All posts by Marianne

Freelance financial journalist, author and blogger with specialist interest in entrepreneurs, running your own business, stockmarkets, investment, trading strategies and savings

Why compound interest, not diamonds, is a girl’s (or guy’s) best friend

I found myself watching Pretty Woman again the other night (which incidentally, I think is a terrible film, though I am probably in the minority amongst the sisterhood here).

What struck me was that instead of flipping snails in posh restaurants, Julia Roberts’ character should have been learning a few share trading tips from top financier Richard Gere. In fact, she could have asked him a few smart questions about how to run your own business. Because, however nice the trinkets and the diamonds are, it is an understanding of the principles of finance, and particularly, the laws of compound interest, which would have kept her off the streets for the rest of her life. Once she’d learnt that, it wouldn’t matter whether or not he stuck around to pay the bills. She’d have all the skills she needed to manage money successfully.

Of course that wouldn’t have made much of a romantic chick-flick, but we are living in the real world here, so here are the facts:

1. When compound interest works in your favour, you are on a winning streak. When you receive interest in the form of savings income, dividend payments from shares, or from passive income, it accrues. Then you receive interest on the initial capital investment, plus the interest on top. Simple.

2. When you are on the wrong side of compound interest then it is easy for debts to spiral out of control pretty quickly. This is particularly the case at the moment where savings interest rates are still historically low, but the interest rates charged on loans are rising. Once you have a capital debt the charges you pay on that can accumulate very quickly, until it becomes difficult to pay off even the monthly interest, never mind the underlying initial debt.

So the bottom line is, manage your money successfully by thinking twice, if not three or four times, before taking on a personal loan or racking up credit card debt. The only debt you should really have is one which is being paid off for you by someone else, for example, a buy-to-let property.

Had Julia Roberts known that, she wouldn’t have needed to wait for her grumpy handsome prince to come waving the credit card and buying the fancy shoes. She could have done it all herself instead.

How to get your pricing right

By Marianne Curphey

While watching  re-runs of The Apprentice, it struck me forcibly how little time or attention the contestants gave to working out how they were going to make a profit from their business.

For example in one exercise the two teams were given the task of selling fast food to commuters with an initial budget of £250 for ingredients. Despite backgrounds in management, accountancy and sales, few team members seemed to grasp the concept that getting the pricing strategy right was absolutely fundamental to the success or failure of the project. They didn’t have profit targets and they weren’t keeping track of whether they were generating a decent return on Alan Sugar’s investment.

These would-be entrepreneurs demonstrated a trait which often leads to business failure – a lack of understanding of the fundamental importance of cash-flow.

If they had been in a real-life business environment, looking for investment from business angels (wealthy investors who support fledgling businesses), they would have been eaten alive. They may be called “angels”, but professional investors make Lord Sugar look like a pussy cat. They have very specific targets for the return on their initial investment, a timetable for exiting when they have made the money they want, and no hesitation in pulling the plug (ie the funding) if it is clear things are not working out.

In fact, it could be argued, as entrepreneur Luke Johnson does here in the Daily Mail, that The Apprentice does nothing to show would-be business owners the practical aspects of running a company, and instead sacrifices genuine business insight for pure reality-show entertainment.

So, forget about the circus show of television, and start to think like a real entrepreneur. Whether you plan to expand your business to the point where you will be seeking outside investment, or you want to keep it relatively small, but successful, you need to understand the principles of profit, cash-flow and putting together a balance sheet.

So here’s how to get your pricing right:

1. Work out your fixed costs: what are the recurring items or bills that you need to purchase or pay for each month in order to run your business?

2.  What are your variable costs? One-off or unusual items (capital expenditure: buying a long-term asset for the business), annual insurance costs (you can break this down into a per-month sum or build it into an annual balance sheet projection)

3. What is your  “break-even” point?  What do you need to make each month to pay basic bills like utilities, phone, rent or leasing costs for your premises, stock storage costs or staff wages? This is the amount you need just to stay afloat and keep your bank manager happy.

4. What is the cost involved per unit? ie providing each service or doing an individual job – ie travel costs, materials, phone calls?

5. What is the value your product or service provides to your customers? The Business Link website has an excellent explanation of the difference between the cost to you of providing the service, the financial reward you receive in return (ie the price) and the value the customer places on your service.

6. What benefits do you provide and on what criteria do customers buy – reliability, reputation, speed of delivery?

7. Establish your value. This is vital, because it helps you work out your unique selling point (USP), enables you to explain to customers why you are different from your competitors, and means you are not selling on price only, which is a dangerous game.

You may have the most brilliant business idea in history, but without a sound understanding of the way finance works, you will struggle to grow your fledging business. One of the most common mistakes when starting out is to concentrate too much on the names, logos, website or premises of your business, and spend too little time on working out the hardcore finances.

In my next blog I will be looking about how to assess your prices in comparison to your competitors, and whether to pursue volume or a smaller number of high-value sales.

regards, Marianne

Why right now is the perfect time to launch your own business

Time to become your own boss?
Why now is the perfect time to launch a business

So you want to run your own business, either because you are sick of your job, you’ve been made redundant, or you’ve had a long-held dream of creating something special? That’s great, because there has never been a better time to run your own show.

Contrary to received wisdom, new businesses can and do survive in tough economic times. The difference between launching your own business in a time of austerity is that you really have to think through your niche, your offering and your unique selling point (USP) in a way that you might not have needed to when money was plentiful.

And here’s why now is the perfect time to become self-employed:

1. Secure jobs are illusory: cut-backs, redudancies and downsizing in companies big and small show that there is no such thing as a job for life…..or even for the next five years. Just because you are on PAYE does not mean that your salary has a gold-plated guarantee. Self-employment offers a much more bumpy ride, income-wise, but no-one can ever fire you.

2.You can’t get finance: in my opinion this is an excellent discipline. We’ve all seen the figures about how one in three small businesses fail in the first few years, despite their creators writing fabulous, long-winded business plans to soothe the nerves of the bank manager when they are trying to get a bank loan. Creating a business that requires minimal investment and leaves you in total control is the best way to control costs and survive in a tough economic climate.

3.You’ll awaken your passion: who wants to hang around in a job they hate until the economy picks up…. or until they retire? Life is too short to spend eight or more hours every day doing something you hate. Finding an outlet for your creative business energy will inject more excitement and fun into your life than you ever dreamed possible.

4. Your business idea will need real focus: lots of flakey business concepts struggle on in good times because of the glut of disposable income. In a recession, you need to find an idea or product that people really need. This is absolutely the best discipline for concentrating your mind on how, why and where you will sell your products, and to whom.

5. The power of the internet is perfect for small businesses: once you were constrained by geographical boundaries, now thanks to social media, Google searches and the power of Facebook and Twitter you can potentially reach hundreds of thousands of prospective customers across the country – and the globe. This is perfect for tightly-targeted niche products which may have a limited market in the UK but a huge market on a global scale via internet marketing and selling.

In my next blogs I’ll be looking at what business schools don’t teach you about running your own business, and how to set up a micro-business while you are still in a job,

regards, Marianne

How to make (and lose) money from stockmarket bubbles

It can be very tempting to buy into a bubble when all around you fellow investors seem to be making easy money. But as a very interesting article today in the Daily Telegraph demonstrates, market timing is everything.

In stockmarket terms, “bubbles” are usually defined as a period when stock prices run ahead of the real valuation of underlying assets, or when stock prices are driven higher than their valuation might justify.

As the Telegraph article illustrates, many people were seduced into buying into the South Sea Company after it was set up in 1711.

The company was promised a monopoly on trade with Spanish South American companies by the British government in return for taking on debt incurred in the War of Spanish Succession.

Intitially, investors made good money. Indeed, Sir Isaac Newton invested early and sold out into profit. But he then made the mistake of buying back into the company at a later date.

The shares were on a roll, rising  from £128 in January 1720 to £1050 by June the same year. Who would want to stand by and miss out on the chance to make a fortune so quickly?

But the bubble burst shortly afterwards, bankrupting many investors. Newton himself was said to have lost £20,000, the equivalent of around £3 million in today’s terms.

That one of history’s smartest men could have been so badly burned by the volatility of the stockmarket is a salutory lesson. The psychology of humans means that we find it very hard to stay level-headed during such frenzies, and those who stand on the sidelines fear they are missing out on a one-off opportunity to make their fortune.

Also, investors are prone to suffer from attachment bias, in other words, they struggle to imagine a scenario which is radically different from the current status quo. A good example is house prices. Residential property in this country is overpriced relative to wages and mortgage affordability, but if you ask anyone what they think their house is worth they are unlikely to quote you a figure 20 to 30% less than the current asking prices on their street.

Knowing when to invest is best learned early on
Market timing can be problematic

Similarly, if you have owned a share which has hit a high and then fallen back significantly, it can be difficult to acknowledge that you are unlikely to see the stock reach that price again in the short to medium term, if ever. This requires you to reassess your data and to accept that you have made a mistake.

So attachment bias prevents you from making an impartial decision and means people tend to discount evidence which contracts their opinion. It is one of the contributory factors to creating a bubble, and explains why the sceptics are often sidelined or ignored even when the bubble looks ready to pop.

Much of investing is about managing one’s own psychology and having the courage to question the behaviour of the crowd. It is much harder to do than it sounds, but is a lesson best learned early on.

You can read the full Daily Telegraph article here.

Marianne Curphey May 2014