companies prefer to reinvest this payout in the growth of business. Formula to define this ratio is Yearly Dividend per Share / Earnings per share.

Earnings per Share (EPS) : This popular ratio tells you how much profit was generated per share. However real picture is seen when current EPS is compared to the previous years. Formula to calculate EPS is (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares.

Gross Profit Margin: This ratio gives pretty good idea about company's pricing policies and markup margins. A stable Gross profit Margin is seen as a healthy sign. Gross Profit Margin is calculated as (Revenue - Cost of Goods Sold) / Revenue.

Price to Earnings Ratio (PE Ratio): Another popular ratio which is used to compare the current share price with earnings to indicate if stock is under or over valued. Formula is Market Value per Share / Earnings per Share.

Profit Margin: This indicates what proportion of sales contribute towards the income of the company. A low margin indicates poor pricing strategy or strain from competition. Formula is Net Income / Revenue.

Return on Assets: This tells us what return a company is generating on it's investments and assets. That is why, this ratio is also referred as ROI or Return on Investment. It is calculated as (Net Income + Interest Expenses) / Total Assets.

Return on Equity: This is amount of return, company is generating on the shareholder's investment and is defined as Net Income / Shareholder's Equity.
12/06/2004 11:31:00 PM :: 3 comments ::

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December 04 -The Carinval of Capitalists

Sunday, December 05, 2004
Another wonderful episode of the Carnival of Capitalists is up. This week, the host is Jeff Cornwall who holds Jack C Massey chair in Entrepreneurship at Belmont University. As usual, we get to read some of the finest piece of writing you can find in the areas of Capitalism and business. There is also a good post about blogging for business by Russell. Read the Carnival of Capitalists here.
12/05/2004 10:37:00 PM :: 0 comments ::

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Financial Plan - Balance Sheet

Saturday, December 04, 2004
On of my readers reminded me that I am missing one of the key components of the Financial Plan i.e. The Balance Sheet. This report is a snapshot in time of company's finances. Although it is a snapshot, it is a very important statement, because it tell you about Assets, Liabilities and Equity of the company. It not only provides you a list of assets, it also tells you which assets are financed by debt or by equity. Let us quickly define few terms here:

Asset: Asset is something that company owns for its economic value.Current Assets are assets that can be converted to cash within a year. There are various types of assets like Intangible, tangible, marquee and alternate. I will define two of the most commonly used ones:
* Intangible Asset, that is not physical in nature. Examples are goodwill, patents, copyrights and intellectual property
* Tangible Asset, that is physical in nature. Cash, land, building and machinery are prime examples of Tangible Assets.

Liability: Liability is an obligation or legal debt as a result of accrual accounting. A liability can be accounts payable, loans, accrued expenses, mortgages. Liabilities can be either current, which are debts payable within a year, or long term, which are debts payable over longer period of time.

Equity: In Balance sheet terms, equity is defined as the contribution value of stockholders and the retained earnings or losses.

The Balance sheet report has two sides viz. Left hand side or Assets and right hand side or Liabilities and Equity.The name "Balance sheet" comes from the fact that Left hand side balances with Right hand side, or in other words Assets = Liabilities + Equity.
12/04/2004 09:26:00 AM :: 1 comments ::

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Financial Plan - Cash Flow Statement

Thursday, December 02, 2004
Cash is the King! To analyse the Cash inflows and Outflows, there is a need for Cash Flow Statement. Cash flow and Income Statement are similar as both report Company's performance over a specified period of time. Cash Flow differs from Income Statement when it comes to non-cash accounting items such as depreciation and amortization. The cash flow statement tells you about how much cash the company has generated by stripping away non-cash accounting items. The Cash flow statement is also used to determine company's ability to finance growth related activities and ability to pay bills and creditors. The potential buyers and investors use the cash flow statements to make crucial decision about investing in the company.

Cash Flow statement has three components:

Operating Cash Flow:It has another name - Working Capital. This is the cash generated from product / service sales and from internal operations, so it can be controlled.

Investing Cash Flow:This cash flow is generated internally from non-operating activities like investments in plant and equipment or other fixed assets and non-recurring loses or gains.

Financing Cash Flow:This cash flow is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.

12/02/2004 09:54:00 PM :: 1 comments ::

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Financial Plan - Income Statement

Wednesday, December 01, 2004
Income statement is also known as Profit and Loss Statement. The income statement is important for Venture Capitalists as it is the basic measuring stick of profitability of the company. The Income Statement provides the investor with much insight to the company's revenues and expenses. You can identify where the company spends much of its income and compare that to similar companies. You can also compare a company's performance with previous years. Most importantly, the income statement tells an investor if the business is profitable. Let us talk about the components of a typical income statement.

Gross Profit on Sales: This is the net value of Sales of the company less Cost of Goods Sold.

Net Sales:This is defined as revenue generated from the sale of all the company's products or services minus an allowance for returns, rebates, etc.

Cost of Goods Sold:It is the money that company spends to buy the raw materials needed to produce its products and manufacturing its products and labor costs.

Operating Income: This is a company's earnings from its business after it has deducted its cost of goods sold and its general operating expenses. Operating income excludes interest expenses, other financing costs, income generated outside the normal activities of the company, such as income on investments or foreign currency gains.

General Operating Expenses:These are normal expenses incurred in the day-to-day operation of running a business which include sales or marketing expenses, salaries, rent, and research and development costs.

Depreciation: It is defined as the gradual loss in value of equipment and other tangible assets over the course of its useful life. Accountants use depreciation to allocate the initial purchase price of a long-term asset to all of the periods for which the asset will be used.

Operating Income: This is very important as it is measures profitability based on a company's operations. In other words, it assesses whether a company is profitable. It ignores income or losses outside of a company's normal domain. It also excludes extraordinary events, such as lawsuits or natural disasters, which in a typical year would not affect the company's bottom line.

Earnings Before Interest and Taxes (EBIT): This is the sum of operating and non-operating income and is also known as "other income" and "extraordinary income (or loss)". As its name indicates, it is a firm's income excluding interest expenses and income tax expenses.

Net Earnings:Also known as Net Income, is the proverbial bottom line. It measures the amount of profit a company makes after all of its income and all of its expenses. It also represents the total dollar figure that may be distributed to its shareholders. Net Earnings are also the typical benchmark of success. Negative Net Earnings are are known as Net Loss :).

Retained Earnings:This is the amount of money that a company keeps for future use or investment. Another way to look at it is as the earnings left over after dividends are paid out. Generally, a company has a set policy regarding the amount of dividends it will pay out every year.

Here is the brief summary in terms of formulae:

Gross Profit on Sales = Sales - Cost of Goods Sold
Operating Income = Gross profit - General Operating Expenses - Depreciation Expense
EBIT = Operating Income +(-) Other Income (loss) +(-) Extraordinary Income (loss)
Net Earnings = Earnings before Interest and Taxes - Interest Expense - Income Taxes
Retained Earnings = Net Earnings - Dividends

12/01/2004 10:46:00 PM :: 2 comments ::

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