Throughput definition

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 15:19:00 PDT 2018

Throughput is the number of units that pass through a process during a period of time. This general definition can be refined into the following two variations, which are:

• Operational perspective. Throughput is the number of units that can be produced by a production process within a certain period of time. For example, if 800 units can be produced during an eight-hour shift, then the production process generates throughput of 100 units per hour.
• Financial perspective. Throughput is the revenues generated by a production process, minus all completely variable expenses incurred by that process. In most cases, the only completely variable expenses are direct materials and sales commissions. Given the small number of expenses, throughput tends to be quite high, except for those situations in which prices are set only slightly higher than variable expenses.

For operations, throughput can be increased by enhancing the productivity of the bottleneck operation that is constraining production. For example, an additional machine can be purchased, or overtime can be authorized in order to run a machine for an extra shift. The key point is to focus attention on the productivity of the bottleneck operation. If other operations are improved, the overall throughput of the system will not increase, since the bottleneck operation has not been enhanced. This means that the key focus of investment in the production area should be on the bottleneck, not other operations.

For financial analysis, throughput can be increased by altering the mix of products being produced, to increase the priority on those products that have the highest throughput per minute of time required at the constrained resource. If a product has a smaller amount of throughput per minute, it can instead be routed to a third party for processing, rather than interfering with the bottleneck operation. As long as some positive throughput is gained by outsourcing, the result is an increased overall level of the throughput for the company as a whole.

Related Courses

Constraint Management 

Depreciable asset

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 13:48:00 PDT 2018

A depreciable asset is property that provides an economic benefit for more than one reporting period. A capitalization limit may also be applied to keep lower-cost purchases from being classified as depreciable assets. A qualifying asset is initially classified as an asset, after which its cost is gradually depreciated over time to reduce its book value. Examples of the classifications of assets used to record depreciable assets are:

• Buildings
• Computers and software
• Furniture and fixtures
• Land
• Machinery
• Vehicles

The time period over which an asset is depreciated depends on its classification. Land is not depreciated at all, since it is considered to have an infinite lifespan.

Related Courses

Fixed Asset Accounting 
How to Audit Fixed Assets 

Consult This Employee Termination Checklist to Keep Things Running Smoothly

by Rachel Gray @ Payroll Tips, Training, and News

Wed Mar 07 05:10:00 PST 2018

Employees leave companies every day to pursue growth opportunities, accommodate personal lives, or experience change. As an employer, you hope employees won’t leave your business, but you know this is wishful thinking. When an employee resigns, you need to know what to do. The average annual overall turnover rate is 19%, according to SHRM. If […]

The post Consult This Employee Termination Checklist to Keep Things Running Smoothly appeared first on Payroll Tips, Training, and News.

Valuation account

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 13:57:00 PDT 2018

A valuation account is paired with an asset or liability account, and is used to offset the value of the assets or liabilities recorded in the account with which it is paired. The result of this account pairing is a net balance, which is the carrying amount of the underlying asset or liability. The "valuation account" term is a less-used phrase that has the same meaning as the contra account concept.

Examples of valuation accounts are:

• Allowance for doubtful accounts (paired with the trade accounts receivable account)
• Allowance for obsolete inventory (paired with the inventory account)
• Accumulated depreciation (paired with the various fixed asset accounts)
• Discount on bonds payable (paired with the bonds payable account)
• Premium on bonds payable (paired with the bonds payable account)

The valuation account concept is useful for estimating any possible reductions in the values of assets or liabilities prior to a more definitive transaction that firmly establishes a reduction.

Valuation accounts are only used in accrual basis accounting. They are not used in cash basis accounting.

Similar Terms

A valuation account is also known as a valuation reserve or contra account.

Related Courses

Bookkeeper Education Bundle 
Bookkeeping Guidebook 

Human resource accounting

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 16:21:00 PDT 2018

Human resource accounting involves the tracking of all costs related to employees in a separate report. These costs may include the following:

• Employee compensation
• Employee payroll taxes
• Employee benefits
• Employee training

Such an accounting system can be used to determine where human resources costs are especially heavy or light in an organization. This information can be used to redirect employees toward those activities to which they can bring the most value. Conversely, the report can be used to identify those areas in which employee costs are too high, which may lead to a reduction in force or a reallocation of staff away from those areas.

A more comprehensive human resource accounting system goes beyond the simple tracking of employee-related costs, and addresses the following two additional areas:

• Budgeting. An organization's annual budget includes a component, in which is concentrated all employee costs being incurred from across the organization. By concentrating cost information by its nature, management can more clearly see the total impact of human resource costs on the entity.
• Employee valuation. Rather than looking at employees as costs, the system is redirected toward viewing them as assets. This can involve the assignment of values to employees based on their experience, education, innovativeness, leadership, and so forth. This can be a difficult area in which to achieve a verifiable level of quantification, and so may have limited value from a management perspective.

From an accounting perspective, the expense-based view of human resources is quite easy - employee costs from the various departments are simply aggregated into a report. The employee valuation approach is not a tenable concept for the accountant, since this is an internally-generated intangible asset, and so cannot be recorded in the accounting system.

Related Courses

Human Resources Guidebook 
Payroll Management 

Turnover ratios

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 15:24:00 PDT 2018

A turnover ratio represents the amount of assets or liabilities that a company replaces in relation to its sales. The concept is useful for determining the efficiency with which a business utilizes its assets. In most cases, a high asset turnover ratio is considered good, since it implies that receivables are collected quickly, fixed assets are heavily utilized, and little excess inventory is kept on hand. This implies a minimal need for invested funds, and therefore a high return on investment.

Conversely, a low liability turnover ratio (usually in relation to accounts payable) is considered good, since it implies that a company is taking the longest possible amount of time in which to pay its suppliers, and so has use of its cash for a longer period of time.

Examples of turnover ratios are:

• Accounts receivable turnover ratio. Measures the time it takes to collect an average amount of accounts receivable. It can be impacted by the corporate credit policy, payment terms, the accuracy of billings, the activity level of the collections staff, the promptness of deduction processing, and a multitude of other factors.
• Inventory turnover ratio. Measures the amount of inventory that must be maintained to support a given amount of sales. It can be impacted by the type of production process flow system used, the presence of obsolete inventory, management's policy for filling orders, inventory record accuracy, the use of manufacturing outsourcing, and so on.
• Fixed asset turnover ratio. Measures the fixed asset investment needed to maintain a given amount of sales. It can be impacted by the use of throughput analysis, manufacturing outsourcing, capacity management, and other factors.
• Accounts payable turnover ratio. Measures the time period over which a company is allowed to hold trade payables before being obligated to pay suppliers. It is primarily impacted by the terms negotiated with suppliers and the presence of early payment discounts.

The turnover ratio concept is also used in relation to investment funds. In this context, it refers to the proportion of investment holdings that have been replaced in a given year. A low turnover ratio implies that the fund manager is not incurring many brokerage transaction fees to sell off and/or purchase securities. The turnover level for a fund is typically based on the investment strategy of the fund manager, so a buy-and-hold manager will experience a low turnover ratio, while a manager with a more active strategy will be more likely to experience a high turnover ratio and must generate greater returns in order to offset the increased transaction fees.

Related Courses

Business Ratios Guidebook 
The Interpretation of Financial Statements 

What Is an FEIN?

by Mike Kappel @ Payroll Tips, Training, and News

Mon Feb 26 05:10:00 PST 2018

When you run a business, you must meet many IRS requirements. You might need an FEIN to identify your business on documents like payroll tax forms. What does FEIN mean? What is an FEIN? FEIN is an acronym for Federal Employer Identification Number, also known as an EIN. This unique, nine-digit number is used by […]

The post What Is an FEIN? appeared first on Payroll Tips, Training, and News.

A Look at Federal, State, and Local Minimum Wages

by Mike Kappel @ Payroll Tips, Training, and News

Wed Mar 21 05:30:00 PDT 2018

You can’t just pay your employees any amount you want. You must follow federal, state, and local laws that set minimum wages. What is minimum wage? Minimum wage is the lowest amount you can pay an employee per hour of work. You can pay more than the minimum wage, but you should never pay less […]

The post A Look at Federal, State, and Local Minimum Wages appeared first on Payroll Tips, Training, and News.

What You Need to Know About a Qualifying Life Event

by Rachel Gray @ Payroll Tips, Training, and News

Mon Mar 12 05:10:40 PDT 2018

Employees have a window of time each year to sign up for certain types of employer-sponsored insurance. Although this open enrollment period takes place at the end of each year for all employees, an employee can add or remove coverage at any time of the year if they have a qualifying life event. What is […]

The post What You Need to Know About a Qualifying Life Event appeared first on Payroll Tips, Training, and News.

Cookie jar accounting

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 11:09:00 PDT 2018

Cookie jar accounting occurs when a business sets up excessive reserves in profitable periods and draws down these reserves during lower-profit periods. The intent is to give the impression that the organization generates more consistent results than is really the case. When investors believe that a firm is able to consistently meet its earnings targets, they tend to place a higher value on its stock. There is a greater temptation to use cookie jar accounting among publicly held businesses, since doing so can mislead analysts into issuing more favorable reports about them to the investment community. This approach to reporting earnings does not reflect actual results, and so can be considered fraudulent reporting.

Cookie jar reserves can be created either by over-estimating the more common reserves (such as for bad debts) or by taking large one-time charges for expected losses from one-time events, such as acquisitions or downsizings.

The term comes from the practice of using a “cookie jar” of reserves whenever needed.

Related Courses

Fraud Examination 
Fraud Schemes 
How to Audit for Fraud 

Correcting Employment Taxes: What to Do If You Withhold the Wrong Amount

by Rachel Gray @ Payroll Tips, Training, and News

Wed Feb 28 05:10:52 PST 2018

It’s easy to make mistakes, especially when you have a million and one things on your plate. One error you could make is deducting the wrong amount from employee wages. Correcting employment taxes is necessary if you withhold too much or too little from your employees’ paychecks. This article provides an overview of employment taxes […]

The post Correcting Employment Taxes: What to Do If You Withhold the Wrong Amount appeared first on Payroll Tips, Training, and News.

Nonprofit accounting

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 04:55:00 PDT 2018

Nonprofit accounting refers to the unique system of recordation and reporting that is applied to the business transactions engaged in by a nonprofit organization. A nonprofit entity is one that has no ownership interests, has an operating purpose other than to earn a profit, and which receives significant contributions from third parties that do not expect to receive a return. Nonprofit accounting employs the following concepts that differ from the accounting by a for-profit entity:

• Net assets. Net assets take the place of equity in the balance sheet, since there are no investors to take an equity position in a nonprofit.
• Donor restrictions. Net assets are classified as being either with donor restrictions or without donor restrictions. Assets with donor restrictions can only be used in certain ways, frequently being assigned only to specific programs. Assets without donor restrictions can be used for any purpose.
• Programs. A nonprofit exists in order to provide some kind of service, which is called a program. A nonprofit may operate a number of different programs, each of which is accounted for separately. By doing so, one can view the revenues and expenses associated with each program.
• Management and administration. Costs may be assigned to the management and administration classification, which refers to the general overhead structure of a nonprofit. Donors want this figure to be as low as possible, which implies that the bulk of their contributions are going straight to programs.
• Fund raising. Costs may be assigned to the fund raising classification, which refers to the sales and marketing activities of a nonprofit, such as solicitations, fund raising events, and writing grant proposals.
• Financial statements. The financial statements produced by a nonprofit entity differ in several respects from those issued by a for-profit entity. For example, the statement of activities replaces the income statement, while the statement of financial position replaces the balance sheet. Both for-profit and nonprofit entities issue a statement of cash flows. Finally, there is no nonprofit equivalent for the statement of stockholders' equity, since a nonprofit has no equity.

Related Courses

Nonprofit Accounting 

The difference between an invoice and a statement

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 16:21:00 PDT 2018

A customer may receive an invoice and a statement from a supplier. What is the difference between these two documents? When a seller issues an invoice to a buyer, the invoice is related to a specific sale transaction where goods or services were provided to the buyer. Since the invoice relates to a specific sale transaction, it itemizes all of the information the buyer needs to know in order to pay the seller, including:

• Invoice number
• Invoice date
• Item description
• Item price
• Shipping and handling charges
• Sales tax
• Total amount payable
• Remit to address
• Payment terms and early payment discount terms (if any)

The intent of an invoice is either to collect payment from the buyer, or to create evidence of the sale (if payment was made in advance or in cash). If payment was made at the time of sale, the invoice is stamped "Paid" before issuing it to the buyer.

When a seller issues a statement, the document itemizes all invoices that have not yet been paid by the buyer, as well as partial payments. In this case, the intent is to remind the buyer that it has an obligation to pay the seller. Since the statement is more aggregated than an invoice, it provides less detailed information at the invoice level. It typically includes the following items:

• Statement date
• Invoice numbers
• Invoice dates
• Invoice totals

A more sophisticated statement will aggregate invoice totals by time bucket, so that overdue invoices are clearly shown.

Invoices are issued whenever a sale has been completed, so they may be issued every day and in significant quantities. However, statements are usually only issued at regular intervals, such as once a month, as part of a company's collection activities.

From the perspective of the buyer, the receipt of an invoice triggers an accounting transaction, which is an account payable. Conversely, the receipt of a statement is strictly informational - it does not trigger the creation of an accounting transaction.

It can be unwise to treat a statement as an invoice and pay items listed on the statement, since it is possible that the buyer already paid for those items, but the payment has not yet been reflected in the seller's accounting system. A better alternative for the buyer is to make inquiries about any invoices that are listed on the statement, and obtain more detailed information before issuing a payment.

There can be some confusion between the invoice and statement terms when dealing with credit card providers, since they issue a "statement" that is actually an invoice.

Related Courses

Bookkeeping Guidebook 
New Controller Guidebook 

Did a Tax Pro Botch Your Return? Here’s What to Do

by Tina Orem @ NerdWallet

Fri Mar 23 06:53:52 PDT 2018

To err is human, but to err on your tax return is a total dumpster fire. If you did your own taxes, of course, you may have only yourself to…

Service Credit Union donates to the N.H. Food Bank

by Lori Holmes @ Service Credit Union

Fri Dec 22 08:49:58 PST 2017

Service Credit Union donated $10,000 and 1,326 pounds of food to the New Hampshire Food Bank, a program of Catholic Charites NH, in order to help the citizens of New Hampshire. Service Credit Union President/CEO David Van Rossum recently presented the check to New Hampshire Food Bank Executive Director Eileen Groll Liponis to help keep […]

SCU to offer assistance for those affected by a government shutdown

by Lori Holmes @ Service Credit Union

Sat Jan 20 05:00:06 PST 2018

Service Credit Union is committed to helping its members who are affected during the government shutdown. For those with direct deposit, Service Credit Union will post credits to members based on the postings nearest to January 1, 2018. The credit of that amount will take place on or before February 1, 2018. This will apply […]

Price to book ratio

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 04:53:00 PDT 2018

The price to book ratio compares the current market price of a company's stock to its aggregate book value. When the ratio is excessively high, it can indicate that a company's shares are over-priced, especially when the ratio is high in comparison to the same calculation for other companies in the same industry. The calculation is:

Closing price of the stock ÷ (Total assets - Intangible assets - Liabilities)

Investors like to use the price to book ratio to search for undervalued companies, and invest in their stock in hopes of having the share price return to a more normal level over time. However, there are a number of issues with the ratio to be aware of, including the following:

• The ratio could be low because the company has been mismanaged, in which case there can be no expectation that the ratio will improve over time.
• The ratio could skewed too high because the company is using accelerated depreciation to write down the value of its fixed assets at an accelerated rate.
• The company may have valuable intellectual property that does not appear on its balance sheet at all, but which is being recognized by investors through a high market price for its stock.
• The company may be investing a large amount in research and development costs, which must be charged to expense as incurred, rather than capitalized. This tends to result in a comparatively low book value for the business.
• The ratio is not overly useful when evaluating services firms and technology companies, since these entities have comparatively fewer fixed assets on their balance sheets.

Related Courses

Business Ratios Guidebook 
The Interpretation of Financial Statements 

Should You Offer a Nonqualified Deferred Compensation Plan?

by Mike Kappel @ Payroll Tips, Training, and News

Mon Mar 26 05:10:00 PDT 2018

You know employees like employer-sponsored benefits. As an employer, offering benefits is advantageous for your business, too. A nonqualified deferred compensation plan is one type of benefit that both you and your employees can enjoy. Find out what a nonqualified deferred compensation plan is, why you might consider offering it, and how to set it […]

The post Should You Offer a Nonqualified Deferred Compensation Plan? appeared first on Payroll Tips, Training, and News.

Organic growth

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 12:42:00 PDT 2018

Organic growth is the increase in sales of a business generated by those of its operations that were in existence at the beginning of the measurement period. The concept is used to differentiate between sales generated from existing operations and those operations that were acquired during the measurement period. In particular, organic growth is used to determine whether existing operations are in a state of decline, neutral growth, or expansion. It is entirely possible that organic "growth" will actually be negative.

For example, a company may report 100% growth during a period, but further analysis may reveal that 95% of the growth was from sales attributable to an acquisition and 5% to existing operations.

Organic growth can be caused by any of the following:

• An increase in prices
• An increase in units sold of existing products
• Sales of new products from existing operations
• Sales to new customers for products from existing operations
• Sales generated by new distribution channels
• Sales generated in new sales regions

Organic growth nearly always refers to changes in revenue, but can be used in reference to changes in profitability or cash flows.

The organic growth concept is a solid growth strategy for many businesses. This approach depends on internally-generated growth, rather than through acquisitions, and is a particularly viable option for a business that does not have sufficient cash to acquire other entities. However, this type of growth tends to be rather slow, especially when compared to the massive sales gains that can be achieved through an acquisition strategy. Also, organic growth could be in a sales segment that does not generate much cash flow, whereas an acquisition could generate sales in a more profitable segment of the market.

Related Courses

Business Ratios Guidebook 
Financial Analysis 
The Interpretation of Financial Statements 

Cook the books

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 04:57:00 PDT 2018

To cook the books means that the managers of a business are deliberately falsifying certain aspects of its financial statements to give investors a false impression of the true state of the business. Alternatively, they engage in business practices to enhance financial results that are technically legal, but which will have a negative impact on the business over the long term. A number of techniques can be used to cook the books, such as the following:

Falsification activities

• Leaving the books open past the end of the month to record additional sales within the prior reporting period.
• Not recording expenses in the reporting period, even though they clearly reflect resource consumption in the period.
• Altering the terms of leasing arrangements so that the liability appears to be held by a third party, thereby keeping the liability off the entity's balance sheet.
• Falsely recording pension liabilities lower than is really the case.
• Setting up expense reserves, such as the allowance for doubtful accounts, that do not reflect the actual loss rate.
• Recording consignment sales as though they are actual sales.
• Taking a one-time charge that is set up as a "cookie jar," which can be used in subsequent periods to write off expenses and artificially inflate profits.

Business practices

• Engage in channel stuffing to sell more goods to customers than they can realistically use.
• Grant much higher credit levels to customers in order to boost sales, even though the customers may not be able to pay off the receivables.

Related Courses

Fraud Examination 
Fraud Schemes 
How to Audit for Fraud 

Exchange of nonmonetary assets

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 04:59:00 PDT 2018

An exchange of nonmonetary assets occurs when two entities swap nonfinancial assets. The accounting for a nonmonetary transaction is based on the fair values of the assets transferred. This results in the following set of alternatives for determining the recorded cost of a nonmonetary asset acquired in an exchange, in declining order of preference:

1. At the fair value of the asset transferred in exchange for it. Record a gain or loss on the exchange.
2. At the fair value of the asset received, if the fair value of this asset is more evident than the fair value of the asset transferred in exchange for it.
3. At the recorded amount of the surrendered asset, if no fair values are determinable or the transaction has no commercial substance.

There can be any number of variations on the nonmonetary exchange concept, including ones where some cash is exchanged, along with other nonmonetary assets. If there is a significant amount of monetary consideration paid (known as boot), the entire transaction is considered to be a monetary transaction. In GAAP, a significant amount of boot is considered to be 25% of the fair value of an exchange. Conversely, if the amount of boot is less than 25%, the following accounting applies:

• Payer. The party paying boot is not allowed to recognize a gain on the transaction (if any).
• Recipient. The receiver of the boot recognizes a gain to the extent that the monetary consideration is greater than a proportionate share of the carrying amount of the surrendered asset. This calculation is based on the percentage of monetary consideration received to either:
  • Total consideration received, or
  • The fair value of the nonmonetary asset received (if more clearly evident)
  • Nonmonetary exchanges of inventory should be recognized at the carrying amount of the inventory transferred (not their fair values).

• Related Courses

  Fixed Asset Accounting 
  How to Audit Fixed Assets 

Payroll records

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 12:00:00 PDT 2018

Payroll records contain information about the compensation paid to employees and any deductions from their pay. These records are needed by the payroll staff to calculate gross pay and net pay for employees. Payroll records typically include information about the following items:

• Bereavement pay
• Bonuses
• Commissions
• Deductions for pensions, benefits, charitable contributions, stock purchase plans, and so forth
• Direct deposit information
• Gross wages
• Hours worked
• Manual check payments
• Net wages paid
• Salary rates
• Vacation and/or sick pay

The information in payroll records have traditionally been stored on paper documents, but can also be recorded as electronic documents.

Payroll records can be considered a subset of the information stored in human resources records, which can contain considerably more information than items pertaining to just employee pay and deductions.

The time period over which payroll records must be retained will depend upon government requirements. The Internal Revenue Service typically states a required retention period in each document it issues dealing with payroll issues. In general, wage calculations should be retained for two years, while collective bargaining agreements should be retained for three years.

Related Courses

Payroll Management 

What Does Pay Frequency Mean?

by Michele Bossart @ Payroll Tips, Training, and News

Wed Feb 21 05:10:38 PST 2018

When you have employees, you need to run payroll so they can receive their wages. Before paying employees, you need to decide on a pay frequency. Your industry, the number of employees you have working for you, the type of workers you have, and legal requirements determine your pay frequency. But first, what does pay […]

The post What Does Pay Frequency Mean? appeared first on Payroll Tips, Training, and News.

Evaluation of internal controls

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 05:50:00 PDT 2018

An evaluation of internal control involves an examination of the effectiveness of an organization's system of internal controls. By engaging in this evaluation, an auditor can determine the extent of other tests that must be performed in order to arrive at an opinion regarding the fairness of the entity's financial statements. A robust system of internal controls reduces the risk of fraudulent activity, which moderates the need for additional audit procedures. The examination concentrates on such issues as:

• The separation of duties
• Checks and balances
• Safeguarding of records
• The training level and competence of employees
• The effectiveness of the entity's internal audit function

The steps involved in this evaluation process include the following:

1. Determine the extent and types of controls being used by the client.
2. Determine which of these controls the auditor intends to rely upon.
3. Based on the first two steps, determine which audit procedures should be expanded or reduced.
4. Make recommendations to the client regarding how to improve its system of internal controls.

The last of the preceding steps is useful for improving the control environment for the auditor in the following year's audit.

Related Courses

Accounting Controls Guidebook 

Competitive advantage

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 14:27:00 PDT 2018

Competitive advantage is the ability of an organization to gain a material edge over its competitors. Having such an advantage can result in above-average profits or high levels of customer loyalty. There are many types of competitive advantage that a business can take advantage of, such as the following:

• Having a supply of unusually inexpensive raw materials
• Having access to a low-cost labor force
• Owning a patent that is key to a product category
• Having a large field servicing operation that can maintain products on short notice
• Having a large chain of retail stores through which goods can be sold
• Having a highly-regarded Internet store that experiences a large number of return visits
• Having a design team that routinely produces leading-edge designs
• Having a short product development cycle that pushes new products into the marketplace faster than what competitors can achieve

An example of how a core competency is used is to leverage a strong field service operation by noting the company's 24-hour response time when pitching a prospective sale to a customer. Another example is being able to offer a commodity product to a customer at an unusually low price, since the seller's workforce is located overseas, where labor costs are reduced by more than half.

Competitive advantage can be taken away by a determined competitor in one of two ways:

• Match and then exceed the advantage offered by the company; or
• Undermine the company's position by developing an entirely new competitive advantage that is highly prized by customers.

It is essential to maintain a competitive advantage, in order to sustain long-term profitability. This means that management must be aware of the advantage and continually reinforce it with ongoing investments in the targeted area.

A competitive advantage can even be achieved by unethical means, such as by offering bribes to the purchasing manager of a customer. Since other sellers are presumably not willing to engage in unethical behavior, the use of bribes can be seen as a competitive advantage.

Service Credit Union named top CU Direct auto lender

by Lori Holmes @ Service Credit Union

Fri Feb 23 08:19:49 PST 2018

Service Credit Union (SCU) was named the top auto lender in the New England/New York region and 10th nationally for 2017 by CU Direct. CU Direct works with auto dealers and credit unions throughout the U.S. to streamline the auto buying process. Last year, the credit union funded more than 21,000 auto loans at approximately […]

Financial model

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 16:52:00 PDT 2018

A financial model is a mathematical representation of the key variables impacting an organization, which is used to make estimates of how future scenarios will impact the performance and financial position of the business. This model is usually constructed on an electronic spreadsheet, using summary-level revenues and expenses, and employing formulas that change the results of the model when certain variables are altered. For example, variables could be used to model the impact of an increase in energy prices, a decline in product prices, a product recall, a change in the rate of sales growth, or a successful employee strike that results in increased compensation and benefit costs.

A financial model is useful for estimating the effects of a number of scenarios within a short period of time, though its effectiveness depends on how well the model mimics the business. An analyst can use a financial model for a number of purposes, such as:

• Acquisitions. To determine the range of possible outcomes that an acquirer can expect with an acquiree, depending on the actions it takes after the deal has been closed.
• Budgeting. To develop several scenarios as part of the budgeting process, to decide which scenarios to pursue when a detailed budget is constructed.
• Capital budgeting. To determine a range of outcomes that might impact the cash flow return related to a prospective fixed asset purchase.
• Risk analysis. To determine which variables can have the greatest negative effect on a firm, as part of a formal risk analysis.

There are two potential problems with financial models. One is that a model may not properly account for the variables that will impact the model's projected future results. The other problem is that a more complex model is at risk of having calculation errors built into it, which can be difficult to detect.

Related Courses

Budgeting 
Capital Budgeting