Saturday, October 30, 2010

Business talks, A wealth Creation Cycle

In Wealth Creation there are five aspects to consider:
Generate income/profit – The businesses’ main aim is to generate a source of income and to maintain a profit. A business cannot survive without a profit. The profit pays for expansion (growth), development, wages, and salaries and provides better conditions for employees. Added value is a major factor in determining profit. Increasing your income is often seen as the way to having more money. (Jeff Cartridge, 2009)
Manage expenses – The manager of the business is in charge of managing expenses and implementing cost cutting initiatives in order to creating larger profit margins. The expenses are things that cost the busy and are usually deducted from the income of the business, if money is left over the business made a profit. However if there’s no money left over it’s referred to as a loss. . Keeping track of where your money goes is an important part of wealth creation. (Jeff Cartridge, 2009)
Maintain and Increase assets – By maintaining and increasing the assets of the company you are creating wealth for the business. The goal of a person looking to create wealth is to increase their assets so they can generate an income off their assets. The starting point is to recognize what is an asset. The true definition of an asset is that it puts money into your pocket. Anything that takes money out of your pocket is considered to be a liability. Many of the things that people consider to be assets are in fact liabilities as they cost them money. Assets can be classified into two categories lifestyle assets and investment assets. The car the house and the boat are all lifestyle assets, while rental property, shares and cash are considered investment assets. (Jeff Cartridge, 2009)
Managing Liabilities – Debt is not good or bad. It is how the debt is used that will determine whether the debt is of benefit to you or detrimental to your financial well being. Liabilities are things that take money out of your pocket, things like rental and other expenditures. (Jeff Cartridge, 2009)
Manage your Risks
Managing risk is about reducing the impact on your financial situation when things do go wrong. Risks fall into two categories, insurable risks and uninsurable risks. Most people have insurance for their house, car and contents, but fewer protect the things that can have a huge impact on your financial well being. Most people’s major asset is their ability to earn income. This can be protected with income protection insurance which will replace an income if you are unable to work for any length of time. Life insurance becomes important if you have children or a partner that depend on you for their lifestyle. Health insurance may be of benefit to you to cover large medical expenses that could occur. (Jeff Cartridge, 2009)
Insurance can be used to minimise the impact of unforeseen events, however there are some things that cannot be insured against. Insurance is not as readily available against your business having a severe downturn or being sued because of a traffic accident. To protect your assets and income in the situation where you are uninsured requires the use of structures to isolate different activities and to hold assets away from creditors. (Jeff Cartridge, 2009)

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