Increase Your Financial IQ

Robert Kiyosaki, author of this text entitled Increase Your Financial IQ is an investor, entrepreneur and educator whose perspectives on money and investing align with conventional wisdom. Kiyosaki has challenged and changed the way many people around the world think about money.

Born and raised in Hawaii, this financial expert is a fourth-generation Japanese-American. After graduating from college in New York, Kiyosaki joined the Marine Corps and served in Vietnam as an officer and helicopter gunship pilot.

On the question of whether money makes one rich, this author says it is not so. He explains that money alone does not make one rich, adding that we all know people who go to work every day, work for money, make more money, but fail to become richer.

This financial expert asserts that ironically, many only grow deeper in debt with the money they earn. Kiyosaki says we have all heard stories of lottery winners, instant millionaires, who are instantly poor again. He adds that again, we have heard stories of real estate going into foreclosure, and instead of making homeowners richer, more financially secure, real estate drives homeowners out of their homes and into the poorhouse.

Kiyosaki says many of us know of individuals who have lost money investing in the stock market. He educates that even investing in gold, the world’s only real money, can cost investors money.

According to him, this text is not a get-rich one or a text about some financial magic formula. Rather, he says it is about increasing your financial intelligence, your financial IQ. It is about getting richer by getting smarter and the five basic forms of financial intelligence required to grow richer, regardless of what the economy, stocks, or real estate markets are doing, reveals this author.

Structurally, this text is segmented into ten chapters. Chapter one is interrogatively entitled What is financial intelligence? In this author’s words here, “Money alone does not solve your money problems. That is why giving poor people money does not solve their money problems. In many cases, it only prolongs the problem and creates more poor people.”

Kiyosaki educates that hardwork also does not solve money problems, stressing that the world is filled with hardworking people who earn money, yet grow deeper in debt, needing to work even harder for more money.

He says education does not solve money problems, adding that the world is filled with highly educated poor people.

According to Kiyosaki, it is only financial intelligence that solves all money problems. In his words, “In simple words, financial intelligence is that part of our total intelligence we use to solve financial problems… Financial intelligence solves these and other money problems. Unfortunately, if our financial intelligence is not developed enough to solve our problems, the problems persist… Many times they get worse, causing even more money problems. For example, there are millions of people who do not have enough money set aside for retirement. If they fail to solve that problem, the problem will get worse, as they grow older and require more money for medical care.”

This author reiterates that whether or not you like it, money does not affect lifestyle and quality of life, adding that the freedom of choice that money offers can mean the difference between hitchhiking or taking bus or travelling by a private jet.

Chapter two is based on the subject matter of the five financial intelligence quotients (IQs). Kiyosaki educates that the five basic financial IQs are: Making more money (Financial IQ No 1); protecting your money (Financial IQ No2); budgeting your money (Financial IQ No3); leveraging your money (Financial IQ No4) and improving your financial information (Financial IQ No5).

As regards difference between financial intelligence and financial IQ, he says, “Most of us know that a person with a mental IQ of 130 is supposedly smarter than a person with an IQ of 95. The same parallels can be drawn with financial IQ. You can be the equivalent of a moron when it comes to financial intelligence… Financial intelligence is that part of our mental intelligence we use to solve our financial problems. Financial IQ is the measurement of that intelligence. It is how we quantify our financial intelligence. For example, if I earn $100,000 and pay 20 per cent in taxes, I have a higher financial IQ than someone who earns $100,000 and pays 50 per cent.”

Kiyosaki explains that in this example, the person who earns a net of $80,000 after taxes has a higher financial IQ than the person who earns a net of $50,000 after taxes. Both have financial intelligence, but the one that keeps more money has a higher financial IQ, educates this expert.

In chapters three to seven, the five financial IQs already discussed in chapter two, are elaborately examined respectively.

Chapter eight is christened The integrity of money. According to Kiyosaki here, “‘Integrity’ is an interesting word. I have heard it used in many different ways and in different contexts. I believe it is one of the more misused, confused, and abused words in the English language. Many times I have heard someone say, ‘He has no integrity’, or ‘If they had any integrity, they would be more successful’. Someone else might say, ‘That house has integrity of design’.”

This author says before discussing the integrity of money, it is necessary to define Integrity. Kiyosaki says “Integrity”, according to Webster, can be defined as “Soundness” (an unimpaired condition); “Incorruptibility” (firm adherence to a code of especially moral or artistic values) and “Completeness” (the quality or state of being complete or undivided).

This expert educates that just as health can break down from a literal lack of integrity, so can wealth be compromised by lack of integrity. “Instead of disease or death, which comes from a breakdown in the body’s integrity, symptoms of a lack of financial integrity are low income, crippling taxes, high expenses, excessive debt, bankruptcy, foreclosure, increased crime, violence, sadness, and despair,” expatiates this author.

He says the integrity of all the five financial IQs is needed to grow rich, stay rich and pass wealth on to generations after you. Kiyosaki asserts that missing one or more of the financial IQs is like someone who does not know how to drive attempting to drive a car that has brakes without pads, and water in the gas line.

In this author’s words, “When a person is struggling financially, one or more of these financial intelligences is out of whack, financial integrity is not sound, and the person is not complete. For example, I have a friend who earns a lot of money as a manager of a small business. Her problem is she has no protection against taxes, plus she does not budget wells, spends impulsively to buy clothes and goes up in price. She gets her financial advice from her husband and his (the husband’s) financial planner.”

In chapters nine and ten, this author beams his intellectual searchlight on the concepts of developing your financial genius and developing your financial IQ.

As regards style, this text is a prototype for stylistic excellence. For instance, most of the illustrations are based on the financial experiences of the author himself, thus lending credibility and conviction to the text. The language is simple and the presentation very didactic. Kiyosaki generously employs graphical embroidery to achieve visual reinforcement of readers’ understanding and make the layout of the text eye-friendly.

However, conceptual repetition is noticed in chapters three to seven where the five financial IQs already discussed in chapter two are further examined. One would have expected him to have harmonised chapters two to seven. Probably, Kiyosaki wants to create emphasis through deliberate repetition.

Also, the word “Intelligence” whose grammatical behaviour in the dictionary shows that it is an uncountable noun as reflected by the symbol “U” against it, is still used in this text in a countable way on pages 150 and 151 where we have “Intelligences”.

In spite of the few errors, this text is fantastic. It is a must-read for those who want to accomplish financial freedom and abundance through concrete financial education.

Developing a Basic Financial Model – Part IV – Working Capital Historical Relationships

In continuing in our series of fundamental concepts of financial modeling, I will now turn to the initial steps of understanding how to forecast financial information. It is important that the reader has some familiarity of the three major financial statements (income statement, balance sheet and cash flow statement) that I covered in the prior three articles. If not, please read those first prior to continuing.

Working Capital Historical Relationships

We often see in disclaimer language that “past performance is not indicative of future results” or other types of language similar to that to let the reader know not to put too much stock in the historical outcomes of a particular situation. This is commonly seen in relation to stock price performance or asset manager historical returns. In the case of forecasting financial information of specific companies, this is not necessarily true. In fact, in investment banking or private equity, historical relationships help to drive the expectations of future performance.

For example, let us assume that there is a company in a relatively mature stage of growth, meaning that the future growth is likely to be more along the lines of a bit above the inflation rate for the next several years. The last two years have showed that the days outstanding for accounts receivable (“DSO”) was 32 (the days from the point of booking a sales turns to cash). In the absence of specific information related to the company, whether a macro event or industry overhaul, there is likely no reason to assume that there would be a significant change from that.

DSO is calculated by taking the average accounts receivable over a time period, like annual, and dividing the result by the total daily sales value for the most recent period. In other word, if annual, the denominator would be the sales figure divided by 365 and the numerator would be the average of the accounts receivable calculated for the current year and the prior year. If the total accounts receivables for the past two years was $50 and $65, and the total sales for the most recent period was $1,050, the DSO would be approximately 20, or on average, accounts receivable is outstanding 20 days before coming to the company as cash.

The same concept would apply to days payables outstanding (“DPO”) or days inventory outstanding (“DIO” – although, a more common concept is inventory turns). DPO is calculated similarly to DSO, except the accounts payable becomes the numerator and the denominator is cost of sales divided by 365. You can easily see the similarities between the DSO and DPO because one is a method to track when cash comes in (DSO) and the other tracks when you have to pay (DPO). These are two components of the cash cycle (also known as the cash conversion cycle).

The cash cycle is a way companies can track how quickly cash comes into the company, and when an analyst is forecasting results for a company, the historical information is very important to understand. In simple terms, the cash cycle follows the purchase of raw materials (often building up payables) to creating a saleable product to the collection of receivables. The cash cycle is = days inventory + days receivable – days payable or DIO + DSO – DPO. The DIO is calculated similarly to DPO in using the cost of sales as the denominator with the average inventory as the numerator (the inventory turns is calculated by taking the total costs of sales as the numerator and the average inventory as the denominator and the result yields how often a company is “turning” its inventory, or selling its products).

To continue with our prior example of DSO = 20 days, if we assume that average inventories was $28, average accounts payable was $37 and the cost of sales in the most recent period was $750, then DIO = 14 and DPO = 18. This translates to a cash conversion cycle of 16 days (20 + 14 – 18). This means that a company is getting cash every 16 days from the current operations. What this really tells you is that the time period of 16 days is what a company must finance prior to getting cash. As a slight tangent, there are instances, although rare, where companies have been able to “self-finance,” or not rely on a credit facility or other source of funding to finance its working capital. If you change the numbers above and have DSO or 11, DIO of 10 and DPO of 22, you can see that the cash cycle is approximately 0 (rounded to -1). This is an instance where an entity is developing inventory to sell faster and receiving cash from accounts receivable faster than that company is paying to its vendors. That is a great position, but it is not a common situation.

Other current assets include prepaid assets, which many financial analysts will see as a percentage of total sales. Other current liabilities include accrued expenses or other accrued liabilities, which financial analysts may view as a percentage of total cost of sales. For example, if prepaid expenses at the end of the year have been on average 3% of total sales, in the absence of specific information, any deviation from that going forward is probably not warranted. The similar logic holds for current liabilities.

I want to make two quick points before ending this section. The first is that for companies who are new and rapidly growing, it is acceptable to look at all working capital relationships as a percentage of total sales. In many instances, if you attempt to forecast receivables, inventory or payables using historical information for a company only in business for one or two years, you will get misleading data. To better understand this, think of a new company who will be building up inventory ahead of a marketing launch and who may be offering better receivables terms to purchasers in order to generate sales. Additionally, a new company is likely to have more stringent terms on payables so you will be double penalized from a cash cycle perspective. As a company goes from upstart to established entities, the various ratios will reach equilibrium and then using the DIO, DPO or DSO analyses is more prudent.

The second point is that some companies will include short-term borrowings or current portion of short-term debt in the current liabilities section. For working capital analyses, these should not be included. The only counter-argument to this is that is there is a specific working capital line that is associated with financing working capital (not just based on the balances but actually used to finance working capital) some would choose to include that in certain working capital calculations. In my experience in financial forecasting, I have separated that component of debt and I do not view it as a current liability but as part of a company’s capital structure (i.e., long-term financing and not a current liability like payables or accrued expenses). But, as long as the methodology is clearly defined, the financial modeler can choose either path, as the results should not differ.

Credit Counseling Companies Tackle Consumer Debt, and Enable Sound Financial Planning

These are turbulent economic times in which we live. The cost of a college education continues to soar. New grads face greater amounts of student loan debt than ever before. Mortgages are expensive, and in the wake of the mortgage crisis, loan companies are tightening eligibility requirements. In many industries, salaries fail to keep pace with inflation. Health insurance premiums continue to soar, as well. No wonder so many Americans are in debt, with average debt at $8,000 or more per household, according to a 2004 MSN Money report! And, many more people are concerned about money management.

The failure to plan for a solid financial future can trample lifestyles and hobble dreams. Fortunately, each person can be in control of his or her own finances. But how?

Credit counseling and financial advising companies are now teaming with legal networks to enable consumers to make good financial decisions. These counseling companies help consumers secure protection against credit theft and credit fraud — two ways people can get into debt without even realizing it. Skilled money coaches then work with clients facing money troubles. They help clients to develop the best course of financial planning to suit their lifestyles. Money coaches can also direct clients to a skilled financial advisor who can best assist them with setting up and maintaining 401Ks, IRAs, Roth IRAs, trusts, and other accounts, enabling them to build healthy financial futures.

Credit theft and credit fraud are major financial security concerns in the Internet era. People are concerned – and with good reason – that their identities may be stolen, and their financial information may be readily accessible to fraudulent criminals. Money coaches can help customers develop crucial plans of action against credit theft or credit fraud. Through techniques such as fraud alerts and credit checks, customers are able to keep control of their finances by maintaining good credit scores. Often, money coaches assist clients in going over their credit scores clients line by line, looking for evidence of fraud or tampering. If errors are found, money coaches advise clients on how to promptly notify credit bureaus. These financial gurus also offer advice for restoring good credit.

In this age of economic turbulence, paying down debts and securing financial futures are of great concern to Americans. A financial advisor or coach at a credit counseling company can help clients plan short-term and long-term money management goals. More importantly, these professionals advise clients on how to actually reach those goals. Clients typically will develop sound economic plans, taking their net incomes and monthly debts and expenditures into account. The coaches can then recommend that clients consult with financial planners and accountants in their area who can help them implement saving, investing, and debt-reduction strategies.

Many clients find the unbiased money coach advice to be an asset; when clients are able to develop the best money-management strategies for their personal situations, they can work towards long-term financial goals more easily. With cursory backgrounds in financial planning and debt reduction information, clients are armed to tackle money and debt issues long after they’ve finished consulting their money coaches. Clients can then formulate a comprehensive financial well-being plan to save money and pay down debts.

Credit counseling companies often offer clients access to a legal team, consisting of attorneys skilled in many areas of money management, debt, and fraud. These lawyers are helpful because they can offer targeted money strategies and advice. Attorneys in the legal network might give clients free consultations, and can often work for them with significant fee reductions.

Many credit counseling companies now offer services online, so clients can fit money management into their busy schedules. Clients, after signing up, can log on to these sites with a user name and password. From that point, they will receive access to financial resources and tools, and might even be able to access and manage short-term and long-term financial plans online. Whether a potential client is a college student, a parent, a newly widowed person, or a mid-career professional, credit counseling companies can assist them with all areas of strategic money management.